UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549










FORM 10-Q







x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2011




o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from ______to______.





BIRCH BRANCH, INC.


(Exact name of registrant as specified in Charter)




Colorado

333-126654

84-1124170(State or other jurisdiction of

incorporation or organization)

(Commission File No.)

(IRS Employee 
Identification No.)





c/o Henan Shuncheng Group Coal Coke Co., Ltd.


Henan Shuncheng Group Coal Coke Co., Ltd. (New Building), Cai Cun Road Intersection,


Anyang County, Henan Province, China 455141


(Address of Principal Executive Offices)











+86 372 323 7890


(Issuer Telephone number)





_______________________________________________________


(Former Name or Former Address if Changed Since Last Report)





Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.


Yes xNo 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 oNo o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):





Large Accelerated Filer oAccelerated Filer oNon-Accelerated Filer oSmaller Reporting Company x





Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes xNo o





State the number of shares outstanding of each of the issuer’s classes of common equity, as of May 13, 2011: 32,047,222










BIRCH BRANCH, INC.





QUARTERLY REPORT ON FORM 10-Q


March 31, 2011





TABLE OF CONTENTS





PAGEPART 1 - FINANCIAL INFORMATIONItem 1.
Financial Statements (Unaudited)

4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

33Item 3.
Quantitative and Qualitative Disclosures About Market Risk

46Item 4.
Controls and Procedures

46PART II - OTHER INFORMATIONItem 1.
Legal Proceedings

47Item 1A.
Risk Factors

47Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

47Item 3.
Defaults Upon Senior Securities

47Item 4.
(Removed and Reserved)

47Item 5.
Other Information

47Item 6.
Exhibits

47SIGNATURES

48





2





CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION





This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.





We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.





These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.





Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.





CERTAIN TERMS USED IN THIS REPORT





When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Birch Branch, Inc. and its subsidiaries. “SEC” refers to the Securities and Exchange Commission.





3





PART I—FINANCIAL INFORMATION





Item 1. Financial Statements.


Birch Branch, Inc.
 
 Reviewed Consolidated Financial Statements
 
 March 31, 2011 and 2010
 
 (Stated in US Dollars)
 
 4
 
 Birch Branch, Inc.
 
 Contents

PageConsolidated Balance Sheets (unaudited)


7-8Consolidated Statements of Operations (unaudited)


9Consolidated Statements of Equity (unaudited)


10Consolidated Statements of Cash Flows (unaudited)


11Notes to Consolidated Financial Statements (unaudited)


12-32
 
 5
 
 REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
 
 To:
The Board of Directors and Stockholders of

Birch Branch, Inc.
  We have reviewed the accompanying consolidated balance sheet of Birch Branch, Inc. (the “Company”) as of March 31, 2011 and December 31, 2010, and the related statements of operations, stockholders’ equity, and cash flows for the three-month periods ended March 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company's management.
 
 We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
 Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
 
 San Mateo, California


Samuel H. Wong & Co., LLPMay 13, 2011


Certified Public Accountants
  6
 
 Birch Branch, Inc.
 Consolidated Balance Sheets
 As of March 31, 2011 and December 31, 2010
 (Stated in US Dollars)
  Note


3/31/2011


12/31/2010Assets




(unaudited)


(audited)Current assets:Cash


2D


$
11,739,753


$
9,213,760Restricted cash


2E



104,458,075



91,017,450Bank notes receivable


2F



2,050,958



4,335,785Trade receivables


2G, 3



23,993,467



28,150,931Other receivables


4



18,432,636



11,548,983Related party receivables


16



10,226,024



4,752,208Inventories


2H,5



62,346,864



59,822,024Advances to suppliers and prepayments


6



67,797,089



52,006,509Deposits


7



4,794,448



4,764,209Total current assets






305,839,314



265,611,859Non-current assets:Property, plant and equipment, net


2I,8



68,904,164



70,056,271Construction in Progress


2J, 9



56,005,865



50,727,936Intangible assets, net


2K, 10



917,119



935,661Long-term investments


2L, 11



20,328,314



20,200,106Total non-current assets






146,155,462



141,919,974Total assets





$
451,994,776


$
407,531,833Liabilities and Stockholders’ EquityLiabilitiesCurrent liabilities:Bank notes payable


12


$
152,509,094


$
120,118,576Bank loans


13



51,749,593



50,213,255Accounts payable






66,559,008



51,021,652Accrued liabilities






262,626



287,899Taxes payable






11,761,026



11,560,614Other payable


14



34,130,874



44,942,564Capital lease obligation, current portion


19



1,491,769



1,455,414Customer deposits






5,671,078



5,486,463Total current liabilities






324,135,068



285,086,437Non-current liabilities:Notes payable to related party


15



68,726,777



64,141,201Forgivable loans


16



5,403,266



5,192,184Capital lease obligation, non-current portion


19



3,528,369



3,620,470Total non-current liabilities






77,658,412



72,953,855Total liabilities





$
401,793,480


$
358,040,292
 The accompanying notes are an integral part of these consolidated financial statements
 7
 
 Birch Branch, Inc.
 Consolidated Balance Sheets
 As of March 31, 2011 and December 31, 2010
 (Stated in US Dollars)
  3/31/2011


12/31/2010(unaudited)


(audited)Stockholders’ EquityPreferred stock, 50,000,000 shares authorized, $0 par value, 0 shares issued and outstanding

$
-


$
-Common stock, 500,000,000 shares authorized, $0 par value, 32,047,222 and 32,047,222 shares issued and outstanding as of March 31, 2011 and December 31, 2010


6,963,403



6,963,403Statutory reserve


234,683



234,683Retained earnings


39,070,774



38,499,365Accumulated other comprehensive income


3,510,779



3,366,695Non-controlling interest


421,657



427,395Total stockholders’ equity


50,201,296



49,491,541Total liabilities and equity

$
451,994,776


$
407,531,833
  The accompanying notes are an integral part of these consolidated financial statements
  8
 Birch Branch, Inc.
 Consolidated Statements of Operations
 For the three-month periods ended March 31, 2011 and 2010
 (Stated in US Dollars)
 
 Note


3/31/2011


3/31/2010Revenues


2R


$
80,033,295


$
64,417,320Cost of revenues






71,459,779



59,443,601Gross profit






8,573,516



4,973,719Operating expenses:Sales and marketing


2T



2,125,809



863,374General and administrative






2,152,260



1,728,459Total operating expenses






4,278,069



2,591,833Income (loss) from operations






4,295,447



2,381,886Other income (expense):Interest income






331,859



311,735Interest expense






(3,941,313
)


(1,235,748
)Other income






205,664



103,994Other expense






(121,722
)Total other income (expense)






(3,525,512
)


(820,019
)Income (loss) before provision for income taxes


2U, 18



769,935



1,561,867Provision for (benefit from) income taxes






204,264



502,139Net income (loss)





$
565,671


$
1,059,728Net income attributable to:- Common stockholders






571,409



1,122,264- Non-controlling interest






(5,738
)


(62,536
)Earnings per share


22- Basic





$
0.02


$
0.04- Diluted





$
0.02


$
0.04Weighted average shares outstanding- Basic






32,047,222



32,047,222- Diluted






32,047,222



32,047,222
 The accompanying notes are an integral part of these consolidated financial statements
  9
 
 Birch Branch, Inc.
 Consolidated Statements of Stockholders’ Equity
 As of March 31, 2011 and December 31, 2010
 (Stated in US Dollars)
 
 AccumulatedNon-


OtherShares


Common


Registered


Statutory


Retained


controlling


Comprehensive


TotalOutstanding


Stock


Capital


Reserve


Earnings


Interest


Income


EquityBalance at January 1, 2010


31,506,750


$
-


$
6,395,907


$
234,683


$
31,426,894


$
472,844


$
2,595,677


$
41,126,005Share compensation


540,472







567,496



















567,496Apportionment of loss to non-controlling interest


















45,449



(45,449
)






0Net income


















7,027,022











7,027,022Currency translation adjustment


























771,018



771,018Balance at December 31, 2010


32,047,222


$
-


$
6,963,403


$
234,683


$
38,499,365


$
427,395


$
3,366,695


$
49,491,541Balance at January 1, 2011


32,047,222


$
-


$
6,963,403


$
234,683


$
38,499,365


$
427,395


$
3,366,695


$
49,491,541Share compensation






























0Apportionment of loss to non-controlling interest


















5,738



(5,738
)






0Net income


















565,671











565,671Currency translation adjustment


























144,084



144,084Balance at March 31, 2011


32,047,222


$
-


$
6,963,403


$
234,683


$
39,070,774


$
421,657


$
3,510,779


$
50,201,296
 
 
 Three months


Twelve months


AccumulatedComprehensive Income

3/31/2011


12/31/2010


TotalNet income

$
566,671


$
7,027,022


$
7,593,693Other Comprehensive IncomeForeign currency translation adjustment


144,084



771,018



915,102Total Comprehensive Income

$
710,755


$
7,798,040


$
8,508,795
 
 The accompanying notes are an integral part of these consolidated financial statements
  10
 
 Birch Branch, Inc.
 Consolidated Statements of Cash Flows
 For the three-month periods ended March 31, 2011 and 2010
 (Stated in US Dollars)
 
 3/31/2011


3/31/2010Cash flows from operating activities:Net income (loss)

$
565,671


$
1,059,728Adjustments to reconcile net income to net cash (used in)provided by operating activities:Share based compensationDepreciation and amortization


1,985,628



1,224,373Bad debt expense






386,623Change in assets and liabilities:Decrease/(Increase) in Notes and trade receivables


6,442,290



(8,447,255
)(Increase) in Inventories


(2,524,841
)


(4,012,877
)Decrease/(Increase) in Prepayments and other receivables


(22,674,232
)


(176,636
)Decrease/(Increase) in Related party receivables


(5,473,816
)


4,617,000(Increase) in Security deposits


(30,238
)


-Increase/(Decrease) in Notes and accounts payable


47,927,874



12,909,428Increase/(Decrease) in Other payables and current liabilities


(5,866,360
)


(4,744,631
)Net cash provided by (used in) operating activities


20,351,976



2,815,753Cash flows from investing activities:Decrease/(Increase) in Restricted cash


(13,440,625
)


2,814,815(purchase) of long-term investment in equities


(128,209
)


(4,390,948
)(Acquisitions)/sale of property, plant and equipment


(808,803
)


2,735,599Decrease/(Increase) in Construction in progress


(5,277,930
)


(5,211,753
)(Increase)/Decrease in Intangible assets


(6,176
)


-Net cash provided by (used in) investing activities


(19,661,743
)


(4,052,287
)Cash flows from financing activities:Proceeds from borrowings from bank and others


13,698,423



19,905,250Repayment of bank borrowings and others


(12,162,083
)


(18,826,049
)Repayment of capital lease obligation


(55,746
)


-Proceeds from forgivable loans


211,082



-Net cash provided by (used in) financing activities


1,691,676



1,079,201Net (decrease) increase in cash


2,381,909



(157,333
)Effect of exchange rate changes


144,084



21,353Cash at beginning of the period


9,213,760



5,749,945Cash at end of the period

$
11,739,753


$
5,613,965Supplemental disclosure of cash flow information:Interest received

$
331,859


$
311,735Interest paid


3,966,586



1,235,748Income taxes paid


-



143,458
 
 The accompanying notes are an integral part of these consolidated financial statements
  11
 
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 1.
The Company and Principal Business Activities
 
 A.
Organizational History
 
 I.
Ultimate Holding Company
  a.)
Birch Branch, Inc. (“BRBH”) was incorporated in the State of Colorado on September 29, 1989.  BRBH was originally formed to pursue real estate development projects until December 16, 2006.Unless the context requires or is otherwise indicated, the term the “Company” includes BRBH and the following entities, after giving effect to the Share Exchange (as defined herein):
  II.
Intermediary Holding Companies
  a.)
Shun Cheng Holdings HongKong Limited (“Shun Cheng HK”) is an investment holding company that was incorporated in Hong Kong on December 18, 2009.



