UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM l0-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended September 30, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________to _________
Commission file number 333-85306
PUDA COAL, INC.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 65-1129912
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
426 Xuefu Street, Taiyuan, Shanxi Province, The People's Republic of China
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(Address of principal executive offices)
011 86 351 228 1302
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(Issuer's telephone number)
Purezza Group, Inc.
936A Beachland Boulevard, Suite 13, Vero Beach, FL 32963
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date, September 30, 2006: 80,654,578
shares.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Unaudited Consolidated Balance Sheet as of September 30, 2006 1
Unaudited Consolidated Statements of Operations for the three and
nine months ended September 30, 2006 and 2005 3
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 2006 and 2005 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 27
Item 3. Controls and Procedures 34
PART II. OTHER INFORMATION 34
Item 1. Legal Proceedings 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits 36
Signatures 37
Certifications 38
PART I - Financial Information
ITEM 1. Financial Statements
PUDA COAL, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
September 30, 2006
(In thousand of United States dollars)
Note(s) September 30, 2006
------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $19,543
Restricted cash 3 233
Accounts receivable, net 7,972
Other receivables
- Related parties 4 15
- Third parties 39
Advances to suppliers 1,199
Deferred charges 9 402
Inventories 5 13,600
-------
Total current assets 43,003
PROPERTY, PLANT AND EQUIPMENT, NET 6 10,112
INTANGIBLE ASSETS, NET 7 3,749
-------
TOTAL ASSETS $56,864
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt
- Related party 4, 8 $ 1,300
Accounts payable
- Related party 4 228
- Third parties 2,282
Other payables
- Related party 4 889
- Third parties 1,595
Accrued expenses 599
Income taxes payable 2,453
VAT payable 535
Distribution payable 1,013
Penalty payable 9 821
-------
Total current liabilities 11,715
-------
LONG-TERM LIABILITIES
Long-term debt
- Related party 4, 8 10,725
Convertible notes 9 5,438
Derivative conversion feature 9 4,676
Derivative warrants 9 12,970
-------
Total long-term liabilities 33,809
-------
1
PUDA COAL, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET (Continued)
September 30, 2006
(In thousand of United States dollars)
Note(s) September 30, 2006
------------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 5,000,000 shares,
par value $0.01, issued and outstanding Nil --
Common stock, authorized 150,000,000 shares,
par value $0.001, issued and outstanding
82,952,667 83
Paid-in capital 11,252
Statutory surplus reserve fund 1,366
Accumulated deficit (2,063)
Accumulated other comprehensive income 702
-------
Total stockholders' equity 11,340
-------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $56,864
=======
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
PUDA COAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2006 and 2005
(In thousand of United States dollars, except per share data)
Note(s) Three months ended Three months ended Nine months ended Nine months ended
September 30, 2006 September 30, 2005 September 30, 2006 September 30, 2005
-----------------------------------------------------------------------------------
NET REVENUE $ 42,650 $ 18,037 $ 94,364 $ 31,056
COST OF REVENUE (33,725) (13,835) (74,899) (24,123)
-----------------------------------------------------------------------------------
GROSS PROFIT 8,925 4,202 19,465 6,933
OPERATING EXPENSES
Selling expenses 1,145 354 2,192 555
General and administrative expenses 636 170 1,627 305
Other operating expenses -- 901 -- 902
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TOTAL OPERATING EXPENSES 1,781 1,425 3,819 1,762
-----------------------------------------------------------------------------------
INCOME FROM OPERATIONS 7,144 2,777 15,646 5,171
GAIN ON SHORT-TERM INVESTMENTS -- -- - 6
INTEREST INCOME 26 2 38 3
INTEREST EXPENSE (577) -- (2,356) --
DEBT FINANCING COSTS 10 (1,672) -- (9,513) --
DERIVATIVE UNREALIZED FAIR VALUE LOSS
11 (314) -- (3,327) --
-----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,607 2,779 488 5,180
INCOME TAXES 12 (2,441) (1,232) (5,130) (2,043)
-----------------------------------------------------------------------------------
NET INCOME/(LOSS) 2,166 1,547 (4,642) 3,137
OTHER COMPREHENSIVE INCOME
Foreign currency translation
adjustment 321 136 548 136
-----------------------------------------------------------------------------------
COMPREHENSIVE
INCOME/(LOSS)
$ 2,487 $ 1,683 $ (4,094) $ 3,273
===================================================================================
EARNINGS /(LOSS) PER SHARE-BASIC
$ 0.03 $ 0.02 $ (0.06) $ 0.04
-DILUTED
===================================================================================
$ 0.02 $ 0.02 $ (0.06) $ 0.04
===================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
-BASIC 13 880,654,578 73,750,000 77,920,661 73,715,934
===================================================================================
-DILUTED 13 118,452,056 73,915,000 77,920,661 73,880,934
===================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
PUDA COAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2006 and 2005
(In thousand of United States dollars)
Nine months Nine months
ended ended
September 30, September 30,
Notes 2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $ (4,642) $ 3,137
Adjustments to reconcile net (loss)/income to net cash
provided by operating activities
Amortization of land-use rights 58 3
Depreciation 711 84
Provision for doubtful debts 12 3
Amortization of debt issue costs 821 --
Amortization of discount on convertible notes and warrants 7,871 --
Derivative unrealized fair value loss 3,327 --
Discount on converted shares and exercised warrants 1,146 --
Issue of common shares for services 21 --
Changes in operating assets and liabilities:
Decrease in short-term investments -- 117
Increase in accounts receivable (3,760) (902)
Decrease in notes receivable -- 638
(Increase)/decrease in other receivables (1) 2,251
Decrease/(increase) in advances to suppliers 1,760 (317)
Increase in inventories (6,041) (699)
Increase in accounts payable 1,184 625
Increase in accrued expenses 236 81
Increase in other payables 902 896
Increase in income tax payable 1,056 53
Increase in VAT payable 218 422
Increase in penalty payable 821 --
Decrease in restricted cash 382 --
------------------------
Net cash provided by operating activities 6,082 6,392
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of warrants 1,800 --
Repayment of long-term debt (975) --
Shareholder contribution -- 50
Distribution paid to owners of a subsidiary -- (947)
------------------------
Net cash provided by/(used in) financing activities 825 (897)
------------------------
Effect of exchange rate changes on cash 569 136
------------------------
Net increase in cash and cash equivalents 7,476 5,631
Cash and cash equivalents at beginning of period 12,067 313
------------------------
Cash and cash equivalents at end of period $ 19,543 $ 5,944
========================
Supplementary cash flow information 14
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Puda Coal, Inc. (formerly Purezza Group, Inc.)("the Company" or "Puda") is a
corporation organized under Florida law, headquartered in Vero Beach, Florida.
The Company was incorporated on August 9, 2001 to market a product called
Phoslock. Phoslock is a patented product for the removal of phosphorus and other
oxyanions in natural and industrial waters and wastewater streams. Prior to
April 22, 2004, the Company's activities consisted of capital transactions,
organization, and development of the Company's Phoslock product line.
On April 23, 2004, the Company transferred all of its assets including, cash on
hand, the Phoslock product line, and all of the Company's rights under a license
agreement for the use of the Phoslock product line, to Purezza Marketing, Inc.
("PMI"), a wholly owned subsidiary of the Company. The Company's license
agreement was with Integrated Mineral Technology Limited ("Integrated"), an
Australian entity, and provided for certain fixed royalty payments by the
Company. As part of the Company's asset transfer to PMI, PMI assumed all
liabilities under the license agreement, which assumption was consented to by
Integrated.
Concurrently with the asset transfer to PMI, the Company distributed on a pro
rata basis all of its stock ownership in PMI to the holders of its common stock
(the "Distribution"). As a result of this transfer and the Distribution, PMI
operates independently from the Company and as a successor to the Company's
business and operations and the Company no longer had any meaningful business
assets, operations or sources of revenue.
On July 15, 2005, the Company acquired all the outstanding capital stock and
ownership interests of Puda Investment Holding Limited ("BVI") and BVI became a
wholly-owned subsidiary of the Company. In exchange, Puda issued to the BVI
members 1,000,000 shares of its Series A convertible preferred stock, par value
$0.01 per share, of the Company, which are convertible into 678,500,000 shares
of Puda's common stock. The purchase agreement provided that the preferred
shares would immediately and automatically be converted into shares of Puda's
common stock (the "Mandatory Conversion"), following an increase in the number
of authorized shares of Puda's common stock from 100,000,000 to 150,000,000, and
a 1 for 10 reverse stock split of Puda's outstanding common stock (the "Reverse
Split"). The share data has been retroactively adjusted for the Reverse Split.