Shun Cheng HK does not have any operations.  Its sole purpose is to act as an intermediary holding company.
  b.)
On March 17, 2010, under the laws of the Henan Province, in the People’s Republic of China (“PRC”), Anyang Shuncheng Energy Technology Co., Ltd. (“Anyang WFOE”) was incorporated as a wholly-foreign owned entity.  Anyang WFOE is wholly-owned by Shun Cheng HK.



Anyang WFOE does not conduct operations.  All operations are conducted through the operating entities via a variable interest entity agreement detailed below.
  III.
Operating Entities
 
 All of the Company’s operations are located in the PRC, and are conducted through its operating entities detailed below:
 
 a.)           Henan Shuncheng Group Coal Coke Co., Ltd. (“SC Coke”) is a limited liability company organized in the PRC on August 27, 1997 as Anyang ShunCheng Washing Co., Ltd.  In February 2005, the name was changed to Coal Coking Co., Ltd.  In August 2007, the name was changed to the current name of Henan Shuncheng Group Coal Coke Co., Ltd.  SC Coke has three shareholders: Wang Xinshun, Wang Xinming and Cheng Junsheng (collectively, the “SC Coke Shareholders”) owning 60%, 20% and 20% interests, respectively.
  SC Coke is located in the Henan Province coal chemical industry cluster area in Anyang County, about 40 kilometers (approximately 25 miles) to the northwest of Anyang City.  SC Coke is principally engaged in the processing of coal into coke, and related byproducts of cleaned coal, tar, crude benzene, and ammonium sulfate.
  b.)           Henan Shuncheng Group Longdu Trade Co., Ltd. (“Longdu”) is a limited liability company organized in the PRC on May 25, 2004.  SC Coke holds an 86% interest in Longdu.  The Company’s Chairman, Mr. Wang Xinshun, owns a 5% interest in Longdu.
 Longdu is principally engaged in coal-washing and the production of refined coal, medium coal and coal slurry.  The majority of Longdu’s coal is sent to the Company for further processing, while the remainder is sold to outside customers.
  12
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 B.
Variable Interest Entity Agreement
  On March 19, 2010, Anyang WFOE entered into four contractual arrangements that for accounting purposes will be collectively known as the variable interest entity (“VIE”) agreement with the SC Coke Shareholders.  The VIE agreement entitles Anyang WFOE to 100% of the future earnings and losses of both SC Coke, and its proportional 86% share of the earnings of Longdu.  The Company filed with the Securities and Exchange Commission (“SEC”) a Current Report on Form 8-K on July 2, 2010 that included the documents comprising the VIE agreement as exhibits.  The Company accounted for the VIE agreement, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”) 810-10, by consolidating SC Coke and Longdu as operating entities (similar to a subsidiary) of both Anyang WFOE and the Company, because the Company: (1) has the authority to direct the operations of SC Coke and Longdu, (2) has the authority to provide financial support for SC Coke and Longdu, and (3) is primary beneficiary of the results of operations of SC Coke and Longdu.  The significant terms of the VIE agreement are detailed for each of the contractual arrangements below:
  I.
Entrusted Management Agreement
 
 Anyang WFOE has full and exclusive rights to manage SC Coke.  These rights include, but are not limited to: appointment and dismissal of the members of the board of directors, hiring and termination of managerial and administrative personnel, and control over assets, which includes deployment and disposition thereof, and related cash flows generated by these assets.
 
 Anyang WFOE is entitled to receive a quarterly management fee paid 45 days in arrears from the end of the quarter equivalent to SC Coke’s earnings before taxes for the quarter, subject to quarterly and annual adjustments.
 
 Anyang WFOE is subject to operational risk and is obligated to settle debts on behalf of SC Coke, if SC Coke does not have sufficient funds to pay its debts itself.
 
 II.
Exclusive Option Agreement
 
 Anyang WFOE, or parties designated by Anyang WFOE, has been granted the irrevocable right to purchase all or part of the ownership interest of SC Coke from the SC Coke Shareholders for the minimum possible price permissible by PRC law.  The option is exercisable only to the extent that such purchase does not violate any PRC law then in effect.  The purchase right is exclusively granted to Anyang WFOE and is not transferable without the express written consent of the SC Coke Shareholders.
 
 The SC Coke Shareholders cannot dispose, assign or mortgage SC Coke assets or operations without the express written consent of Anyang WFOE.
 
 Unless unanimously terminated by all parties, the Exclusive Option Agreement remains in effect for SC Coke, the SC Coke Shareholders, and Anyang WFOE and their successors.
 
 III.
Shareholders' Voting Proxy Agreement
 
 The SC Coke Shareholders have irrevocably appointed the board of directors of Anyang WFOE as their proxy to vote on all matters that require the approval of the SC Coke Shareholders.  These voting rights include, but are not limited to, the election of directors and the chairman of the board.
 
 13
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 In the event that PRC regulations change (which regulations presently prohibit the transfer of SC Coke to Anyang WFOE), the SC Coke Shareholders may be exclusively permitted to transfer their ownership in SC Coke to Anyang WFOE; however, they are strictly prohibited from transferring their ownership in SC Coke to any other individuals or entities.
 
 The SC Coke Shareholders have agreed to irrevocably and unconditionally indemnify the board of directors of Anyang WFOE from claims arising from the exercise of any of the powers conferred upon Anyang WFOE under the agreement.
 
 IV.
Shares Pledge Agreement
 
 The SC Coke Shareholders have pledged all of their ownership interests in SC Coke, including rights to PRC registered capital and dividends related to ownership in SC Coke, to guarantee their obligations under the Entrusted Management Agreement, the Exclusive Option Agreement and the Shareholders’ Voting Proxy Agreement.
 
 C.
Share Exchange Agreements
 
 On June 28, 2010, BRBH closed a share exchange transaction (the “Share Exchange”) in which BRBH issued 30,233,750 common shares to the former shareholders of Shun Cheng HK in exchange for all of the issued and outstanding shares of Shun Cheng HK.  In connection with the Share Exchange, certain shareholders of BRBH agreed to cancel 435,123 common shares and BRBH issued 540,472 common shares to financial consultants.  Immediately prior to the closing of the Share Exchange there were 1,708,123 common shares outstanding.  Upon completion of the Share Exchange and transactions contemplated by the Share Exchange agreement, there were 32,047,222 common shares outstanding.  Immediately following the closing of the Share Exchange, the former shareholders of Shun Cheng HK and the original shareholders of BRBH own approximately 95% and approximately 5% of BRBH’s issued and outstanding common shares, respectively.
  The Share Exchange has been accounted for as a recapitalization of Shun Cheng HK in which BRBH (the legal acquirer) is considered the accounting acquiree and Shun Cheng HK (the legal acquiree) is considered the accounting acquirer.  As a result of the Share Exchange, BRBH is deemed to be a continuation of the business of Shun Cheng HK.  Accordingly, the financial data included in the accompanying consolidated financial statements for all periods prior to June 28, 2010 is that of the accounting acquirer Shun Cheng HK.  The historical stockholders’ equity of the accounting acquirer prior to the Share Exchange has been retroactively restated as if the Share Exchange occurred as of the beginning of the first period presented.
 
 2.
Summary of Significant Accounting Policies
 
 A.
Financial Statement Presentation
 
 The financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).  The consolidated financial statements include the accounts of BRBH, Shun Cheng HK, Anyang WFOE, SC Coke, and Longdu. All intercompany transactions, such as sales, cost of sales, and balances due to/due from, investment in subsidiaries, and subsidiaries’ capitalization have been eliminated.
  The Company regrouped certain accounts in the December 31, 2010 consolidated balance sheet to improve comparability with March 31, 2011 balance sheet line items.  There was no impact on earnings as a result of the regrouping.
  14
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 B.
Non-controlling Interest
 
 14% of the registered capital of Longdu is owned by parties other than SC Coke.  The Company’s Chairman, Mr. Wang Xinshun, owns a 5% interest in Longdu, while other investors own the remaining 9% interest.  Mr. Wang’s and the other investors’ share of capital, retained earnings, and income are separately disclosed on the Company’s balance sheet and statement of operations.
  C.
Use of Estimates
 
 The preparation of consolidated financial statements in conformity with US GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities.  Significant estimates and assumptions are used for, but not limited to: (1) allowance for trade receivables, (2) economic lives of property, plant and equipment, (3) asset impairments, and (4) contingency reserves.  The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.  In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results.
  D.
Cash
 
 Cash consists primarily of cash on hand or cash deposits in banks that are available for withdrawal without restriction.
  E.
Restricted Cash
 
 Restricted cash represents cash that is held by banks as collateral for bank notes payable. The banks have collateral requirements ranging from 0% to 100% of the outstanding bank notes.
  F.
Bank Notes Receivable
 
 Bank notes receivable are highly liquid negotiable instruments issued by banks in the PRC on behalf of SC Coke’s customers, which are collateralized by deposits made by such customers at the subject banks.  These notes typically have maturities between one to six months. The Company can: (a) redeem the notes for face value at maturity, (b) endorse the notes to the Company’s vendors as a form of payment instrument, or (c) factor the notes to a bank.  In the event that the Company factors these notes to a bank, it will record as interest expense the difference between cash received and the face value of the note.
  G.
Trade Receivables
 
 Trade receivables are reported at net realizable value. The Company has established an allowance for doubtful accounts based upon factors pertaining to the credit risks of specific customers, historical trends, age of the receivable and other information. Delinquent accounts are written off when it is determined that the amounts are uncollectible.
 
 15
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 H.
Inventories
 
 Inventories are stated at the lower of cost or market.  Cost is determined on a standard cost basis, which approximates actual cost on a first-in, first-out (“FIFO”) method.  Lower of cost or market is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolescence and are charged to cost of revenues.  Currently, the Company does not allocate costs to the byproducts.
  I.
Plant and Equipment
 
 Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line basis over the estimated useful lives of the related assets as follows:
 
 Machinery and equipment

10 yearsBuilding and improvements

20 yearsCompany vehicles

5 yearsFurniture and office equipment

5 yearsMiscellaneous

5 years
 
 Repairs and maintenance costs are expensed as incurred. Gaines or losses on disposals are included in cost of revenues.
 
 The Company capitalizes interest attributable to capital construction projects in accordance with ASC subtopic 835-20, Capitalization of Interest, which requires interest to be capitalized for assets that are constructed or otherwise produced for an entity’s own use, including assets constructed or produced for the entity by others for which deposits or progress payments have been made.
  J.
Construction in Progress
  Construction in progress represents direct costs of construction or acquisition and design fees incurred.  Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed.  No depreciation is recorded on construction in progress until construction has been completed and the related asset is ready for intended use and has been transferred to plant and equipment.
  K.
Intangible Assets
 
 Land Use Rights are stated at cost less accumulated amortization. Amortization is provided over its useful life, using the straight-line method.  The useful life of the land use right is 30 years.
 
 L.
Long-term Investments
 
 Long-term investments represent investments that SC Coke has in private companies within China other than Longdu.  SC Coke does not hold any interest greater than 20% and it has determined that it did not have significant control or influence over any of the private companies in which it has investment holdings.  As a result of the investments being private companies, there is a lack of readily determinable market value for these investments; as such, SC Coke recorded these investments at cost or fair value whichever is lower.
 
 16
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 M.
Impairment of Long-Lived Assets
 
 The Company has adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, ASC 360-10-35.  The Company evaluates its long lived assets for impairment when indicators of impairment are present or annually, whichever occurs sooner.  In the event that there are indications of impairment, the Company will record a loss to the statement of operations equal to the difference between the carrying value and the fair value of the long lived asset. The Company typically, but not exclusively, employs the expected future discounted cash flows method to determine fair value of long lived assets subject to impairment. The fair value of long lived assets that are held for disposition will include the cost of disposal.
  The Company’s long-lived assets are grouped by their presentation on the consolidated balance sheets, and further segregated by their operating and asset type. Long-lived assets subject to impairment include buildings, equipment, vehicles, software licenses, and land-use-rights. The Company makes its determinations based on various factors that impact those assets.
  At March 31, 2011, the Company assessed its buildings, equipment, vehicles, software licenses, and land-use-rights for production and has concluded its long-lived assets have not experienced any impairment losses because the Company’s long lived assets have enabled the Company to experience significant profit growth during the three months ended March 31, 2011 and 2010.
  N.
Fair Value of Financial Instruments
 
 The Company has adopted ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. ASC 820-10 applies whenever other statements require or permit assets or liabilities to be measured at fair value.
 
 ASC 820-10 includes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable.  Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or liability based upon their own market assumptions.  The fair value hierarchy consists of the following three levels:
  Level 1–inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
  Level 2–observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
  Level 3–instrument valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.
  17
 
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 The Company’s financial instruments consist mainly of cash, restricted cash, bank notes receivable, and debt obligations.  Bank notes receivable are reflected in the accompanying financial statements at historical cost, which approximates fair value due to the short-term nature of these instruments.  Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments.  While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 
 The following table presents the Company’s financial assets and liabilities in accordance with the hierarchy set forth in ASC 820-10:
  At March, 2011

Quoted inActive


SignificantMarkets


Other


Significantfor Identical


Observable


UnobservableAssets


Inputs


Inputs(Level 1)


(Level 2)


(Level 3)


TotalFinancial assets:Cash

$
11,739,753


$
-


$
-


$
11,739,753Restricted cash


104,458,075



-



-



104,458,075Notes receivables






2,050,958







2,050,958Total financial assets


116,197,828



2,050,958



-



118,248,786Financial liabilities:Notes payable


-



152,509,094



-



152,509,094Total financial liabilities


-



152,509,094



-



152,509,094
  In January 2008, the Company adopted ASC 825-10, Fair Value Option for Financial Assets and Financial Liabilities, and has elected not to measure any of SC Coke’s current eligible financial assets or liabilities at fair value.  ASC 825-10 was issued to allow entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, ASC 825-10 specifies that unrealized gains and losses for that instrument shall be reported in earnings at each subsequent reporting date. ASC 825-10 became effective January 1, 2008. The Company did not elect the fair value option for its financial assets and liabilities existing on January 1, 2008, and did not elect the fair value option for any financial assets or liabilities transacted during the three months ended March 31, 2011.
 
 O.
Statutory Reserve
 
 In accordance with PRC laws, statutory reserve refers to the appropriation from net income, to the account “statutory reserve,” to be used for future company development, recovery of losses, and increase of capital, as approved, to expand production or operations.  PRC laws prescribe that an enterprise operating at a profit must appropriate, on an annual basis, an amount equal to 10% of its profit.  Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.  SC Coke cannot pay dividends out of statutory reserves or paid in capital registered in PRC.
 
 18
 
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 P.
Foreign Currency Translation
 
 The accompanying consolidated financial statements are presented in U.S. Dollars. The functional currency of the Company’s operating entities is the RMB, the official currency of the PRC. Capital accounts of the consolidated financial statements are translated into U.S. Dollars from RMB at their historical exchange rates when the capital transactions occurred.  Assets and liabilities are translated at the exchange rates as of the balance sheet date.  Income and expenditures are translated at the average exchange rates for the three months ended March 31, 2011 and 2010. Currency translation adjustment results from translation to U.S. Dollar for financial reporting purposes are recorded in other comprehensive income as a component of owners’ equity.  A summary of the conversion rates for the periods presented is as follows:
  3/31/2011


12/31/2010


3/31/2010Period/year end RMB: U.S. Dollar exchange rate


6.5701



6.6118



6.8361Average RMB: U.S. Dollar exchange rate


6.5894



6.7788



6.8360
  RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. Dollars at the rates used in translation.
  Q.
Comprehensive Income
 
 The Company accounts for comprehensive income in accordance with the provisions of ASC topic 220, Comprehensive Income, which establishes standards for reporting comprehensive income or loss and its components in the financial statements. The accumulated other comprehensive income represents foreign currency translation adjustments.
 
 R.
Revenue Recognition
 
 In accordance with ASC 605-10, the Company recognizes revenue upon receipt of an acceptance of goods document issued by its customers. Each customer enters into an annual master sales agreement with the Company which will indicate a total volume for the year, and an acceptable range of prices, given market fluctuations on a short term basis, for the Company’s coke and coal byproducts. Final determination of the price for coke is determined on individual purchase orders which lie in the aforementioned price range. The Company’s coke and coal byproducts are fully usable at the point of shipment. From a revenue recognition perspective, the Company believes that collectability of the revenue is reasonably assured at the time that customers acknowledge receipt and accept the Company’s product. The Company has not experienced any material return of products, and as such, it has not prepared allowances for returns.
  Customer payments received prior to completion of the above criteria are recorded as a liability on the Company’s balance sheet as unearned revenue.
 
 S.
Shipping and Handling Costs
 
 Shipping and handling costs billed to customers are recorded net of the amount collected. Shipping and handling expense are included in sales and marketing expenses.
 
 19
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 T.
Advertising
 
 Advertising and promotion costs are expensed as they are incurred; such costs were immaterial for the first quarter 2011 and 2010 and are included in sales and marketing expenses.
 
 U.
Income Taxes
 
 The Company has implemented ASC 740, Accounting for Income Taxes. Income tax liabilities computed according to the United States, Hong Kong and PRC tax laws are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled.  Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the associated tax benefit, or that future realization is uncertain. The Company assesses its future tax assets and liabilities for any uncertainty on an annual basis.  Upon completion of its quarter review of its tax position for the three months ended March 31, 2011, the Company concluded that there was no uncertainty regarding its tax position. Any changes in the Company’s position on a going forward basis will be charged to tax expense or deferred tax benefit in its statement of operations.
 
 V.
Recent Accounting Pronouncements
 
 In June 2009, FASB issued ASC 860, Transfers and Servicing, and ASC 810, Consolidation, a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation).  The Company has adopted the new accounting policies and has determined that there is no material impact to the financial statements presented herein.
  On June 30, 2009, FASB issued ASC 105, Accounting Standards Codification (FASB ASC 105 Generally Accepted Accounting Principles) a replacement of FASB Statement No. 162 the Hierarchy of Generally Accepted Accounting Principles. On the effective date of this standard, ASC became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  If an accounting change results from the application of this guidance, an entity should disclose the nature and reason for the change in accounting principle in their financial statements.  This new standard categorizes the US GAAP hierarchy to two levels: one that is authoritative (in ASC) and one that is non-authoritative (not in ASC). Exceptions include all rules and interpretive releases of the SEC under the authority of federal securities laws, which are sources of authoritative US GAAP for SEC registrants, and certain grandfathered guidance having an effective date before March 15, 1992.  Statement No. 168 is the final standard that will be issued by FASB in that form.  There will no longer be, for example, accounting standards in the form of statements, staff positions, Emerging Issues Task Force (“EITF”) abstracts, or AICPA Accounting Statements of Position. The Company has adopted and implemented the new accounting policy.
  20
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 In October 2009, the FASB issued ASU No. 2009-13 “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force”. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The management is in the process of evaluating the impact of adopting this ASU on the Company’s financial statements.
 
 The FASB issued ASU-2010-09 (Topic 855) to amend guidance on subsequent events to remove the requirement for SEC filers (as defined in ASU 2010-09) to disclose the date through which an entity has evaluated subsequent events. This change alleviates potential conflicts with current SEC guidance. An SEC filer is still required to evaluate subsequent events through the date financial statements are issued, but disclosure of that date is no longer required. The amendments in ASU 2010-09 became effective upon issuance of the guidance. Management adopted this pronouncement as of July 1, 2010.
 
 3.
Trade Receivables
  The Company’s trade receivables as of March 31, 2011 and December 31, 2010, as well as the activity in the Company’s allowance for bad debts for the three-month ended March 31, 2011 and the year ended December 31, 2010 are set forth below:-
  3/31/2011


12/31/2010Trade Receivables

$
25,099,748


$
29,804,218Less: Allowance for Bad Debt


1,106,281



1,653,287Trade Receivables, net


23,993,467



28,150,931Allowance for Bad DebtsBeginning Balance


1,653,287



3,618,626Provision for bad debts


-



75,532Less: Allowance write back because of bad debt recovery


547,006



2,040,871Ending Balance

$
1,106,281


$
1,653,287
 
 4.
Other Receivables
 
 Other receivables at March 31, 2011 and December 31, 2010 are detailed in the table below.
  3/31/2011


12/31/2010Project safety deposit

$
-


$
10,411Non-collateralized, non-interest bearing loans to individuals and companies receivable on demand


13,765,659



9,814,316Others


4,666,977



1,724,256$
18,432,636


$
11,548,983
  21
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
  5.
Inventories
 
 The components of the Company’s inventories as of March 31, 2011 and December 31, 2010 are as follows:-
  3/31/2011


12/31/2010Raw materials

$
10,018,404


$
10,767,108Work in process and semi-finished goods


27,659,403



44,736,578Finished goods


24,669,057



4,318,338Total inventories

$
62,346,864


$
59,822,024
  6.
Advances to Suppliers and Prepayments
 
 The components of the Company’s advances to suppliers and prepayments as of March 31, 2011 and December 31, 2010 are as follows:-
  3/31/2011


12/31/2010Construction projects prepayments

$
6,203,892


$
4,354,061Prepayments for raw materials in operations


60,296,934



44,628,658Prepaid taxes


1,296,263



3,023,790$
67,797,089


$
52,006,509
  7.
Deposits
 
 Deposits are the company issued Notes Payable and deposited into Shanghai Pudong Development Bank under the names of AnJie Wu and JianKai Wang. These deposits are refundable when notes payable due in May 2011, are paid.
 