On August 2, 2005, the authorized number of shares of common stock of the
Company was increased from 100,000,000 shares to 150,000,000 shares. On
September 8, 2005, Puda completed the Reverse Split. Following the Mandatory
Conversion of preferred shares and the Reverse Split, the BVI members received,
in the aggregate, approximately 67,850,000 shares of total of 73,750,000 of
Puda's common stock, representing 92% of the outstanding shares of Puda's common
stock.
BVI is an International Business Company incorporated in the British Virgin
Islands on August 19, 2004 and it has a registered capital of $50,000. BVI did
not have any operating activities from August 19, 2004 (inception) to September
30, 2006.
5
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. The Company (continued)
BVI, in turn, owns all of the registered capital of Taiyuan Putai Business
Consulting Co., Ltd. ("Putai"), a wholly foreign owned enterprise ("WFOE")
registered under the wholly foreign-owned enterprises laws of the People's
Republic of China ("PRC"). Putai was incorporated on November 5, 2004 and has a
registered capital of $20,000. Putai did not have any operating activities from
November 5, 2004 (inception) until June 24, 2005 when it entered into certain
restructuring agreements with Shanxi Puda Coal Group Co., Ltd. (formerly, Shanxi
Puda Resources Co. Ltd.)("Shanxi Coal"), a company with limited liability
established under the laws of the PRC.
Shanxi Coal was established on June 7, 1995. Shanxi Coal mainly processes and
washes raw coal and sells from its plants in Shanxi Province, high-quality, low
sulfur refined coal for industrial clients mainly in Central and Northern China.
Shanxi Coal has a registered capital of RMB22,500,000 ($2,717,000) which is
fully paid-up. The owners of Shanxi Coal are Mr. Zhao Ming (80%) and Mr. Zhao
Yao (20%). Zhao Ming and Zhao Yao are executive officers of Puda and are
brothers.
On June 24, 2005, Putai and Shanxi Coal entered into an Exclusive Consulting
Agreement, an Operating Agreement, and a Technology License Agreement
(collectively, these agreements are referred to herein as the "Restructuring
Agreements"). Under the Restructuring Agreements, Putai has agreed to advise,
consult, manage and operate Shanxi Coal's business, to provide certain financial
accommodations to Shanxi Coal, and to license certain technology to Shanxi Coal
for use in its business, in exchange for Shanxi Coal's payment of all of its
operating cash flow to Putai. Each of the holders of the registered capital of
Shanxi Coal also granted Putai the exclusive right and option to acquire all of
their registered capital of Shanxi Coal and further authorized Putai to exercise
the voting rights of the owners of the registered capital of Shanxi Coal and to
act as the representative for such holders in all matters respecting Shanxi
Coal's registered capital. Although Puda owns none of the outstanding equity
interests in Shanxi Coal, the Restructuring Agreements provide Puda control over
Shanxi Coal, and the risks and rewards associated with equity ownership.
Immediately after the Mandatory Conversion and Reverse Split, the percentages
owned by Mr. Zhao Ming and Mr. Zhao Yao in the Group companies are as follows:
o Puda Coal, Inc.: Mr. Zhao Ming (approximately 74%); Mr. Zhao Yao
(approximately 18%) held directly.
o Puda Investment Holding Limited: Mr. Zhao Ming (approximately 74%);
Mr. Zhao Yao (approximately 18%) held indirectly through Puda.
o Taiyuan Putai Business Consulting Co., Ltd: Mr. Zhao Ming
(approximately 74%); Mr. Zhao Yao (approximately 18%) held
indirectly through Puda and BVI.
o Shanxi Puda Coal Group Co., Ltd.: Mr. Zhao Ming (80%); Mr. Zhao Yao
(20%) held directly.
6
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. The Company (continued)
After the above reorganization and as of September 30, 2006, Puda Coal, Inc.
owns all of the outstanding capital stock of Puda Investment Holding Limited,
which in turn, owns all of the outstanding capital stock of Taiyuan Putai
Business Consulting Co. Ltd. The organizational structure of the Group is as
follows:
----------------------
Puda Coal, Inc.
"Puda"
----------------------
| 100%
---------------------- ------------------------
Puda Investment Zhao Ming (80%)
Holding Limited and
"BVI" Zhao Yao (20%)
---------------------- ------------------------
| 100% |
---------------------- ------------------------
Operating Agreements
Taiyuan Putai Business Shanxi Puda Coal Group
Consulting Co., Ltd. Operation and Control -> Co., Ltd.
"Putai" "Shanxi Coal"
<- Economic Benefits and Risks
---------------------- ------------------------
2. Summary of Significant Accounting Policies
(a) Basis of Presentation and Consolidation
These unaudited consolidated financial statements include Puda (Registrant and
Legal Parent), BVI, Putai and Shanxi Coal (Operating Company). Puda controls BVI
and Putai through stock ownership. Puda controls Shanxi Coal by means other than
record ownership of voting stock (Note 1). Intercompany items have been
eliminated. The unaudited consolidated financial statements give effect to the
Mandatory Conversion and Reverse Split. For accounting purpose, the transactions
are effective on January 1, 2004.
The merger of a private operating company into a non-operating public shell
corporation with nominal net assets typically results in the owners and
management of the private company having actual or effective operating control
of the combined company after the transaction, with shareholders of the former
public shell continuing only as passive investors. These transactions are
considered to be capital transactions in substance, rather than business
combinations. That is, the transaction is equivalent to the issuance of stock by
the private company for the net monetary assets of the shell corporation,
accompanied by a recapitalization. The accounting is identical to that resulting
from a reverse acquisition, except that no goodwill or other intangible should
be recorded. For accounting purposes, Shanxi Coal is deemed to be the acquirer.
7
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (continued)
(a) Basis of Presentation and Consolidation (continued)
The unaudited consolidated balance sheet as of September 30, 2006 includes Puda,
BVI, Putai and Shanxi Coal (`the Group"). The unaudited consolidated statements
of operations for the three and nine months ended September 30, 2006 include
Puda, BVI, Putai and Shanxi Coal. The unaudited consolidated statement of
operations for the three and nine months ended September 30, 2005 include Shanxi
Coal for the full period, and BVI and Putai from June 24, 2005.
The accompanying unaudited consolidated financial statements as of September 30,
2006 and for the three and nine month periods ended September 30, 2006 and 2005
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. In the opinion of management, these unaudited
consolidated interim financial statements include all adjustments considered
necessary to make the financial statements not misleading. The results of
operations for the nine months ended September 30, 2006 are not necessarily
indicative of the results for the full fiscal year ending December 31, 2006. The
unaudited consolidated interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2005 as reported in Form 10-KSB as
amended.
(b) Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reported
periods. Significant estimates include depreciation and allowance for doubtful
accounts receivable. Actual results could differ from those estimates.
(c) Inventories
Inventories comprise raw materials and finished goods and are stated at the
lower of cost or market value. Substantially all inventory costs are determined
using the weighted average basis. Costs of finished goods include direct labor,
direct materials, and production overhead before the goods are ready for sale.
(d) Property, Plant and Equipment, Net
Property, plant and equipment is stated at cost. Depreciation is provided
principally by use of the straight-line method over the useful lives of the
related assets Expenditures for maintenance and repairs, which do not
8
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (continued)
(d) Property, Plant and Equipment, Net (continued)
improve or extend the expected useful lives of the assets, are expensed to
operations while major repairs are capitalized.
Management considers that they have a 10% residual value for buildings, and a 5%
residual value for other property, plant and equipment. The estimated useful
lives are as follows:
Buildings and facility 20 years
Machinery and equipment 10 years
Motor vehicles 10 years
Office equipment and others 10 years
The gain or loss on disposal of property, plant and equipment is the difference
between the net sales proceeds and the carrying amount of the relevant assets,
and, if any, is recognized in the unaudited consolidated statement of
operations.
(e) Derivative Financial Instruments
Derivative financial instruments are accounted for under Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" as amended (SFAS No. 133). Under SFAS No. 133, all derivative
instruments are recorded on the balance sheet as assets or liabilities and
measured at fair value. Changes in the fair value of derivative instruments are
recorded in current earnings.
(f) Income Taxes
The Group accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The Group reviewed the differences between the tax bases under PRC tax laws and
financial reporting under US GAAP, and no material differences were found, thus,
there were no deferred tax assets or liabilities as of September 30, 2006.
9
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (continued)
(f) Income Taxes (continued)
Under current PRC tax laws, no tax is imposed in respect to distributions paid
to owners except individual income tax.
(g) Revenue Recognition
Revenue from goods sold is recognized when (i) persuasive evidence of an
arrangement exists, which is generally represented by a contract between the
Company and the buyer; (ii) title has passed to the buyer, which generally is at
the time of delivery; (iii) the seller's price to the buyer is agreed between
the Company and the buyer; and (iv) collectability is reasonably assured.
(h) Foreign Currency Transactions
The reporting currency of the Group is the U.S. dollar. Shanxi Coal uses its
local currency, Renminbi, as its functional currency. Results of operations and
cash flow are translated at average exchange rates during the period, and assets
and liabilities are translated at the end of period exchange rates. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in stockholders' equity. Transaction gains and losses that
arise from exchange rate fluctuations from transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred. These amounts are not material to the unaudited
consolidated financial statements for the three and nine months ended September
30, 2006 and 2005.
The PRC government imposes significant exchange restrictions on fund transfers
out of the PRC that are not related to business operations. These restrictions
have not had a material impact on the Group because it has not engaged in any
significant transactions that are subject to the restrictions.
(i) Earnings Per Share
Basic earnings per share is computed by dividing the earnings for the period by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities by including
other potential common stock, including stock options and warrants, in the
weighted average number of common shares outstanding for the period, if
dilutive. Shares issued in the exchange (see Note 1) are presented as
outstanding for all periods.
10
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Restricted Cash
Restricted cash is reserved for interest payment on convertible notes.
4. Related Party Transactions
As of September 30, 2006, the Group had the following amounts due from/to
related parties:-
September 30,
2006
-------
$'000
Other receivable from an owner, Zhao Ming $ 15
=======
Accounts payable to Shanxi Liulin Jucai Coal Industry
Co., Limited. ("Jucai Coal"), a related company with a
common owner $ 228
=======
Other payable to Shanxi Puda Resources Group Limited
("Resources Group"), a related company with common owners $ 687
Other payable to an owner, Zhao Yao $ 202
-------
$ 889
=======
Loan payable to Resources Group:
-current portion $ 1,300
-non-current portion 10,725
-------
$12,025
=======
11
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Related Party Transactions (continued)
The balances, except for the loan payable to Resources Group, are unsecured,
interest-free and there are no fixed terms for repayment.
The balance payable to Resources Group of $687,000 includes professional and
regulatory charges related to the public listing paid by Resources Group on
behalf of the Company of $901,000, netted against other receivables of $214,000
due from Resources Group.
The amount payable to Zhao Yao represents land-use rights paid by him on behalf
of Shanxi Coal (see Note 7).
The loan payable to Resources Group of $12,025,000 was incurred in relation to
the purchase of the Liulin and Zhong Yang coal washing plants. It bears interest
at a rate of 6% per annum payable quarterly. In the three months ended September
30, 2006, Shanxi Coal paid principal of $325,000 and interest of $185,000 to
Resources Group. In the nine months ended September 30, 2006, Shanxi Coal paid
principal of $975,000 and interest $570,000 to Resources Group. This loan is
subordinated to the convertible notes (see Note 8).
In the three months ended September 30, 2006 and 2005, Shanxi Coal purchased raw
coal from Jucai Coal in the amounts of $5,110,000 and $2,342,000, respectively.
In the nine months ended September 30, 2006 and 2005, Shanxi Coal purchased raw
coal from Jucai Coal in the amounts of $12, 321,000 and $3,631,000,
respectively.
On November 17, 2005, Shanxi Coal entered into a coal supply agreement with
Jucai Coal, pursuant to which Shanxi Coal has priority to Jucai Coal's high
grade metallurgical coking coal supply over Jucai Coal's other customers. Under
the terms of the agreement, Shanxi Coal receives a discount of approximately $4
to $6 per metric ton of coal from the price Jucai Coal charges to its other
customers.
12
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Inventories
As of September 30, 2006, inventories consist of the following:
September 30, 2006
------------------
$'000
Raw materials $ 12,161
Finished goods 1,439
---------------
Total $ 13,600
===============
There was no allowance for losses on inventories as of September 30, 2006.
6. Property, Plant and Equipment, Net
As of September 30, 2006, property, plant and equipment consist of following:
September 30, 2006
------------------
$'000
Cost:
Buildings and facilities $ 2,961
Machinery equipment 8,131
Motor vehicles 254
Office equipment and others 76
------------------
11,422
------------------
Accumulated depreciation:
Buildings and facilities 208
Machinery equipment 931
Motor vehicles 137
Office equipment and others 34
------------------
1,310
------------------
Carrying value:
Buildings and facilities 2,753
Machinery equipment 7,200
Motor vehicles 117
Office equipment and others 42
------------------
$ 10,112
==================
13
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Property, Plant and Equipment, Net (continued)
Depreciation expense for the three months ended September 30, 2006 and 2005 was
approximately $238,000 and $28,000, respectively. Depreciation expenses for the
nine months ended September 30, 2006 and 2005 was approximately $711,000 and
$84,000, respectively. In the nine months ended September 30, 2006, the amounts
included in cost of sales and general and administrative expenses were
approximately $692,000 (2005: $66,000) and $19,000 (2005: $18,000),
respectively.
7. Intangible Assets
Land-use rights
September 30, 2006
------------------
$'000
Cost $ 3,831
Accumulated amortization 82
------------------
Carrying value $ 3,749
==================
Land-use rights of $197,000 paid by Zhao Yao on behalf of Shanxi Coal are
located in Liulin County, Shanxi Province and are amortized over fifty years up
to March 2051 (see Note 4).
Land-use rights in Liulin County purchased from Resources Group are located in
Shanxi Province and are amortized over fifty years up to August 4, 2055. Land
use rights of Zhong Yang County purchased from Resource Group are located in
Shanxi Province and are amortized over fifty years up to May 20, 2055. Shanxi
Coal pledged the land-use rights and plant and equipment to Resources Group
until such time when the purchase price and interest thereon is fully paid by
Shanxi Coal.
Amortization expense for the three months ended September 30, 2006 and 2005 was
approximately $19,000 and $1,000, respectively. Amortization expense for the
nine months ended September 30, 2006 and 2005 was approximately $58,000 and
$3,000, respectively. The estimated aggregate amortization expense for the five
years ending December 31, 2006, 2007, 2008, 2009 and 2010 amounts to
approximately $76,000, $76,000, $76,000, $76,000 and $76,000, respectively.
14
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-term Debt
September 30, 2006
------------------
$'000
Conveyance loan $ 12,025
Less: current portion (1,300)
-----------------
Long-term portion $ 10,725
=================
The conveyance loan is seller-financed, payable over ten years from December 31,
2005 and bears interest at a rate of 6% per annum, payable quarterly. In the
three months ended September 30, 2006, Shanxi Coal paid principal of $325,000
and interest of $185,000 to Resources Group. In the nine months ended September
30, 2006, Shanxi Coal paid principal of $975,000 and interest $570,000 to
Resources Group. The conveyance loan is subordinated to the convertible notes.
Payments by Shanxi Coal to Resources Group under the conveyance loan may not be
accelerated while Puda has obligations of principal or interest outstanding to
investors under the notes, nor may Shanxi Coal make payments under the
conveyance loan if Puda is in default to the investors under the notes (see Note
4).
The future principal payments under the conveyance loan as of September 30, 2006
are as follows:
September 30, 2006
------------------
Year $'000
----
2007 $ 1,300
2008 1,300
2009 1,300
2010 1,300
2011 1,300
Thereafter 5,525
------------------
$ 12,025
==================
15
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Convertible Notes and Related Warrants
On November 18, 2005, the Company issued $12,500,000 aggregate principal amount
of 8% unsecured convertible notes due October 31, 2008 and related warrants to
purchase shares of common stock of the Company. The notes are convertible into
common stock at $.50 per share over the term of the debt and $850,000 of
aggregate principal amount was converted into 1,700,000 shares of common stock
immediately. In the first quarter of 2006, $200,000 of aggregate principal
amount was converted into 400,000 shares of common stock. In the second quarter
of 2006, $1,575,000 was converted into 3,150,000 shares of common stock. In the
third quarter of 2006, $350,000 of aggregate principal amount was converted into
700,000 shares. The related warrants to purchase 25,000,000 shares of common
stock, exercisable at $.60 per share, have a term of five years from the date of
issuance. In the second quarter of 2006, 650,000 warrants were exercised into
650,000 shares of common stock and in the third quarter of 2006, 2,350,000
warrants were exercised into 2,350,000 shares of common stock.