 3/31/2011


12/31/2010AnJie Wu

$
2,054,764


$
2,041,804JianKai Wang


2,739,684



2,722,405$
4,794,448


$
4,764,209
  8.
Property, Plant and Equipment, net
 
 The components of the Company’splant and equipment are as follows:-
 
 Accumulated3/31/2011

At Cost


Depreciation


NetBuildings and plant

$
31,513,809



3,150,009



28,363,800Machinery and equipment


52,612,955



15,050,425



37,562,530Electronic equipment


934,031



292,205



641,826Vehicles


3,729,352



1,808,657



1,920,695Wastewater treatment and environmental equipment


795,795



380,482



415,313Total plant and equipment

$
89,585,942


$
20,681,778


$
68,904,164
  22
 
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
  Accumulated12/31/2010

At Cost


Depreciation


NetBuildings and plant

$
31,214,528



2,724,146


$
28,490,382Machinery and equipment


52,145,602



13,736,261



38,409,341Electronic equipment


970,225



272,652



697,573Vehicles


3,660,104



1,650,989



2,009,115Wastewater treatment and environmental equipment


786,680



336,820



449,860Total plant and equipment

$
88,777,139


$
18,720,868


$
70,056,271
 
 Depreciation expenses related to plant and equipment were $ 1,960,910 and $5,977,886 for the three months and twelve months ended March 31, 2011 and December 31, 2010, respectively.
 
 9.
Construction in Progress
 
 The components of the Company’sconstruction in progress are as follows:-
 
 Accumulated3/31/2011

At Cost


Depreciation


NetConstruction in progress

$
44,600,095



-


$
44,600,095Deposits for construction projects


11,405,770







11,405,770Total Construction in progress

$
56,005,865



-


$
56,005,865
 
 Accumulated12/31/2010

At Cost


Depreciation


NetConstruction in progress


37,363,374



-



37,363,374Deposits for construction projects


13,364,562







13,364,562Total Construction in progress

$
50,727,936



-


$
50,727,936
 
 The construction in progress sub-account is detailed below:-
 
 Description

3/31/2011


12/31/2010Coking furnace

$
18,635,456


$
12,548,316Office buildings


4,669,551



4,176,514Plant and facilities


20,645,429



20,006,351Sewage system


649,659



632,193$
44,600,095


$
37,363,374
  10.
Intangible Assets, net
 
 The components of the Company’s intangible assets are as follows:-
  Accumulated3/31/2011

At Cost


Amortization


NetLand Use Rights

$
979,229


$
62,110


$
917,119Total intangible assets

$
979,229


$
62,110


$
917,119
  23
 
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
  Accumulated12/31/2010

At Cost


Amortization


NetLand Use Rights

$
973,053


$
37,392


$
935,661Total intangible assets

$
973,053


$
37,392


$
935,661
 
 Amortization expenses related to intangible assets were $ 24,718 and $37,392 for the three months and twelve months ended March 31, 2011 and December 31, 2010, respectively.
 
 11.
Investments
 
 The following tabulation presents SC Coke’s investment in non-controlled entities, which are not included in the consolidation.
  Investment

Ownership

Type

3/31/2011Anyang Rural Credit Cooperative - Tongye Branch


11.26
%
Equity

$
4,400,551Anyang Urban Credit Cooperative


11.26
%
Equity


6,206,755Ansteel Group Metallurgy Stove Co., Ltd.


19
%
Equity


2,371,348Anyang Xinlong Coal (Group) Hongling Coal Co., Ltd.


16
%
Equity


7,349,660$
20,328,314
 
 12.
Bank Notes Payable
  The following table provides the name of the financial institution, due date, and amounts outstanding at March 31, 2011 for the Company’s bank notes payable.
  Financial Institution

Due Date

3/31/2011China Citic Bank - Anyang Branch

07/10/2011

$
12,937,394Shanghai Pudong Development Bank - Zhengzhou Branch

04/14/2011


2,739,684Shanghai Pudong Development Bank - Zhengzhou Branch

04/28/2011


5,327,164Shanghai Pudong Development Bank - Zhengzhou Branch

06/10/2011


9,893,305Shanghai Pudong Development Bank - Zhengzhou Branch

07/06/2011


4,566,141Shanghai Pudong Development Bank - Zhengzhou Branch

07/07/2011


6,088,187Guangdong Development Bank - Anyang Branch

06/14/2011


7,610,234Guangdong Development Bank - Anyang Branch

09/22/2011


9,132,281Guangdong Development Bank - Anyang Branch

09/23/2011


9,741,100Henan Rural Credit Cooperative - Tongye Branch

07/13/2011


4,870,550Commercial Banks of China - Anyang Branch

09/09/2011


4,566,141Bank of Luoyang - Zhengzhou Branch

05/30/2011


1,522,047Bank of Luoyang - Zhengzhou Branch

09/07/2011


4,566,141Bank of Luoyang - Zhengzhou Branch

09/28/2011


3,805,117Bank of Luoyang - Zhengzhou Branch

09/29/2011


4,566,141China Minsheng Banking Corp.- Zhengzhou Branch

06/08/2011


13,698,422China Minsheng Banking Corp.- Zhengzhou Branch

06/09/2011


4,566,141China Minsheng Banking Corp.- Zhengzhou Branch

07/10/2011


1,522,047China Minsheng Banking Corp.- Zhengzhou Branch

09/15/2011


1,522,047China Everbright Bank - Zhengzhou Branch

04/13/2011


3,044,094China Everbright Bank - Zhengzhou Branch

06/21/2011


7,610,234China Everbright Bank - Zhengzhou Branch

07/12/2011


4,566,141China Everbright Bank - Zhengzhou Branch

08/28/2011


3,044,094China Everbright Bank - Zhengzhou Branch

09/17/2011


3,044,094Agriculture Bank of China - Anyang  Branch

09/03/2011


1,522,047Bank of  Zhengzhou – Nongdong Branch

09/18/2011


3,044,094Bank of Pingdingshan

08/23/2011


9,132,281China Construction Bank - Zhongzhou Branch

08/12/2011


4,261,731$
152,509,094
  24
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 The bank notes payable do not carry a stated interest rate, but do carry a specific due date.  These notes are negotiable documents issued by financial institutions on the Company’s behalf to vendors. These notes can either be endorsed by the vendor to other third parties as payment, or prior to coming due, they can factor these notes to other financial institutions. These notes are short term in nature and, as such, the Company does not calculate imputed interest with respect to them. These notes are collateralized by the Company’s deposits as described in Note 2E - Restricted Cash.
 
 13.
Loans
 
 The components of the Company’s loans payable are as follows:
 
 Due

InterestName of Creditors

Note

Date

Rate


3/31/2011Henan Rural Credit Cooperatives - Anyang Branch

A

03/22/2012


12.1200
%

$
4,566,141Shanghai Pudong Development Bank - Zhengzhou Branch

B

09/19/2011


6.1160
%


6,088,184Bank of China - Anyang Branch

C

07/20/2011


5.8410
%


3,044,094China Construction Bank -  Anyang Branch

D

07/28/2011


6.3720
%


3,044,094Agricultural Bank of China - Anyang Branch

E

09/18/2011


6.3720
%


4,566,141Industrial and Commercial Bank of China - Shuiye Branch

F

05/13/2011


5.6500
%


7,610,234Guangdong Development Bank - Anyang Branch

G

07/19/2011


5.3100
%


3,044,094Guangdong Development Bank - Anyang Branch

H

06/07/2011


5.3100
%


1,522,047Guangdong Development Bank - Anyang Branch

I

07/14/2011


5.3100
%


1,522,047Henan Urban Credit Cooperative - Anyang Branch

J

04/13/2011


7.9650
%


3,044,094Bank of Luoyang - Zhengzhou Branch

K

07/25/2011


6.4200
%


3,044,094Bank of Luoyang - Zhengzhou Branch

L

09/25/2011


6.7200
%


3,044,094Bank of Zhengzhou – Nongyedong Branch

M

11/29/2011


6.6720
%


1,522,047Bank of Zhengzhou – Nongyedong Branch

N

11/29/2011


6.6720
%


3,044,094China Citic Bank - Anyang Branch

O

03/14/2012


6.6660
%


3,044,094$
51,749,593
 
 SC Coke has collateralized its debt obligations above.  Refer to notes below for collateral corresponding to each obligation.
  A.
Guaranteed by Linzhou Hongqiqu Electrical Carbon Co., Ltd,  Henan Hubo Cement Co., Ltd, Wang Xinshun, Wang Xinming and Cheng Junsheng
  B.
Guaranteed by Anyang New Tianhe Cement Co., LLC, Bailianpo Coal Co., Ltd., Wang Xinshun, Wang Xinming and Cheng Junsheng
  C.
Guaranteed by Xinlei Group Co., Ltd., the Company’s machinery, Wang Xinshun, Wang Xinming and Cheng Junsheng
  D.
Guaranteed by Linzhou Hexin Casting Co., Ltd.
  E.
Guaranteed by Henan Hubo Cement Co., Ltd., the Company’s machinery and Wang Xinshun
  F.
Guaranteed by the Company’s inventory
  25
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 G.
Guaranteed by Henan Hubo Cement Co., Ltd , Xinlei Group Cheng Chen Coking., Ltd, the Company’s machinery, Wang Xinshun, Wang Xinming and Cheng Junsheng
  H.
Guaranteed by Henan Hubo Cement Co., Ltd,  Xinlei Group Cheng Chen Coking., Ltd and the Company’s machinery
  I.
Guaranteed by Henan Hubo Cement Co., Ltd and Xinlei Group Cheng Chen Coking., Ltd
  J.
Guaranteed by Anyang Liyuan Coking Co., Ltd, the company’s office building, Wang Xinshun, Wang Xinming and Cheng Junsheng
  K.
Guaranteed by Anyang Xinpu Steel Co., Ltd, Xinlei Group Cheng Chen Coking., Ltd, Wang Xinshun and Wu Fengyun
  L.
Guaranteed by. Xinlei Group Cheng Chen Coking., Ltd and Wang Xinshun
  M.
Guaranteed by Anyang Liyuan Coking Co., Ltd
  N.
Guaranteed by Anyang Liyuan Coking Co., Ltd
  O.
Guaranteed by Henan Chen Yu Coking., Ltd
  14.
Other Payable
 
 Other payable at Mach 31, 2011 and December 31, 2010 is detailed in the table below.
  3/31/2011


12/31/2010Project safety deposit

$
255,949


$
111,222Unbilled purchase payable


-



133,446Payable for raw materials in operation


1,751,217



29,194Advances from individuals and companies payable on demand


31,283,476



43,962,055Others


840,232



706,647$
34,130,874


$
44,942,564
  15.
Notes Payable to Related Party
  Creditor

Note


3/31/2011


12/31/2010Chairman, Wang Xinshun


A


$
41,231,781


$
36,955,017SC Coke Shareholders


B



27,494,996



27,186,184$
68,726,777


$
64,141,201
 
 A.
Note Payable to Wang Xinshun
  On May 23, 2010, SC Coke entered into a formal loan agreement with the Company’s Chairman, Mr. Wang Xinshun, for amounts owed to him in the amount of approximately $35.6 million at December 31, 2009. The significant terms of the loan are: (a) 12 year term, beginning as of December 31, 2009 to December 31, 2021, (b) 3% fixed simple annual interest, (c) SC Coke has the option, but not the obligation, to pay interest for the first two years, (d) after the first two years, the balance of the loan will be amortized over the remaining 10 years of the term and SC Coke is required to make monthly interest and principal payments, and (e) Mr. Wang Xinshun is prohibited from declaring default against SC Coke.
 