Investors were given "full ratchet" anti-dilution protection under the notes and
the warrants, meaning that the conversion price under the notes and the exercise
price under the warrants will be adjusted to the lowest per share price for
future issuances of Puda's common stock should such per share price be lower
than the conversion price of the notes or the exercise price of the warrants,
with carve-outs for (i) issuance of shares of common stock in connection with
the conversion of the notes or exercise of the warrants, (ii) the issuance of
shares of common stock for the payment of the penalties under the notes, or
(iii) the issuance of common stock to employees or directors pursuant to an
equity incentive plan approved by Puda's stockholders. The conversion price of
the notes and the exercise price of the warrants are also subject to
proportional adjustments for issuance of shares as payment of dividends, stock
splits, rights offerings to shareholders in conjunction with payment of cash
dividends. Investors were also given registration rights in connection with the
resale of (i) the common stock into which the notes may be converted, and (ii)
the common stock underlying the warrants, on a registration statement to be
filed with the Securities and Exchange Commission ("SEC"). Such registration
statement is required to be filed within 30 days following the date of closing
of the offer and sale of the units, which occurred on November 18, 2005, and
declared effective within 120 days from that date, or Puda will be subject to
pay a penalty to investors of an amount equal to 1% of the purchase price of
each unit held by investors, payable in shares of common stock for every 30 day
period, or part thereof, after the relevant date. Puda is required to pay the
costs associated with the registration statement. Puda is also required to pay
investors an amount equal to 1% of the purchase price of each unit held by
investors for every 30 day period that Puda becomes deficient in its periodic
reporting requirements with the SEC under the Securities Exchange Act of 1934,
as amended, until all the securities have been sold by the investors. This late
filing penalty will be in addition to any other penalties and is payable in
shares of Puda's common stock. Puda may redeem all, but not less than all, of
the warrants at $0.001 per share subject to 30 business days' prior notice to
the holders of the warrants, and provided that (i) a registration statement is
in effect covering the common stock underlying the warrants, (ii) the closing
bid price of the common stock of Puda exceeds $2.50 per share on an adjusted
basis for at least 20 consecutive trading days and (iii) the average daily
trading volume of the common stock exceeds 50,000 shares per day during the same
period. Puda will be subject to default on the notes should they
16
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Convertible Notes and Related Warrants (continued)
fail to (i) make timely interest payment and such default continues for 15 days,
(ii) make payment of the principal when due, (iii) comply with any other
agreements under the Note, (iv) commences bankruptcy, provided that note holders
representing at least 50% of the principal amount of the notes have notified
Puda of the default and Puda has not cured the default within 45 days of such
notice.
The convertible notes and warrants require the Company to register the resale of
the shares of common stock upon conversion or exercise of these securities. The
warrants are freestanding derivative financial instruments. The Company accounts
for the fair value of these outstanding warrants to purchase common stock and
conversion feature of its convertible notes in accordance with SFAS No. 133
"Accounting For Derivative Instruments And Hedging Activities" and EITF Issue
No. 00-19 "Accounting For Derivative Financial Instruments Indexed To And
Potentially Settled In A Company's Own Stock" which require the Company to
account for the conversion feature and warrants as derivatives. Pursuant to SFAS
No. 133, the Company bifurcated the fair value of the conversion feature from
the convertible notes, since the conversion features were determined not to be
clearly and closely related to the debt host. In addition, since the effective
registration of the securities underlying the conversion feature and warrants is
an event outside of the control of the Company, pursuant to EITF Issue No.
00-19, the Company recorded the fair value of the conversion features and
warrants as liabilities. The Company is required to carry these derivatives on
its balance sheet at fair value and unrealized changes in the values of these
derivatives are reflected in the unaudited consolidated statement of operations
as "Derivative unrealized fair value gain / (loss)".
Based on a Black-Scholes pricing model the warrants, which are exercisable at
$.60 per share, have a value of $2.25 per share, or $56,250,000, and the
conversion feature, has a value of $2.17 per share, or $54,250,000. The
parameters used in the model include the stock market price on issuance date of
$2.46, exercise price of warrants of $0.60, (conversion price of note of $0.50),
contractual term of five years (three years for conversion feature), risk-free
interest rate for treasury bills of 3.89% and historical volatility of 110%
based on the previous twelve months stock price.
As these values are greater than the debt of $12,500,000, the total issue was
discounted. The discount was allocated between the warrants and conversion
feature based on their relative fair values, resulting in the warrants being
valued at $6,363,000 and the conversion feature at $6,137,000. The conversion
feature was recorded as a derivative liability as the contract does not contain
an explicit limit on the number of shares to be delivered in a share settlement,
and is being amortized over the life of the debt of three years using the
effective interest method, up to October 31, 2008. The portion of the discount
of $938,000 related to the converted shares in the nine months ended September
30, 2006 was recorded in interest expense. The amount amortized in the three and
nine months ended September 30, 2006 was $304,000 and $945,000, respectively.
The unamortized amount of $3,607,000 was offset against convertible notes. The
amount allocated to the warrants is classified as a derivative liability because
they embody an obligation to issue a variable number of shares. This obligation
is generated
17
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Convertible Notes and Related Warrants (continued)
by the Registration Rights and Late Filing Penalties described above. Warrants
are being amortized over the term of five years using the effective interest
method, up to October 31, 2010 and the amount amortized was $501,000 and
$3,683,000 in the three and nine months ended September 30, 2006, respectively.
The portion of the discount of $79,000 related to the exercised warrants in the
nine months ended September 30, 2006 was recorded in interest expense. The
unamortized amount of $480,000 was offset against convertible notes.
In conjunction with the issuance of the notes, the placement agent was issued
five year warrants, exercisable from November 18, 2005, to purchase 2,500,000
shares of common stock of the Company at an exercise price of $.60 per share.
The warrants issued to the placement agent have the same terms and conditions as
the warrants issued to the investors, including "full ratchet" anti-dilution
protection, proportional exercise price adjustments based on issuances of stock
as dividends and share splits, and Puda's right to redeem the warrants subject
to an effective registration statement covering the underlying shares of the
placement agent's warrant, and certain share price and trading volume
requirements. However, the warrants issued to the placement agent, unlike the
warrants issued to the investors, have a cashless exercise feature. As with the
warrants related to the notes, the placement agent warrants are classified as a
derivative liability and are freestanding derivative financial instrument and
contain Registration Rights and Late Filing Penalties identical to those held by
the investors. These warrants are being amortized over the term of five years
using the effective interest method, up to October 31, 2010. The amount
amortized in the three and nine months ended September 30, 2006 were $430,000
and $3,243,000, respectively. The unamortized amount of $379,000 was recorded in
deferred charges. As of September 30, 2006, these warrants were valued at $3.31
per share according to a Black-Scholes pricing model and the unrealized loss on
the change in fair value of these warrants of $3,327,000 was included in the
unaudited consolidated statements of operations. In the first quarter of 2006,
64,167 placement agent warrants were exercised in a cashless method and resulted
in the issuance of 55,687 common shares. In the second quarter of 2006, 191,667
placement agent warrants were exercised in a cashless method and resulted in the
issuance of 172,100 common shares. In the third quarter of 2006, 17,500
placement agent warrants were exercised in a cashless method and resulted in the
issuance of 14,393 common shares. The portion of the discount of $129,000 in the
nine months ended September 30, 2006 related to the exercised warrants was
recorded in interest expense.
Debt issue costs of $1,583,000 are being amortized over the life of the debt of
three years using the effective interest method, up to October 31, 2008 and the
amount amortized in the three months and nine months ended September 30, 2006
was $53,000 and $821,000 respectively. The unamortized amount of $23,000 as of
September 30, 2006 was recorded in deferred charges.
18
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Convertible Notes and Related Warrants (continued)
As of September 30, 2006, long-term liabilities include the following:
September 30, 2006
-----------------
$000
Convertible notes:
Gross amount issued $ 12,500
Less: amount converted (2,975)
Less: unamortized discount on conversion feature (3,607)
Less: unamortized discount on note warrants (480)
-----------------
$ 5,438
=================
Derivative conversion feature:
Amount allocated to conversion feature $ 6,137
Less: amount transferred to equity upon conversion (1,461)
-----------------
$ 4,676
=================
Derivative warrants:
Amount allocated to investor warrants $ 6,363
Placement agent warrants 5,625
Less: amount transferred to equity upon exercise (1,645)
Add: change in fair value 2,627
-----------------
$ 12,970
=================
Interest expense on the convertible notes in the three and nine months ended
September 30, 2006 amounted to $194,000 and $641,000, respectively.
As at September 30, 2006, the registration statement regarding the convertible
notes and related warrants has not been declared effective by the SEC. The
relevant date of March 17, 2006 for having the SEC declared the registration
date has passed. Therefore, Puda is required to pay the penalty to investors for
the delay in getting them registration rights. According to the subscription
agreement of the convertible notes and related warrants, the penalty is equal to
1% of the purchase price of each unit held by investors, payable in shares of
common stock of the Company, for every 30 day period, or part thereof, after the
relevant date. The penalty payable to the investors is $4,167 per day after the
relevant date. At September 30, 2006, the penalty was $821,000 which was
recorded as a current liability and will be transferred to equity when the
common shares are issued.
10. Debt Financing Costs
Debt financing costs for the three months ended September 30, 2006 include
amortization of debt issue costs of $53,000 (2005: $nil), amortization of
discount on convertible notes and warrants of $1,235,000 (2005: $nil), and
penalty for the delay in getting the registration statement effective by March
17, 2006 of $384,000 (2005:$nil).
19
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Debt Financing Costs (continued)
Debt financing costs for the nine months ended September 30, 2006 include
amortization of debt issue costs of $821,000 (2005: $nil), amortization of
discount on convertible notes and warrants of $7,871,000 (2005: $nil), and
penalty for the delay in getting the registration statement effective by March
17, 2006 of $821,000 (2005:$nil) (See Note 9).
11. Derivative Unrealized Fair Value Loss
Derivative unrealized fair value loss of $314,000 in the three months ended
September 30, 2006 (2005: $nil) and derivative unrealized fair value loss of
$3,327,000 in the nine months ended September 30, 2006 (2005: $nil) represent
the change in fair value of the derivative warrants (see Note 9).
12. Taxation
No provision for taxation has been made for Puda, BVI and Putai for the three
and nine months ended September 30, 2006 , as they did not generate any taxable
profits during the period.
Pursuant to the PRC Income Tax Laws, Shanxi Coal is subject to enterprise income
tax at a statutory rate of 33% (30% national income tax plus 3% local income
tax).
Details of income taxes in the statements of operations are as follows:-
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
----------------------------------------------------------
$'000 $'000 $'000 $'000
Current period provision $ 2,441 $ 1,232 $ 5,130 $ 2,043
=======================================================
A reconciliation between taxes computed at the United States statutory rate of
34% and the Group's effective tax rate is as follows:-
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
----------------------------------------------------------
$'000 $'000 $'000 $'000
Income before income taxes $ 4,607 $ 2,779 $ 488 $ 5,180
=======================================================
Income tax on pretax income at
statutory rate 1,567 945 166 1,761
Tax effect of expenses that are not
deductible in determining taxable
profits 829 315 4,645 334
Effect of different tax rates of
subsidiary operating in
other jurisdictions (73) (28) (161) (52)
Valuation allowance 118 -- 480 --
-------------------------------------------------------
Income tax at effective rate $ 2,441 $ 1,232 $ 5,130 $ 2,043
=======================================================
20
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Taxation (continued)
As at September 30, 2006, the Group had accumulated net operating loss
carryforwards for United States federal tax purposes of approximately of
$2,746,000, that are available to offset future taxable income. Realization of
the net operating loss carryforwards is dependent upon future profitable
operations. In addition, the carryforwards may be limited upon a change of
control in accordance with Internal Revenue Code Section 382, as amended.
Accordingly, management has recorded a valuation allowance to reduce deferred
tax assets associated with the net operating loss carryforwards to zero at
September 30, 2006. The net operating loss carryforwards expires in years 2021,
2022, 2023, 2024 and 2025, 2026 in the amounts of $132,000, $394,000, $153,000,
$371,000, $287,000 and $1,409,000, respectively.
At September 30, 2006, deferred tax assets consist of:
September 30, 2006
-----------------
$'000
Net operating loss carryforwards $ 934
Less: Valuation allowance (934)
-----------------
Net $ --
=================
13. Basic and Diluted Weighted Average Number of Shares
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
----------------------------------------------------------
$'000 $'000 $'000 $'000
Basic weighted average number of shares 80,654,578 73,750,000 77,920,661 73,715,934
Options outstanding, after adjusting for 10
to 1 reverse split 124,724 165,000 -- 165,000
Assumed conversion of notes 16,517,791 -- -- --
Assumed exercise of warrants 21,154,963 -- -- --
---------------------------------------------------------
Diluted weighted average number of
Shares 118,452,056 73,915,000 77,920,661 73,880,934
=========================================================
The options, convertible notes and warrants have no dilutive effect on the basic
loss per share in the nine months ended September 30, 2006 because of the loss,
but these items could potentially dilute earnings per share in the future.
21
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Supplementary cash flow information
Nine months ended September 30,
---------------------------------
2006 2005
---------------------------------
$'000 $'000
Cash paid during the period for:
Interest $ 1,211 $ 4
=================================
Income taxes $ 4,074 $ --
=================================
Major non-cash transactions:
Notes converted into 4,250,000 common shares $ 2,125 $ --
=================================
Common shares for services $ 21 $ --
=================================
Cashless exercise of 273,334 placement agent warrants
into 242,180 common shares $ -- $ --
=================================
Dividend declared $ -- $ 1,452
=================================
15. Options
As at September 30, 2006, Puda has outstanding options as follows:
Number of After adjusting for the 10 Estimated
options granted to 1 reverse stock split Exercise price Expiry date Fair value
--------------- -------------------------- -------------- ---------------- ----------
$'000
150,000 15,000 (i) $ 0.10 October 20, 2008 54
500,000 50,000 (ii) $ 1 October 27, 2006 137
1,000,000 100,000 (iii) $ 1 November 5, 2006 273
(i) were granted in 2003 to former directors/officers in consideration
of services rendered.
(ii) were granted in 2003 to Sanzari Family Trust and TJP Management,
Inc. in consideration of providing working capital to the Company.
(iii) were granted in 2003 to Gregory A. Nagel in consideration of
providing working capital to the Company.
22
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Options (continued)
The following summarizes the share option transactions during the periods:
Number of Weighted average
options exercise price
$
Options outstanding at December 31, 2004
(after adjusting for the 10 to 1 reverse stock split) 165,000 0.92
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
-----------------------------------
Options outstanding at December 31, 2005 165,000 0.92
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
-----------------------------------
Options outstanding at September 30, 2006 165,000 0.92
===================================
23
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Condensed Financial Information of Registrant
Balance Sheet-Parent Company Only
(In thousand of United States dollars)
September 30, 2006
------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8
Restricted cash 233
Deferred charges 402
-----------------
Total current assets 643
INVESTMENTS IN SUBSIDIARIES 23,765
-----------------
TOTAL ASSETS $ 24,408
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Other payable 303
Penalty payable 821
-----------------
Total current liabilities 1,124
-----------------
LONG-TERM LIABILITIES
Convertible notes 5,438
Derivative conversion feature 4,676
Derivative warrants 12,970
-----------------
Total long-term liabilities 23,084
-----------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 5,000,000 shares, par
value $0.01, issued and outstanding Nil --
Common stock, authorized 150,000,000 shares, par
value $0.001, issued and outstanding 82,952,667 shares 83
Paid-in capital 21,529
Accumulated deficit (21,412)
-----------------
Total stockholders' equity 200
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,408
=================
24
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Condensed Financial Information of Registrant (continued)
Statement of Operations-Parent Company Only
(In thousand of United States dollars)
For the three For the nine
months ended months ended
September 30, September 30,
2006 2006
---------------------------------
Revenue $ -- $ --
General and administrative expenses (152 (768)
-------------------------------
Loss from operations (768)
(152)
Interest expenses (392 (1,786)
Debt financing costs (1,672 (9,513)
Derivative unrealized fair value loss (314 (3,327)
-------------------------------
Net loss $ (2,530) $ (15,394)
===============================
25
PUDA COAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Condensed Financial Information of Registrant (continued)
Statement of Cash Flows-Parent Company Only
(In thousand of United States dollars)
For the nine
months ended
September
30, 2006
------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,394)
Adjustments to reconcile net income to net cash used in
operating activities
Amortization of debt issue costs 821
Amortization of discount on convertible notes and warrants 7,871
Derivative unrealized fair value loss 3,327
Discount on converted shares and exercised
warrants 1,146
Issue of common stock for services 21
Changes in operating assets and liabilities:
Advance to subsidiaries (1,090)
Increase in other payables 303
Increase in penalty payable 821
Decrease in restricted cash 382
------------
Net cash used in operating activities (1,792)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of warrants 1,800
------------
Net cash provided by financing activities 1,800
------------
Net increase in cash and cash equivalents 8
Cash and cash equivalents at beginning of period --
------------
Cash and cash equivalents at end of period $ 8
============
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Forward-Looking Statements
The following discussion may contain certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements are intended to be covered by
the safe harbor created by such provisions. These statements include the plans
and objectives of management for the future growth of Puda Coal, Inc., formerly
Purezza Group, Inc. ("Puda Coal" or the "Company") and its controlled
affiliates, including plans and objectives related to the consummation of
acquisitions and future private and public issuances of Puda Coal's equity and
debt securities. The forward-looking statements included herein are based on
current expectations that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of Puda Coal. Although Puda Coal believes
that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this Form 10-QSB will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by Puda Coal or any other person that
the objectives and plans of Puda Coal will be achieved.