 The Company has neither accrued nor paid any interest for the note payable to Mr. Wang Xinshun during the three months ended March 31, 2011.
  26
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
  B.
Note Payable to SC Coke Shareholders
  On March 31, 2010, the SC Coke Shareholders, and Anyang Xinlong Coal (Group) Hongling Coal Co., Ltd., Anyang Huichang Coal Washing Co., Ltd. and Anyang Jindu Coal Co., Ltd (collectively, the “third party lenders”) formalized the terms for approximately $35.5 million of loans previously extended to SC Coke by the three lenders.
  On June 21, 2010, the SC Coke Shareholders entered into an agreement with the third party lenders to assume the obligations of the third party lenders, and concurrently the third party lenders released SC Coke from any liability.
 
 Also, on June 21, 2010, SC Coke and the SC Coke Shareholders entered into a debt agreement for the original principal amount of the loans due to the third party lenders (approximately $35.5 million), the significant terms of which are: (a) 15 year term, commencing on June 21, 2010, (b) 2% fixed simple annual interest, (c) SC Coke has the option, but not the obligation, to pay interest when accrued, and (d) the SC Coke Shareholders do not have the ability to declare a default.
  16.
Forgivable Loans
  SC Coke is currently the beneficiary of two government grants that are generally intended to be used towards capital technology improvement with the end goal of increased production and energy efficiency. The grants were awarded during 2008 and 2009, respectively. These grants have been recorded as forgivable loans in the liability section of the balance sheet. SC Coke has received payment of the grants, but has not yet met all the criteria set forth under the grant.  Upon receiving government approval of fulfilling all of the criteria set forth under the grant, SC Coke will credit the balance to other income on the consolidated statement of operations. SC Coke will also appropriate that same amount from retained earnings to statutory reserves indicating that the assets associated with these grants are not available for dividend distribution.
 
 17.
Related Party Transactions
  SC Coke has specified the following transactions with related parties with ending balances as of March 31, 2011:-
  A.
Trade Receivables and Revenue
  (a)
Angang Steel Group Metallurgy Furnace Co., Ltd (Angang), in which SC Coke owns a 19% stake, is one of the customers of SC Coke.
  There was an ending balance in accounts receivable from Angang of approximately $783,164 as of March 31, 2011.
 
 Revenue recorded in the consolidated financial statements from Angang amounts to approximately $ 848,848 for the three months ended March 31, 2011.
  27
 
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 B.
Deposits and Cost of Revenues
  (a)
The Chairman and majority owner, Mr. Wang Xinshun, owns a 43.86% interest in Anyang Bailianpo Coal Co., Ltd. (Bailianpo) which provides raw coal to SC Coke.
  SC Coke had outstanding prepayment to Bailianpo of $ 9,031,752 as of March 31, 2011.
  There is no purchase transaction from Bailianpo for the three months ended March 31, 2011.
 
 (b)
SC Coke holds a 16% interest in Anyang Xinlong Coal (Group) Hongling Coal Co., Ltd. (Anyang Xinlong), which is a coal mine located in Anyang County providing SC Coke with a substantial portion of its coking coal requirements.
  SC Coke has an ending balance in accounts receivable from Anyang Xinlong of $ 411,108 as of March 31, 2011.
  Cost of revenues related to purchases from Anyang Xinlong included in the consolidated financial statements amounts to approximately $739,742 for the year ended December 31, 2010.
 
 18.
Income Taxes
  The Company and its operating entities are subject to income tax under the jurisdictions where they operate. The following table details the Company and its operating entities, and the statutory tax rates to which they are subject:
  Entity

Country of Domicile

Income Tax RateBirch Branch, Inc.

USA


15.00% - 35.00%Shuncheng Holdings HongKong Ltd.

HK


16.50%Anyang Shuncheng Energy Technology Co., Ltd.

PRC


25.00%Henan Shuncheng Group Coal Coke Co., Ltd.

PRC


25.00%Henan Shuncheng Group Longdu Trade Co., Ltd.

PRC


25.00%
  Although the Company is subject to United States income taxes, it is a holding company with no operations or profits within the U.S. borders. The Company currently only incurs expenses in the United States that are associated with being a public company.
  Income (loss) before taxes and provision for taxes (tax benefit) consisted of the following for the three months ended March 31, 2011 and 2010, respectively:
  3/31/2011


3/31/2010Income (loss) before tax:USA

$
-


$
-HK


4



-PRC


769,931



1,561,867Total

$
769,935


$
1,561,867Provision for income taxes:US Federal


-



-State


-



-PRC

$
204,264


$
502,139Total provision for taxes (tax benefit)

$
204,264


$
502,139Effective tax rate


26.53
%


32.15
%
 
 28
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 The differences between the U.S. federal statutory income tax rates and the Company’s effective tax rate for the three months ended March 31, 2011 and 2010 are shown in the following table:
  3/31/2011


3/31/2010US statutory tax rate


34
%


34
%Lower rates in the PRC


-9
%


-9
%Accrual and reconciling items


1.53
%


7.15
%Effective tax rate


26.53
%


32.15
%
 
 19.
Commitments and Contingencies
  Third Party Guarantees
  SC Coke entered into agreements as a guarantor of debt for eleven companies (the “guarantees”) in the amount of approximately $54,565,382 at March 31, 2011. Of the aforementioned guarantees, six of the eleven companies have, in turn, guaranteed debts of approximately $38,051,174 on behalf of SC Coke at March 31, 2011.  SC Coke has not historically incurred any losses due to such debt guarantees.  Additionally, the Company has determined that the fair value of the guarantees is immaterial.  For more details of the outstanding guarantees, see the table below:
  GuaranteeGuarantee Beneficiary

Creditor

End

3/31/2011Anshan Minshan Metal Co., Ltd.

Avic International

09/15/2013

$
4,566,140Anyang New Tianhe Cement Co., Ltd

Guangdong Development Bank - Anyang Branch

07/27/2011


6,088,187Anyang Public Transportation Department

China Commercial Bank - Anyang Branch

10/30/2011


3,044,094Henan Hubo Cement Co., Ltd.

Bank of China - Anyang Branch

05/19/2011


1,522,047Henan Hubo Cement Co., Ltd.

Bank of China - Anyang Branch

11/13/2011


3,044,094Henan Hubo Cement Co., Ltd.

Guangdong Development Bank - Anyang Branch

07/06/2011


1,674,252Henan Hubo Cement Co., Ltd.

Guangdong Development Bank - Anyang Branch

07/06/2011


1,978,661Anyang Hengxiang Coal Co., Ltd.

Agricultural Bank of China - Anyang Branch

04/13/2012


684,921Linzhou Hongqiqu Electrical Carbon Co., Ltd

Agricultural Bank of China - Linzhou Branch

12/14/2011


1,522,047Linzhou Hongqiqu Electrical Carbon Co., Ltd

Agricultural Bank of China - Linzhou Branch

01/29/2012


1,522,047Linzhou Hongqiqu Electrical Carbon Co., Ltd

Agricultural Bank of China - Linzhou Branch

04/27/2011


3,044,094Linzhou Hongqiqu Electrical Carbon Co., Ltd

Agricultural Bank of China - Linzhou Branch

02/10/2012


4,566,141Xinlei Group Cheng Chen Coking

Henan Rural Credit Cooperative - Tongye Branch

04/04/2011


3,044,094Henan Yulong Coking Co., Ltd.

Henan Rural Credit Cooperative - Tongye Branch

04/23/2011


3,044,094Henan Liyuan Coking Co., Ltd

China Merchants Bank – Anyang Branch

12/26/2011


4,566,141Anyang Xingya Cleaning Co., Ltd.

Guangdong Development Bank - Anyang Branch

07/22/2011


3,044,094Anyang Xinpu Steel Co., Ltd.

Anyang Rural Credit Cooperatives

02/12/2014


7,610,234$
54,565,382
 
 29
 
 
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 Capital Lease Obligations
  SC Coke has entered into a non-cancellable lease agreement for certain machinery and equipment. The following table details SC Coke’s commitments for minimum lease payments and the related principal outstanding at March 31, 2011:-
  Quarter ending  March 31:

Principal


Payments2011

$
1,108,502


$
1,424,2032012


1,576,174



1,898,9372013


1,696,189



1,898,9372014


636,167



683,075Total future minimum lease payments

$
5,017,032


$
5,905,152
 
 Capital Commitment on Uncompleted Construction Project Contracts
 
 SC Coke entered into several contracts pertaining to Construction Project in Progress. As of March 31, 2011, capital commitments in respect of these contracts amounted to $44,500,344 attributable to items as follow:
 
 Coking stove

$
25,921,721Office building


4,962,083Plant and facility


13,093,252Sewage System


523,288$
44,500,344
 
 Accrued Payment of Enterprise Income Taxes
 
 Effective January 1, 2008, PRC government implements a new 25% income tax rate for all enterprise regardless of whether domestic or foreign enterprise without any tax holiday. Certain local government has the authority to defer the enterprise’s tax payment in a way to support local business. SC Coke is subject to the 25% tax rule. However, Anyang City government defers SC Coke income tax payment by implementing fixed payment quota instead of determining based on taxable income assessment. As of March 31, 2011, SC Coke had accrued approximately $11 million liability for estimated taxes. In the event that, PRC tax authority starts to collect this deferral, SC Coke will be subject to an overdue fine at the rate of 0.05% per day of the amount of taxes in arrears. The tax authority may also impose an additional fine of 50% to five times the underpaid taxes. SC Coke has been unable to determine the potential penalties and interest related to the overdue tax balance at this time.
  SC Coke has available funds to cover the unpaid tax liability, but may not have sufficient funds available to pay the fine. The Chairman entered into a tax indemnity agreement on May 23, 2010, pursuant to which he agreed to indemnify SC Coke for any interest, penalties or other related extra costs resulting from the prior and any future tax underpayments in tax years in which he managed and operated SC Coke.  The indemnification is capped at $35.6 million.
 
 30
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
  20.
Risks
  Concentration of Credit and Other Risks
  Cash, bank notes receivable, and trade receivables subject SC Coke to concentrations of credit risk.  SC Coke holds all its deposits and bank notes receivable with banks in China.  In China, there is no insurance equivalent to the federal deposit insurance in the United States; as such these amounts held in banks in China are not insured. SC Coke has not experienced any losses in such bank accounts through March 31, 2011.
  SC Coke offers unsecured credit to its customers in the normal course of business; therefore, SC Coke’s accounts receivable are subject to credit risks.
  Economic and Political Risks
  The operations of SC Coke 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 environment in the PRC.
 
 The Chinese Government controls its foreign currency reserves through restrictions on imports and conversion of Renminbi into foreign currency. In July 2005, the Chinese Government adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate”.  From December 31, 2010 to March 31, 2011, the exchange rate between RMB and US Dollars fluctuated between $1.00 to RMB 6.6118and $1.00 to RMB 6.5701. There can be no assurance that the exchange rate will remain stable. The Renminbi could appreciate or depreciate against the US Dollar.  The Company’s financial condition and results of operations may also be affected by changes in the value of certain currencies other than the Renminbi in which its earnings and obligations are denominated.
  Concentration Risks
  The Company deals with four suppliers and five customers to source its purchases and sells its products which can create certain concentration risks.
 
 The following four suppliers accounted for 66.78% of total purchases:
 
 Suppliers

3/31/2011


%ZaoZhuang Mining (Group) Co.,Ltd.

$
15,918,086



22.83
%Linyi Mining Coal Transportation and Sales Group Co., Ltd


14,110,919



20.24
%Jizhong Energy Group Handan BaiWei Import and Export Trade Co.,Ltd


9,249,452



13.26
%Xuzhou YuanTong Fuel Co.