The words "we," "us" and "our" refer to Puda Coal and its subsidiaries and
controlled affiliates. The words or phrases "would be," "will allow," "intends
to," "will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements." Actual results could differ materially from those
projected in the forward looking statements as a result of a number of risks and
uncertainties, including but not limited to: (a) limited amount of resources
devoted to expanding our business plan; (b) our failure to implement our
business plan within the time period we originally planned to accomplish; and
(c) other risks that are discussed in annual report on Form 10-KSB as amended or
included in our previous filings with the Securities and Exchange Commission.
Management's Overview of Historical and Prospective Business Trends
Increased demand for cleaned coking coal
We believe that the market for steel as well as cleaned coking coal will expand
over the next few years as a result of the construction booming in China.
Therefore, as of approximately the second half of 2007, we plan to further
expand our capacity to fulfill increased demand and take more market shares.
We are considering the acquisition of a new coal washing plant. We intend to use
the proceeds from the exercise of the warrants issued in our November 2005
private placement, to the extent such warrants are exercised. If these proceeds,
which would aggregate $15,000,000 only when they are all fully exercised, are
not sufficient to pay the $14,100,000 the plant is projected to cost, the
balance of the cost would be paid from cash generated from our operations, or we
would have to secure a loan.
27
Raw Coal and Coking Coal Prices
Based on information we can get, we believe that from now to the first half of
2007, both the raw coal price and cleaned coking coal prices will go up
slightly. Such change in the prices may have little effect on our gross profit
margin in the fourth quarter of 2006, for we purchase raw coal at market price,
and sell cleaned coking coal at contract price. Although we can make quarterly
adjustment to the contract price, the change in raw coal price is too slight to
justify such adjustment. In the first half of 2007, we can reset the cleaned
coking coal price to reflect the change in raw coal price and maintain higher
profit margin than it in the fourth quarter of 2006.
Uncertainties and Other Risk Factors that May Affect our Future Results and
Financial Condition
An important uncertainty the Company has to face is the filing of Registration
Statement for the in November 2005 private placement. We can't exactly
anticipate when the Registration Statement can be declared effective by the
Securities and Exchange Commission, and the delay in being effective of the
Registration Statement will result in the following two negative effects on the
Company's operation and finance: (i) Puda will be subject to pay a penalty to
investors of an amount equal to 1% of the purchase price of each unit held by
investors, payable in shares of common stock for every 30 day period, or part
thereof, after the relevant date. Puda is required to pay the costs associated
with the registration statement. This late filing penalty will be in addition to
any other penalties and is payable in shares of Puda's common stock.; and (ii)
the Company cannot raise another round of financing in capital markets, and as a
result, the warrant holders may not warrant to exercise their warrants and the
Company may not be able to obtain necessary capital to facilitate its expansion
plan.
The management believes that in order to satisfy the Company's capital
requirements for expansion plan through the first half of 2007, it will need to
obtain additional financing from third parties. If the Company does not obtain
any necessary financing in the future, we may have to stop our expansion plan.
There can be no assurance that sufficient funds will be available to us to allow
us to cover the cost related to such expansion plan.
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1. Risk Factors" in
the Annual Report on Form 10-KSB for the year ended December 31, 2005, as
amended, which could materially affect the Company's business, financial
condition or future results. The risks described in the Company's Annual Report
on Form 10-KSB, as amended, are not the only risks facing the Company.
Additional risks and uncertainties not currently known to the management or that
the management currently deems to be immaterial also may materially adversely
affect the Company's business, financial condition and/or operating results.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
28
Results of Operations
Three Months Ended September 30, 2006 Compared to Three Months Ended September
30, 2005
Net Revenue. Net revenue was $42,650,000 in the three months ended September 30,
2006, compared to $18,037,000 in the three months ended September 30, 2005, an
increase of $24,613,000, or 136%. The tonnage sales of cleaned coal increased
approximately 312,000 MT from approximately 234,000 MT in the three months ended
September 30, 2005 to approximately 546,000 MT in the three months ended
September 30, 2006, a 133% increase. This was the primary reason for our
increase in net revenue. The increase in tonnage sales was primarily due to
increased orders of cleaned coal from existing and new customers in the three
months ended September 30, 2006. The increase in orders was primarily because of
the increase in the general demand for high-grade coking coal in China, which
was largely driven by the substantial economic growth that China continued to
experience in the three months ended September 30, 2006. Steel is a key
component of the rail systems, bridges, ports, airports, construction projects
and car production spearheading China's economic growth and the increased demand
for steel directly affects the demand for the cleaned high-grade metallurgical
coking coal, which we sell. The average selling price was approximately $78 per
ton in the three months ended September 30, 2006 and 2005.
In response to this increase in general demand, we have significantly expanded
our capacity to 2.7 million MT per year through the purchase of two new coal
processing facilities in November 2005. One of our new facilities became
operational in late 2005 and the other became operational by the end of March
2006. Management anticipates that China's strong economic growth will continue
in 2006 and we believe that this will drive a strong demand for steel and
high-grade metallurgical coking coal. However, in response to this strong demand
in the market, it is expected that there will be more supply in the market from
competitors and due to increased supply, and notwithstanding the expected strong
demand, our average per ton sales price is not expected to increase.
Cost of Revenues. Cost of revenue was $33,725,000 in the three months ended
September 30, 2006, compared to $13,835,000 in the three months ended September
30, 2005, an increase of $19,890,000 or 144%. This was primarily due to an
increase in sales volume and an increase in the average price of raw coal from
approximately $42 per ton in the three months ended September 30, 2005 to
approximately $46 per ton in the three months ended September 30, 2006.
Gross Profit. Gross profit was $8,925,000 in the three months ended September
30, 2006, compared to $4,202,000 in the three months ended September 30, 2005,
an increase of $4,723,000 or 112% due to an increase in sales volume. Gross
profit margin in the three months ended September 30, 2006 was 21% versus 23% in
the three months ended September 30, 2005 due to an increase in average price of
raw coal in the three months ended September 30, 2006.
Selling Expenses. Selling expenses were $1,145,000 in the three months ended
September 30, 2006, compared to $354,000 in the three months ended September 30,
2005. This represents an increase of $791,000, or 223%, primarily due to
increased sales volume.
General and Administrative Expenses. General and administrative expenses were
$636,000 in the three months ended September 30, 2006, compared to $170,000 in
the three months ended September 30, 2005. This represents an increase of
$466,000, or 274%, primarily due to increases in salary and benefits, legal and
professional fees and investor relation expenses.
29
Other Operating Expenses. Other operating expenses of $901,000 in the three
months ended September 30, 2005 were mainly professional and regulatory charges
related to the public listing. No such expenses were incurred in the three
months ended September 30, 2005.
Income from Operations. Operating profit was $7,144,000 in the three months
ended September 30, 2006, compared to $2,777,000 in the three months ended
September 30, 2005. The increase of $4,367,000, or 157%, was primarily the
result of an increase in gross profit of $4,723,000, which was offset by an
increase in operating expenses of $356,000.
Interest Expense. Interest expense of $577,000 in the three months ended
September 30, 2006 includes interest payments of $194,000 for the 8% convertible
notes, $185,000 for the 6% loan from Resources Group for the purchase of the
Liulin and Zhong Yang plants and $198,000 for the expensed portion of the
discount on the conversion feature and warrants related to converted shares and
exercised warrants. No such expense was incurred in the three months ended
September 30, 2005.
Debt Financing Costs. Debt financing costs of $1,672,000 in the three months
ended September 30, 2006 include amortization of debt issue costs of $53,000,
amortization of discount on convertible notes and warrants of $1,235,000, and a
penalty of $384,000 for not getting the registration statement effective by
March 17, 2006. No such expenses were incurred in the three months ended
September 30, 2005.
Derivative Unrealized Fair Value Loss. Derivative unrealized fair value loss in
the three months ended September 30, 2006 of $314,000 represented a change in
fair value of the warrants issued to the placement agent. No such charge was
incurred in the three months ended September 30, 2005.
Income Before Income Taxes. Income before income taxes was $4,607,000 in the
three months ended September 30, 2006, compared to $2,779,000 in the three
months ended September 30, 2005. The increase of $1,828,000 or 66%, was
primarily the result of an increase in operating profit of $4,367,000, which was
offset by an increase in interest expense of $577,000, an increase in debt
financing costs of $1,672,000 and an increase in derivative unrealized fair
value loss of $314,000.
Income Taxes. Income taxes were $2,441,000 in the three months ended September
30, 2006, compared to $1,232,000 in the three months ended September 30, 2005,
an increase of $1,209,000 or 98% ,due to an increase in the operating profit of
Shanxi Coal from $2,779,000 in the three months ended September 30, 2005 to
$7,287,000 in the three months ended September 30, 2006. Income tax was imposed
on Shanxi Coal by the China Tax Bureau.
Net Income. Net income was $2,166,000 in the three months ended September 30,
2006, compared to $1,547,000 in the three months ended September 30, 2005, an
increase of $619,000, or 40%, mainly due to increase in gross profit of
$4,723,000, which was offset by an increase in operating expenses of $356,000,
an increase in interest expense of $577,000, an increase in debt financing costs
of $1,672,000, an increase in derivative unrealized fair value loss of $314,000
and an increase in income taxes of $1,209,000 in the three months ended
September 30, 2006.
30
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
2005
Net Revenue. Net revenue was $94,364,000 in the nine months ended September 30,
2006, compared to $31,056,000 in the nine months ended September 30, 2005, an
increase of $63,308,000, or 204%. The tonnage sales of cleaned coal increased
approximately 797,000 MT from approximately 413,000 MT in the nine months ended
September 30, 2005 to approximately 1,210,000 MT in the nine months ended
September 30, 2006, a 193% increase. This was the primary reason for our
increased net revenue. The increase in tonnage sales was primarily due to
increased orders of cleaned coal from existing and new customers in the nine
months ended September 30, 2006. The increase in orders was primarily because of
increased general demand for high-grade coking coal in China, which was largely
driven by the substantial economic growth that China continued to experience in
the nine months ended September 30, 2006. The increase in net revenue was also
contributed by an increase in the average selling price from approximately $77
per ton in the nine months ended September 30, 2005 to approximately $78 per ton
in the nine months ended September 30, 2006.
Cost of Revenues. Cost of revenue was $74,899,000 in the nine months ended
September 30, 2006, compared to $24,123,000 in the nine months ended September
30, 2005, an increase of $50,776,000, or 210%. This was primarily due to an
increase in sales volume and an increase in average price of raw coal from
approximately $42 per ton in the nine months ended September 30, 2005 to
approximately $45 per ton in the nine months ended September 30, 2006.
Gross Profit. Gross profit was $19,465,000 in the nine months ended September
30, 2006, compared to $6,933,000 in the nine months ended September 30, 2005, an
increase of $12,532,000 or 181% due to increased sales volume. Gross profit
margin in the nine months ended September 30, 2006 was 21% versus 22% in the
nine months ended September 30, 2005 due to an increase in average price of raw
coal in the nine months ended September 30, 2006.
Selling Expenses. Selling expenses were $2,192,000 in the nine months ended
September 30, 2006, compared to $555,000 in the nine months ended September 30,
2005. This represents an increase of $1,637,000, or 295%, primarily due to
increased sales volume.
General and Administrative Expenses. General and administrative expenses were
$1,627,000 in the nine months ended September 30, 2006, compared to $305,000 in
the nine months ended September 30, 2005. This represents an increase of
$1,322,000, or 433%, primarily due to increases in salary and benefits, legal
and professional fees and investor related expenses.
Income from Operations. Operating profit was $15,646,000 in the nine months
ended September 30, 2006, compared to $5,171,000 in the nine months ended
September 30, 2005. The increase of $10,475,000, or 203%, was primarily the
result of an increase in gross profit of $12,532,000, which was offset by an
increase in operating expenses of $2,057,000.
31
Interest Expense. Interest expense of $2,356,000 in the nine months ended
September 30, 2006 includes interest payments of $641,000 for the 8% convertible
notes, $570,000 for the 6% loan from Resources Group for the purchase of the
Liulin and Zhong Yang plants and $1,145,000 for the expensed portion of the
discount on the conversion feature and warrants related to converted shares and
exercised warrants. No such expense was incurred in the nine months ended
September 30, 2005.
Debt Financing Costs. Debt financing costs of $9,513,000 in the nine months
ended September 30, 2006 include amortization of debt issue costs of $821,000,
amortization of discount on convertible notes and deferred financing costs of
warrants of $7,871,000, and a penalty of $821,000 for not getting the
registration statement effective by March 17, 2006. No such expenses were
incurred in the nine months ended September 30, 2005.
Derivative Unrealized Fair Value Loss. Derivative unrealized fair value loss in
the nine months ended September 30, 2006 of $3,327,000 represented a change in
fair value of the warrants issued to the placement agent. No such charge was
incurred in the nine months ended September 30, 2005.
Income Before Income Taxes. Income before income taxes was $488,000 in the nine
months ended September 30, 2006, compared to $5,180,000 in the nine months ended
September 30, 2005. The decrease of $4,692,000 or 91%, was primarily the result
of an increase in interest expense of $2,356,000, an increase in debt financing
costs of $9,513,000 and an increase in derivative unrealized fair value loss of
$3,327,000, which was offset by an increase in operating profit of $10,475,000.
Income Taxes. Income taxes was $5,130,000 in the nine months ended September 30,
2006, compared to $2,043,000 in the nine months ended September 30, 2005, an
increase of $3,087,000, or 151%, due to the increase in the operating profit of
Shanxi Coal from $5,180,000 in the nine months ended September 30, 2005 to
$16,031,000 in the nine months ended September 30, 2006. Income tax was imposed
on Shanxi Coal by the China Tax Bureau.
Net Loss. Net loss was $4,642,000 in the nine months ended September 30, 2006,
compared to net income $3,137,000 in the nine months ended September 30, 2005, a
decrease of $7,779,000, or 248%, mainly due to an increase in operating expenses
of $2,057,000, an increase in interest expenses of $2,356,000, an increase in
debt financing costs of $9,513,000, an increase in derivative unrealized fair
value loss of $3,327,000 and an increase in income taxes of $3,087,000, which
were offset by an increase in gross profit of $12,532,000 in the nine months
ended September 30, 2006.
Liquidity and Capital Resources
Net cash provided by operating activities was $6,082,000 in the nine months
ended September 30, 2006, compared to $6,392,000 in the nine months ended
September 30, 2005, a decrease of $310,000. This was primarily due to an
increase in working capital needs resulting from increased accounts receivable
and inventory, which were offset by increased income from operations (after
adjusting for non-cash items).
Net cash provided by financing activities of $825,000 in the nine months ended
September 30, 2006 was related to the cash received from the exercise of
warrants of $1,800,000 which was offset by the repayment of long-term debt of
$975,000. Net cash used in financing activities of $897,000 in the nine months
ended September 30, 2005 was mainly related to the dividend distribution.