7,285,250



10.45
%$
46,563,707



66.78
%
 
 Five customers accounted for 84.42% of its sales:
 
 Customers

3/31/2011


%Zhejiang Huatuo Energy Co., Ltd

$
19,667,504



24.57
%Henan Fengbao Steel Co.,Ltd


15,227,428



19.03
%Changzhou zhongfa Iron Co., Ltd


13,541,891



16.92
%Shagang Group Anyang Yongxing Iron & Steel Co., Ltd


11,044,831



13,80
%Wuhan Iron & Steel group Echeng Iron & Steel Co.,Ltd


8,085,532



10.10
%$
67,567,186



84.42
%
 
 31
 Birch Branch, Inc.
 Notes to Consolidated Financial Statements
 As of March 31, 2011 and December 31, 2010
 And for the three-month periods ended March 31, 2011 and 2010
 
 21.
Warrants
  On June 28, 2010, the Company issued to SCM Capital, LLC two warrants.  The first warrant entitles the holder to purchase 1,922,833 common shares, at an exercise price of $4.50 per share.  The second warrant entitles the holder to purchase 6% of the number of common shares issued and outstanding immediately following the closing of a private financing resulting in gross proceeds of $25 million or more, less 1,922,833 common shares.  Neither warrant is exercisable until the closing of such private financing, and each warrant is subject to forfeiture in the event such private financing is not closed on or prior to August 31, 2010.  Accordingly, the Company believes that the contingently issuable shares are related to a capital transaction and are not compensatory in nature but are potentially dilutive for purposes of calculating earnings per share.
  As of October 21, 2010, the Company has not closed the private financing. These warrants have been forfeited.
 
 22.
Earnings Per Share
  3 months


3 monthsended


ended3/31/2011


3/31/2010Basic earnings per share numerator:Net income attributable to common shareholders

$
571,409


$
1,122,264Basic weighted average shares outstanding:


32,047,222



32,047,222Additions from potentially dilutive eventsWarrants issued to consultants






-Diluted weighted average shares outstanding:


32,047,222



32,047,222Earnings per share- Basic

$
0.02


$
0.04- Diluted

$
0.02


$
0.04Weighted average shares outstanding:- Basic


32,047,222



32,047,222- Diluted


32,047,222



32,047,222
 
 32




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.





The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Report. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements.





Background





Operating through Henan Shuncheng Group Coal Coke Co., Ltd. (“SC Coke”), a variable interest entity incorporated under the laws of People’s Republic China (“PRC”), we are a vertically integrated coke producer with facilities and operations based solely in the PRC, principally in Henan Province. SC Coke, which operates and derives its revenue solely in the PRC, has a coke production plant with current capacity of approximately 1.7 million tons of coke annually, equity ownership in a coal mine and two coal washing plants (producing refined coal).





We control SC Coke and its operations through a series of contractual arrangements between Anyang Shuncheng Energy Technology Co., Ltd. (“Anyang WFOE”), our Chinese wholly-foreign owned enterprise subsidiary, and SC Coke and its shareholders.





Corporate History





We were incorporated in the State of Colorado on September 28, 1989.  We were previously a residential real estate holding company.  In September 2006, we sold our real estate assets to its then president and, effective December 6, 2006, our plan was to evaluate the structure and complete a merger with, or acquisition of, prospects consisting of private companies, partnerships or sole proprietorships.





On May 14, 2010, we entered into a share exchange agreement (the “Share Exchange Agreement”) with Shun Cheng Holdings Hong Kong Limited (“Shun Cheng HK”), the former shareholders of Shun Cheng HK (the “Shun Cheng HK Shareholders”), and our former principal shareholders, pursuant to which the Shun Cheng HK Shareholders agreed to transfer all of the issued and outstanding securities of Shun Cheng HK to us in exchange for 30,233,750 shares of our common stock (the “Share Exchange”).  The Share Exchange closed on June 28, 2010, at which time Shun Cheng HK became our wholly-owned subsidiary.  The acquisition of Shun Cheng HK has been accounted for as a reverse merger.  For accounting purposes, Shun Cheng HK is the acquirer in the reverse acquisition transaction and, consequently, its financial results have been reported on a historical basis.




33





The corporate structure of the Company, after taking into account the Share Exchange, is as follows:











Contractual Arrangements





Our relationships with SC Coke and its shareholders are governed by a series of contractual arrangements, described below, through which we exercise management rights over SC Coke.  None of the Company, Shun Cheng HK, and Anyang WFOE owns any direct equity interest in SC Coke.  On March 19, 2010, Anyang WFOE entered into the following contractual arrangements with SC Coke and its shareholders:





Entrusted Management Agreement.  Pursuant to the entrusted management agreement between Anyang WFOE, on the one hand, and SC Coke and Wang Xinshun, Wang Xinming and Cheng Junsheng (collectively, the “SC Coke Shareholders”), on the other hand, (the “Entrusted Management Agreement”), SC Coke and the SC Coke Shareholders agreed to entrust the business operations of SC Coke and its management to Anyang WFOE until Anyang WFOE acquires all of the assets or equity of SC Coke (as more fully described under “Exclusive Option Agreement” below).  Under the Entrusted Management Agreement, Anyang WFOE manages SC Coke’s operations and assets, and controls all of SC Coke’s cash flow and assets through entrusted or designated bank accounts.  In turn, it is entitled to any of SC Coke’s net earnings as a management fee, and is obligated to pay all SC Coke’s debts to the extent SC Coke is not able to pay such debts.  Such management fees payable by SC Coke shall accrue until such time as the parties shall mutually agree.  The Entrusted Management Agreement will remain in effect until the acquisition of all assets or equity of SC Coke by Anyang WFOE is completed.





Shareholders’ Voting Proxy Agreement.Under the shareholders’ voting proxy agreement (the “Shareholders’ Voting Proxy Agreement”) between Anyang WFOE and the SC Coke Shareholders, the SC Coke Shareholders irrevocably and exclusively appointed the board of directors of Anyang WFOE as their proxy to vote on all matters that require SC Coke shareholder approval.  The Shareholders’ Voting Proxy Agreement shall not be terminated prior to the completion of the acquisition of all assets or equity of SC Coke by Anyang WFOE.





Exclusive Option Agreement.Under the exclusive option agreement (the “Exclusive Option Agreement”) between Anyang WFOE, on the one hand, and SC Coke and the SC Coke Shareholders, on the other hand, the SC Coke Shareholders granted Anyang WFOE an irrevocable exclusive purchase option to purchase all or part of the shares or assets of SC Coke.  The option is exercisable at any time on or after June 28, 2010, but only to the extent that such purchase does not violate any PRC law then in effect.  The exercise price shall be the minimum price permitted under the PRC law then applicable and such price, subject to applicable PRC law, shall be refunded to Anyang WFOE or SC Coke for no consideration or the minimum consideration permitted under the PRC law then applicable, whichever is more, in a manner decided by Anyang WFOE, at its reasonable discretion.




34





Shares Pledge Agreement.Under the shares pledge agreement between Anyang WFOE, on the one hand, and SC Coke and the SC Coke Shareholders, on the other hand, (the “Shares Pledge Agreement”), the SC Coke Shareholders pledged all of their equity interests in SC Coke, including the proceeds thereof, to guarantee all of Anyang WFOE’s rights and benefits under the Entrusted Management Agreement, the Exclusive Option Agreement and the Shareholders’ Voting Proxy Agreement.  Prior to termination of the Shares Pledge Agreement, the pledged equity interests cannot be transferred without Anyang WFOE’s prior consent.





Overview





SC Coke, which operates and derives its revenue solely in the PRC, is a vertically integrated coke producer, that has a coke production plant with current capacity of approximately 1.7 million tons of coke annually, equity ownership in a coal mine and two coal washing plants (producing refined coal).  From our refined coal production process, byproducts such as medium coal and coal slurry are produced and sold.  From coke production, SC Coke recycles and produces coke byproducts, including crude benzol, amsulfate, coal gas and tar.  These coke byproducts are either marketed and sold, or recycled and consumed to provide electricity for its internal operations.  For the purpose of this discussion, such refined coal and coke byproducts are referred to as “secondary products.”





The PRC coke manufacturing industry is highly competitive.  The average sale prices for products are driven by a number of factors, including the particular composition and grade or quality of the coal or coke being sold, prevailing market prices for these products in the Chinese local, national and global marketplace, timing of sales, delivery terms, negotiations between SC Coke and its customers, and relationships with those customers.





The Chinese coking industry is also a regionalized business where supply of raw materials and the demand for coke become uneconomical at long distances as transportation costs become prohibitive.  SC Coke estimates that supply of raw materials and demand for coke to be delivered by truck transportation is uneconomical beyond 800 kilometers (approximately 500 miles); and access to and delivery by rail becomes a critical competitive factor.  SC Coke is located in close proximity to the main coal mining provinces of Shanxi and Henan in China and has a private railway line, approximately 1.7 kilometers (approximately 1 mile) in length, which provides connection to the national railway network.





As the coke industry is highly dependent on the iron and steel industries, it is affected by many of the same factors that impact the iron and steel industries.  Iron and steel are basic commodities that are required in many other industries, such as construction, infrastructure works, automotive and aerospace.  The iron and steel industries are highly cyclical and have historically been very volatile.  Similarly, the price and demand for coke has also experienced such cyclicality and volatility.  SC Coke intends to focus on better recycling and use of its secondary products, in particular coke byproducts.  The applications for coke byproducts are expected to be more diverse; therefore, demand factors for coke byproducts are likely to be different from the factors applicable to the iron and steel industries; for example, coal tar is used for the treatment of psoriasis and amsulfate is used as agricultural fertilizer.




35





The primary raw material for coke production is coal, principally coking coal.  Raw coal is washed to produce refined coal which is the main raw material for SC Coke’s coke production.  Coke prices are highly correlated to coal prices.  SC Coke’s production process is as follows:





production_chart





Because of our reliance on coal, SC Coke acquired an equity ownership interest in a coal mine.  Although SC Coke has developed multiple sources of coal supplies and long term relationships with its coal suppliers, because of the PRC government policies of encouraging consolidation in the coal mining industry, SC Coke may continue to invest in coal mines, if, when and where opportunities are available and the terms of such investments are economically attractive.





The PRC government recently adopted policies to encourage consolidation in the PRC coal mining industry whereby smaller and inefficient coal mines have been shut down.  Similarly in the iron and steel industries, which are SC Coke’s main customers, companies have been merged and consolidated by the government.  We believe that the coke manufacturing industry may face similar consolidation pressures in the future.  Accordingly, SC Coke intends to continue its capacity expansion to maintain its competitive positioning.





SC Coke has started construction on two additional coke ovens which when completed are expected to increase SC Coke’s production capacity to approximately 3.0 million tons of coke annually.  This increase in coke production may produce sufficient quantities of coke byproducts to allow SC Coke to potentially consider producing further downstream secondary products; for example, crude benzol, a current byproduct, may be processed further to produce benzene.





For the reasons above, the availability of expansion capital is critical to SC Coke to facilitate capacity expansion, downstream diversification or upstream acquisitions.  If such capital is unavailable on commercial terms, if at all, SC Coke’s growth and business could be materially adversely affected.





Results of Operations





Three Months ended March 31, 2011 Compared to the Three Months ended March 31, 2010





Revenues. During the three months ended March 31, 2011, the primary business of production and sale of coke and refined coal has contributed 81% of SC Coke’s total revenues.  However, because refined coal is a raw material for coke production, as coke production increases, our internal consumption of refined coal increases, which reduces the amount of SC Coke’s own refined coal available for external sales.  This trend is likely to continue.




36





Primary Products





SC Coke’s revenues for the three months ended March 31, 2011 and 2010, contributed by its primary products of coke and refined coal, were as follows:





RevenuesCoke


Refined Coal


TotalRevenuesThree months ended March 31 2010

$
51,096,739.33


$
984,214.54


$
52,080,953.87Three months ended March 31 2011


65,200,598.15



332,746.13



65,533,344.28Increase (decrease)

$
14,103,858.82


$
(651,468.41
)

$
13,452,390.41% Increase (decrease)


28
%


(66
)%


26
%As Percentage of Total RevenuesThree months ended March 31 2010


79
%


1.5
%


80.5
%Three months ended March 31 2011


81
%


0.4
%


81.8
%Quantity Sold (metric tons)Three months ended March 31 2010


219,770



5,841



225,611Three months ended March 31 2011


259,140



1,800



260,940Increase (decrease)


39,370



(4,041
)


35,329% Increase (decrease)


18
%


(69
)%


16
%Average Price Per TonThree months ended March 31 2010

$
232.50


$
168.49Three months ended March 31 2011


251.60



184.86Increase (decrease)

$
19.10


$
16.37% Increase (decrease)


8
%


10
%





Revenues for the three months ended March 31, 2011 increased substantially from the revenues for the three months ended March 31, 2010, primarily from the recovery in the global economic environment and the demand for coke from various steel mills in and near the Henan Province.





Sales volume for coke benefited from the global economic recovery, while sales volume for refined coal decreased due to the decrease in the amount of refined coal available for external sales.  Sales volume for the three months ended March 31, 2011 increased over the comparable period in 2010 by 18% (from 219,770 tons to 259,140 tons); and over the same period, refined coal sales volume decreased by 69% (from 5,841 tons to 1,800 tons).





Product unit price for both coke and refined coal benefited from the global economic recovery.  When compared with the same period of 2010, average sales price per ton for coke increased from $232.50 to $251.60 and refined coal increased from $168.49 to $184.86, for the three months ended March 31, 2011.  Contribution as a percentage of total revenues for coke and refined coal remained stable at approximately 81.8% and 80.5% in the year 2011 and 2010.





Because of the recovery in product unit price and sales volume, revenues generated from coke and refined coal increased from $52 million for the three months ended March 31, 2010 to $65 million for the three months ended March 31, 2011.





SC Coke believes that the significant drop in prices and volumes for its products as a result of the global financial crisis in 2009 has abated in 2010 and it is likely to experience less volatility in product prices for the balance of 2010.


37





Secondary Products





SC Coke’s secondary product revenues for the three months ended March 31, 2011 and 2010 were as follows:




Medium

Coal


Crude

Benzol


Amsulfate


Coal Gas


Tar


Coke Grain


Coke Powder


Others


TotalRevenuesThree months ended March 31 2011

$
473,688.13


$
2,365,074.77


$
301,986.62


$
1,004,375.45


$
6,719,953.88


$
4,280.68


$
2,899,920.84


$
730,669.93


$
14,499,950.30Three months ended March 31 2010


32622,17



1738,593.53



133,987.41



692,807.30



3,969,676.10



455,671.18



1,965,865.58



3,347,142.86



12,336,366.13Change

$
441,065.96


$
626,481.24


$
167,999.21


$
311,568.15


$
2,750,277.78


$
(451,390.50
)

$
934,055.26


$
(2,616,472.93
)

$
2,163,584.17% Change


1352
%


36
%


125
%


45
%


69
%


(99
)%


48
%


(78
)%


17
%As% of Total RevenuesThree months ended March 31 2011


0.6
%


3
%


0.3
%


1.3
%


8.4
%


0
%


3.6
%


0.9
%


18.1
%Three months ended March 31 2010


0
%


2.7
%


0.2
%


1.
%


6.2
%


0.7
%


3.
%


5.2
%


19
%


Along with the increase in coke production and sales, the total revenue of our secondary products significantly increased to $14 million in the three months ended March 31, 2011 from $12 million in the three months ended March 31, 2010, which was an increase of 17%, similarly as a result of the recovery in the global economic environment.  Revenue contribution from secondary products as a percentage of total revenues decreased from 19% in the three months ended March 31, 2010 to 18% in the three months ended March 31, 2011.  In the percentage of revenues contributed by secondary products was primarily from the increase in the sales of tar.





Of the secondary products, the largest contributor to revenue was from tar sales.  Tar sales increased by 69% from $3.9 million in the three months ended March 31, 2010 to $6.7 million in the three months ended March 31, 2011.  Other secondary products sales experienced sales decrease from $8.4 million for the three months ended March 31, 2010 to $7.8 million for the three months ended March 31, 2011.





Cost of Goods Sold and Gross Profit.   Cost of goods sold is comprised of raw material, labor and manufacturing costs.  Cost of goods sold increased from $59 million in the three months ended March 31, 2010 to $71 million in the three months ended March 31, 2011.  The primary reasons for this increase were due to the increase in production and raw material costs.  Gross profit increased from $4.9 million in the three months ended March 31, 2010 to $8.5 million the three months ended March 31, 2011; and gross profit margin increased from 7.7% in the three months ended March 31, 2010 to 10.7% in the three months ended March 31, 2011, due to an increase in the average unit sales price.




38





Operating Expenses.  Operating expenses increased by 65% from $2.59 million in the three months ended March 31, 2010 to $4.27 million in the three months ended March 31, 2011.  Operating expenses are comprised of sales and marketing expenses and general and administrative expenses.  Sales and marketing expenses increased marginally from $0.8 million in the three months ended March 31, 2010 to $2.1 million in the three months ended March 31, 2011.  General and administrative expenses increased from $1.7 million in the three months ended March 31, 2010 to $2.1 million in the three months ended March 31, 2011 due to costs associated with the general cost increased during the three months ended March 31, 2011.





Other Income and Expense.   Other income for the three months ended March 31, 2011 was $0.2 million compared to other expense of $0.1 million for the three months ended March 31, 2011 due to an increase in sales of waste material created during the production process.





Interest Income and Expense.  Interest expense for the three months ended March 31, 2010 was $1.2 million compared to interest expense for the three months ended March 31, 2011 of $3.9 million, due to an increase in bank notes payable during the period.  Interest income increased marginally by $0.02 million in the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.





Provision for Income Taxes.  Provision for income taxes in the three months ended March 31, 2011 was $0.2 million compared to provision for income taxes for the three months ended March 31, 2010 of $0.5 million.  SC Coke and Longdu were subject to a corporate income tax rate of 25% during the three months ended March 31, 2011 and 2010.





Net Income.   SC Coke recorded net income of $0.5 million for the three months ended March 31, 2011 compared to net income of $1 million for the three months ended March 31, 2010.  The decrease was primarily attributed to the increase of $2.7 million of interest expense.





Liquidity and Capital Resources





Net Cash Provided by Operating Activities





Net cash provided by operating activities for the three months ended March 31, 2011 was $20,351,976 compared with net cash used by operating activities for the three months ended March 31, 2010 of $2,815,753.  Net cash used by notes receivable was $6,442,290 for the three months ended March 31, 2011 compared with net cash provided of approximately $8,447,255 for the three months ended March 31, 2010.  However, net cash provided by notes and accounts payable was $47,927,874 for the three months ended March 31, 2011 compared with net cash used of $12,909,428 for the three months ended March 31, 2010.





Net Cash Used in Investing Activities





Net cash used in investing activities for the three months ended March 31, 2011 was $19,661,743 compared to $4,052,287 for the three months ended March 31, 2010.  The primary reasons were increased in restricted cash by $10,625,810 from $2,814,815 for the three months ended March 2010 to $13,440,625 for the three months ended March 31, 2011.





Net Cash Provided by (Used in) Financing Activities





Net cash used by financing activities in the three months ended March 31, 2011 was $1,691,676 compared with net cash provided in financing activities of $1,079,201 for the three months ended March 31, 2010.  In the three months ended March 31, 2011, SC Coke repaid loans of $12,162,083 and proceeds from borrowings from bank and others of $13,698,423.




39





Capital Resources





Funding for our business activities has historically been provided by cash flow from operations, and short-term lender financing, including loans from SC Coke’s sole director Xinshun Wang, who is also our Chairman of the Board of Directors, and/or from short term and long term bank loans obtained from local financial institutions.





The original loans from Xinshun Wang were interest free and had no repayment terms.  On May 23, 2010, SC Coke entered into a loan agreement with its sole director regarding outstanding loans to SC Coke of $35.6 million as of December 31, 2009.  The principal terms of the loan are: (a) 12 year term, from December 31, 2009 to December 31, 2021, (b) 3% fixed annual interest on a non-compounded basis over the term of the loan, (c) SC Coke has the option, but not the obligation, to pay interest for the first two years, (d) 10 year equal payments from December 31, 2012 to December 31, 2021, and (e) the lender has no ability to call a default.  Additionally, on May 31, 2010, SC Coke’s sole director agreed to indemnify SC Coke from any underpayment of its income tax in prior and future years, and all associated interest, penalties and costs as a result of such underpayment, up to a maximum of $35.6 million.





On March 31, 2010, the SC Coke Shareholders, and Anyang Xinlong Coal (Group)Hongling Coal Co., Ltd., Anyang Huichang Coal Washing Co., Ltd. and Anyang Jindu Coal Co., Ltd (collectively, the “third party lenders”) formalized the terms for approximately $35.5 million of loans previously extended to SC Coke by the three lenders.





On June 21, 2010, the SC Coke Shareholders entered into an agreement with the third party lenders to assume the obligations of the third party lenders, and concurrently the third party lenders released SC Coke from any liability.  Also, on June 21, 2010, SC Coke and the SC Coke Shareholders entered into a debt agreement for the original principal amount of the loans due to the third party lenders





Because of SC Coke’s rapid capacity expansion, its internally generated funds from operations have historically been insufficient to meet its liquidity requirements.  SC Coke has been dependent on financings to meet its liquidity, working capital and expansion expenditures.  As of December 31, 2010, total loans payable were $37.6 million (excluding the related party loan from SC Coke’s sole director), all of which are short term and payable in the next 12 months.  These loans have interest rates ranging from 5.31% to 8.85%, and certain of the loans are collateralized.





The loans are guaranteed by various parties in exchange for corresponding guarantees obtained from SC Coke.  For a description of such guarantees, refer to “Off-Balance Sheet Arrangements.”  If such bank financings become unavailable to us and/or additional funding is not obtained, we may not be able to meet our financing obligations, which could have a material adverse impact on our business.  If SC Coke is required to satisfy obligations of any of its guarantees, it could have a material adverse impact on its financial condition.





As part of our operations, SC Coke issues bank notes payable as payments to its suppliers.  These bank notes payable are issued by financial institutions and require deposits from SC Coke, ranging from 50% to 100% of the bank notes issued.  Bank notes were payable outstanding at December 31, 2010 were $120 million.