32
On November 17, 2005, Shanxi Coal entered into two conveyance agreements with
Resources Group. The two agreements transfer two new coal washing plants,
related land-use rights and coal washing equipment in Liulin County and Zhong
Yang County, Shanxi Province. The Liulin County plant is expected to have an
annual clean coal washing capacity of 1.1 million MT while the Zhong Yang County
plant is expected to have an annual clean coal washing capacity of 1.2 million
MT. After completing trial production, the Liulin County plant started formal
production at the end of November 2005. The Liulin County plant, land-use rights
and related equipment were purchased for a cost of $5,800,000. The Zhong Yang
County plant started formal production at the end of March 2006. The Zhong Yang
County plant, land-use rights and related equipment were purchased for a cost of
$7,200,000. Each conveyance agreement provides that the purchase price paid by
Shanxi Coal to Resources Group, which totals $13,000,000, be amortized over 10
years from December 31, 2005 and bears interest at a rate of 6% per annum
payable quarterly.
Our principal on-going capital requirements are to finance our coal washing
operations and to fund the payment of the loans totaling $13,000,000 for the
acquisition of the New Shanxi Liulin Jucai Plant and the New Zhong Yang Plant.
We must also pay interest on the notes issued in our November 18, 2005 private
placement which have an aggregate principal amount of $12.5 million, an interest
rate of 8% per annum and a maturity date of October 31, 2008. Interest is
payable quarterly and the principal amount is payable at the maturity date.
These notes may be converted into our common stock at the conversion price of
$.50 per share. The price of our stock is likely to impact our liquidity needs
for payment of these notes on both a long-term and short-term basis. We believe
that as our stock becomes more valuable, the note holders will be more likely to
convert their notes into common stock, and we would not be required to pay the
interest any longer or the principal at all, decreasing our need for cash.
Conversely, if our stock price decreases, note holders are less likely to
convert and our need for cash to pay interest and principal on the notes will
increase. Warrants were also issued in that private placement to acquire up to
25,000,000 shares of our common stock which are exercisable at price of $.60 per
share, or an aggregate of $15,000,000. We believe that the likelihood that these
warrants being exercised increases as our stock price increases and decreases as
our stock price decreases, with a corresponding effect on the likelihood of our
realizing proceeds from their exercise.
Our business is heavily dependent on our coal inventory. Because of recent coal
mining accidents, the Chinese government has been closing mines throughout
China. In addition, in Shanxi Province, the authorities are not approving new
mines that produce less than 300,000 MT output per year, are closing mines that
produce less than 90,000 MT per year and are consolidating existing mines into
larger mines with outputs between 300,000 and 900,000 MT. These activities may
lead to increased competition for coal and result in higher prices for the raw
coal we purchase, increasing our need for capital resources.
In addition, while the Chinese steel industry has been expanding over-supply
could have the effect of depressing steel prices, making the collection of our
accounts receivable more difficult.
33
We are considering the acquisition of a new coal washing plant. We intend to use
the proceeds from the exercise of the warrants issued in our November 2005
private placement, to the extent such warrants are exercised from this purchase.
If these proceeds, which would aggregate $15,000,000 only when they are all
fully exercised, are not sufficient to pay the $14,100,000 the plant is
projected to cost, the balance of the cost would be paid from our operations, or
we would have to secure a loan, or issue additional equity.
We believe that our liquidity will be adequate to satisfy our obligations for
the foreseeable future. Future requirements for our business needs, including
the funding of capital expenditures and debt service for outstanding financings
are expected to be financed by a combination of internally generated funds, the
proceeds from the sale of our securities, borrowings and other external
financing sources. However, we may not be able to generate sufficient operating
cash flow and external financing sources may not be available in amounts or on
terms sufficient to meet our liquidity needs. Our opinion concerning our
liquidity is based on current information. If this information proves to be
inaccurate, or if circumstances change, we may not be able to meet our liquidity
needs.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, Puda Coal conducted an
evaluation, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, of Puda Coal's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "1934 Act")). Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that Puda Coal's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by Puda Coal in reports that it files or submits under
the 1934 Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there is no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
There was no change in Puda Coal's internal controls over financial reporting
during Puda Coal's most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, Puda Coal's internal
controls over financial reporting. The Company is currently seeking a chief
financial officer with more expertise in the generally accepted accounting
principles of the U.S. and experience in financial reporting requirements and
guidelines of the SEC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
34
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
In July 2006, we issued 14,393 shares of our common stock to Kyle Rogers upon
cashless exercise of a warrant for 17,500 held by Kyle Rogers. Kyle Rogers
acquired the warrant as placement agent warrant in our private placement of
notes and securities which closed in November, 2005.
In August 2006, we issued 500,000 shares of our common stock to Silver Rock I
Ltd. upon conversion of a convertible note in aggregate principal amount of
$1,000,000 held by Silver Rock I Ltd at $0.50 per share. Silver Rock acquired
the convertible note in our private placement of notes and securities which
closed in November, 2005.
In August 2006, we issued 200,000 shares of our common stock to Wachovia
Securities LLC FBO Chelverton Dividend Income Fund Limited upon exercise of a
portion of a warrant held by Wachovia Securities FBO Chelverton at $0.60 per
share by the payment to us of $120,000. Wachovia Securities FBO Chelverton
acquired the warrant in our private placement of notes and securities which
closed in November, 2005. 200,000 of the outstanding balance of the warrant were
so exercised. A replacement warrant for 600,000 was reissued to Wachovia
Securities FBO Chelverton, representing the outstanding balance of the warrant
after such partial exercise.
In September 2006, we issued 100,000 shares of our common stock to Christopher
Wrolstad upon conversion of a convertible note in the aggregate principal amount
of $200,000 held by Christopher Wrolstad at $0.50 per share. Christopher
Wrolstad acquired the convertible note in our private placement of notes and
securities which closed in November, 2005.
In September 2006, we issued 50,000 shares of our common stock to Wachovia
Securities FBO PerInvest Special Situations Fund Limited upon exercise of a
portion of a warrant held by Wachovia Securities FBO PerInvest at $0.60 per
share by the payment to us of $30,000. Wachovia Securities FBO PerInvest
acquired the warrant in our private placement of notes and securities which
closed in November, 2005. 50,000 of the outstanding balance of the warrant were
so exercised. A replacement warrant for 50,000 was reissued to Wachovia
Securities FBO PerInvest, representing the outstanding balance of the warrant
after such partial exercise.
In September 2006, we issued 100,000 shares of our common stock to PerInvest
Dividend Equity Fund Limited - Teawood Nominees Limited upon exercise of a
portion of a warrant held by Teawood Nominees Limited at $0.60 per share by the
payment to us of $60,0000. Teawood Nominees Limited acquired the warrant in our
private placement of notes and securities which closed in November, 2005.
100,000 of the outstanding balance of the warrant were so exercised. A
replacement warrant for 100,000 was reissued to Teawood Nominees Limited,
representing the outstanding balance of the warrant after such partial exercise.
In September 2006, we issued 2,000,000 shares of our common stock to Crestview
Capital upon exercise of a warrant held by Crestview Capital at $0.60 per share
by the payment to us of $1,200,000. Crestview Capital acquired the warrant in
our private placement of notes and securities which closed in November, 2005.
35
In September 2006, we issued 100,000 shares of our common stock to David French
upon conversion of a convertible note in the aggregate principal amount of
$200,000 held by David French at $0.50. David French acquired the convertible
note in our private placement of notes and securities which closed in November,
2005.
The proceeds from warrants exercise, which aggregated $1,410,000 will be used to
expand the company's coal washing capacity by acquiring a coal washing plant in
Linshi County, Shanxi, China. To acquire this plant requires investment of $9.4
million as well as working capital of $4.7 million. The balance of investment
and working capital will be raised from exercise of outstanding warrants.
The convertible notes which were converted in connection with each of the above
issuances were offered and sold in our November, 2005 private placement only to
accredited investors in the United States and to persons who are not "U.S.
persons" as defined in Regulation S under the Securities Act. The notes and
related warrants, or Units, offered in such private placement, as well as the
common stocks issued upon conversion of aforementioned notes and exercise of
aforementioned warrants, were offered and sold and issued in reliance on the
exemptions from registration afforded under Rule 506 of Regulation D and
Regulation S under the Securities Act. We did not engage in any public
advertising or general solicitation in connection with the issuance of the
Units.
Repurchase of Equity Securities
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1 Certification of Mr. Zhao Ming pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Ms. Jin Xia pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
of Puda Coal, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
36
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PUDA COAL, INC.
By: /s/ Zhao Ming
Zhao Ming
Chief Executive Officer and President
Date: November 14, 2006
37