40





SC Coke’s management intends to continue the growth in its business through (1) increased coking production volumes to seek to achieve greater economies of scale which it believes will increase productivity and energy efficiency; (2) better recycling and usage of coking byproducts which have higher profit margins and create less environmental impact; and (3) potential acquisitions or equity participation in third party coal mines to source raw materials.  Growth through facility expansion and acquisition will require additional bank financing and/or equity capital, and therefore the sustainability of such growth will be dependent upon the availability of financing arrangements and capital, if any, on acceptable terms.  SC Coke’s management believes that the costs associated with its expansion activities will be funded through cash flows from operations and additional short and long-term debt obligations and/or raising funds through equity offerings, if any such financing is available on terms acceptable to the Company.  If additional funding is not obtained, SC Coke will need to reduce, defer or cancel development programs, planned initiatives or overhead expenditures, to the extent necessary.  The failure to fund SC Coke’s capital requirements would have a material adverse effect on its business, financial condition and results of operations.





Capital Expenditures





During the three months ended March 31, 2011, SC Coke has not made any capital expenditures.





Additionally, SC Coke intends to invest in the building of additional coking production capacity of 1.3 million tons, which is expected to be commissioned in 2011.  The testing and full ramp-up of this production capacity is anticipated to be completed in 2011.





The total investment required for the new 1.3 million ton coke facility, including two additional ovens is expected to be approximately $85 million and is expected to be financed by debt and/or equity financings and internally generated cash flow.  Construction work, which includes site preparation, foundation and construction, began in late 2009 and is anticipated to be available for use by the end of May 2011.  As of the date hereof, approximately 50% of the construction work has been completed.  Equipment to be included in the new facility will be predominantly locally sourced in China and is substantially similar to existing equipment.  To date, SC Coke has expended approximately $24.2 million on the expansion.  If additional financing is not obtained, SC Coke may need to reduce, defer or cancel its expansion plans.





With the new production capacity, total coking production is planned to reach designable capacity 3.0 million tons annually. Accordingly, we expect to achieve different economies of scale, both in coke and coke byproducts production, than our current operations.





The financing for the completion of the facility is expected to come from: (1) internally generated funds, (2) debt financing from local financial institutions, and (3) future equity financing. If SC Coke is unable to obtain additional funding, it will need to reduce, defer or cancel development programs, planned initiatives or overhead expenditures, to the extent necessary. The failure to fund SC Coke’s capital requirements could have a material adverse effect on its business, financial condition and results of operation.





Foreign Currency Translation Gains and Losses





During three months ended March 31, 2011, SC Coke recognized a foreign currency translation gain of $0.1 million as compared to a foreign currency translation gain of $0.006 million for the three months ended March 31, 2010 due to a increase in the value of the RMB to the U.S. Dollar and the increase in SC Coke’s overall debt to equity ratio.





Off-Balance Sheet Arrangements





SC Coke has entered into financial guarantees and similar commitments to guarantee the payment obligations of third parties.  Conversely, SC Coke’s debt with lenders is also guaranteed by other parties which may be related or unrelated to us.  As an industry practice, Chinese financial institutions require third party guarantees in order to provide both short term and long term bank loans to any corporate borrower.  Because of this requirement, it is common practice that Chinese private enterprises enter into arrangements with other private enterprises to provide mutual guarantees in order to obtain bank loans from local Chinese financial institutions.


41





Typically, SC Coke enters into such mutual guarantees for companies that have good longstanding relationships with SC Coke or its sole director and our Chairman of the Board of Directors, Xinshun Wang, and a mutual guarantee provided to SC Coke of approximately similar amounts.  Such guarantees are typically for a period of 2 years from the date of issuance of the guarantees.





Changes in the economic environment could leave SC Coke exposed for obligations that it has guaranteed which could have a materially negative impact on our ongoing business, and cause SC Coke to potentially be unable to meet its obligations under other bank financings.  Additionally, should any of the companies for which SC Coke provides guarantees defaults, and the banks enforce SC Coke’s guarantees, SC Coke’s recourse may only be limited to default on the mutual guarantee; SC Coke may not be able to meet the liquidity and working capital requirements for our ongoing business, resulting in a material adverse impact on our business.





As of December 31, 2010, SC Coke guaranteed the obligations of eleven companies of approximately $50 million in total principal outstanding.  SC Coke’s potential liability under guarantees could include interest, default interest and the obligation to pay costs of collection in addition to principal amounts to which the guarantees relate.





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.





Inflation





In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation.  During the past fifteen years, the official consumer price index in China has been as high as 24.1% and as low as -1.4%; while these inflation rates are an average national basis, the regional inflation in the major cities has been higher.  These factors have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation including bank lending restrictions on property investment in China.  While inflation has been more moderate since 1995, high inflation may in the future cause the PRC government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for SC Coke’s products.  SC Coke’s operations have also experienced cost increases, including labor costs and raw material costs.  SC Coke expects its operating costs to increase in tandem with the inflationary environment, particularly because of the economic growth in China, and we expect higher inflation rates to impact our operating costs in the near term.





Critical Accounting Policies and Estimates





Basis of Presentation





In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States, we are required to make judgments, estimates and assumptions that affect: (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Because the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. We believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of operations and corresponding balance sheet accounts would be necessary. These adjustments would be made in future financial statements. When reading our financial statements, you should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements. SC Coke has not made any material changes in the methodology used in these accounting polices during the past two years.




42





We consolidated the financial position, results of operations, and cash flows of SC Coke and Longdu based on accounting guidance found in FASB ASC 810 Consolidation of Variable Interest Entities which calls for us to consider various factors indicative of the relationship between the WFOE and SC Coke and Longdu. We considered the risks (absorption of potential losses), benefits (residual returns), obligations (repayment of debt on behalf of subsidiaries or the operating entities), nature of the business, legal aspects, and the purpose of the entities in concluding that SC Coke and Longdu should be treated for accounting purposes as wholly-owned subsidiaries.





Use of Estimates





In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the U.S., management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. Significant estimates and assumptions are used for, but not limited to, allowance for trade receivables, economic lives of property, plant and equipment, asset impairments, and contingency reserves. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In addition, any change in these estimates or their related assumptions could have an adverse effect on the Company’s operating results.





Long lived assets make up a significant portion of our asset base. Accordingly, we make regular assessments of our estimates of the useful lives, potential residual values, and potential impairments of our long lived assets.





The carrying value of trade receivables is subject to our estimate of the allowance for doubtful accounts. We perform a regular analysis of the aging of our receivables in order to determine that estimate.





Bank Notes Receivable/Payable





Banks in China commonly issue bank notes to companies for transactional purposes. The bank notes do not have a stated interest rate, but may be redeemed by the holder at a discount before the maturity date. The requirements by the banks vary, but the usual transaction will require the borrowing company to pay approximately 50% of the bank note upon issuance and deposit the remaining 80% to 100% with the bank as restricted funds. The amount of money required depends on bank policy and the credit rating of the requesting company. The notes are settled at maturity, which is usually between three to six months.





SC Coke accepts bank notes receivable from vendors in China as payment for products sold in the ordinary course of business. SC Coke also obtains bank notes from various banks to pay vendors for coal or for deposits on machinery or coal. Due to the short-term nature of the bank notes and the immaterial credit risk, as a function of the notes bearing the full creditworthiness of the issuing banks, SC Coke considers both bank notes receivable and bank notes payable at face value to be recorded at their fair market value. Despite the liquid nature of the bank notes, SC Coke does not include in current cash bank notes receivable with a maturity of less than three months.




43





Revenue Recognition and Trade Receivables





SC Coke is primarily in the business of processing coal to produce and sell coke. During the production process, several byproducts are produced, which SC Coke refines to produce and sell additional products. SC Coke’s primary customers are long-term customers with which SC Coke has developed long-term selling relationships. Most of these customers have long term contracts with SC Coke, but the terms of the contracts tend to change with the prevailing market price of coal and/or coke. Credit investigations are performed on new customers before a contract is approved. SC Coke reviews trade receivables and provides an allowance for receivables its suspects might not be collectable.





Revenue is recognized when products are fully delivered and accepted and collection is reasonably assured.





We believe that our revenue recognition policy meets the prescribed guidelines found in the FASB ASC 605-10 and is conservative in nature because our policy is reliant on customer acceptance documentation.





Plant and Equipment





Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets.





Repairs and maintenance costs are expensed as incurred. Gain or loss on disposals are immaterial and included in cost of revenues for the six months ended June 30, 2010 and 2009. SC Coke capitalizes interest attributable to capital construction projects in accordance with Accounting Standards Codification subtopic 835-20, Capitalization of Interest, which requires interest to be capitalized for assets that are constructed or otherwise produced for an entity’s own use, including assets constructed or produced for the entity by others for which deposits or progress payments have been made.





Our existing plant and equipment make up a very material portion of our asset base. We are also actively adding to our facilities in order to both increase capacity and efficiency. The selection of a useful life for assets heavily impacts the amount of depreciation that we record and in turn the results of our operations. In accordance with PRC tax law, the PRC national government provides guidelines for useful lives for plant and equipment. The PRC tax depreciation guidelines are very strong indicators of appropriate useful lives; accordingly the PRC useful lives are used for both PRC tax law and US GAAP reporting purposes.





Long-term Investments





Long-term investments represent investments SC Coke has in private companies within China. SC Coke did not hold a greater than 20% interest in, and it has determined that it did not have significant control or influence over, any of SC Coke’s investment holdings other than Longdu. SC Coke’s investments are in private companies where there is not a market to determine the value of the investments. Accordingly, SC Coke records these investments at cost. SC Coke will continually evaluate its investments.





We have made equity investments in four private companies. The investments are passive in nature. We do not participate in management of the companies in which we invest. In the event that the companies in which we have invested become insolvent, the maximum loss that we would experience is up to the amount that we have invested. We review the financial statements of such companies annually to determine if there has been any impairment of our investment. We have not yet received any cash dividends from our investments. We are not aware that the companies in which we have invested currently have any plans to become public listed companies. If any of our investments became publicly listed, we would mark their values to fair market value on a quarterly basis.




44





Guarantees





From time to time, SC Coke provides guarantees of loans and other obligations for other, unrelated local enterprises. SC Coke’s potential liability under such guarantees could include interest, default interest and the obligation to pay costs of collection in addition to principal amounts to which the guarantee relates. Because banks typically require security for loans, such as guarantees, mortgages or pledges, and these enterprises, including SC Coke, have mortgaged and pledged all of their available assets in order to obtain additional bank loans, the local enterprises often agree to provide guarantees for one another. All of the guarantees provided by SC Coke are joint liability guarantees, which provide that when the debtor defaults, the bank can request SC Coke to pay the total debt outstanding without first enforcing its rights against the debtor. SC Coke records a liability for guarantees of loans and other obligations for others when: (i) information available indicates that it is probable that a liability has been incurred at the financial statement date, and (ii) the amount of the loss can be reasonably estimated.





Forgivable Loans





SC Coke is currently the beneficiary of two government grants that are generally intended to be used towards capital technology improvement with the end goal of increased production and energy efficiency. The grants were awarded during 2008 and 2009, respectively. These grants are recorded as deferred income in the liability section of the balance sheet when cash is received and will be recognized as non-operating income when the fulfillment of the obligation has occurred.





When all of the criteria set forth in the grants have been fulfilled, the amounts will become part of SC Coke’s permanent capital, which is restricted for growth purposes and cannot be used to pay dividends.





Income Taxes





SC Coke accounts for income taxes in accordance with ASC 740,Income Taxes (ASC 740) (formerly SFAS 109Accounting for Income Taxes). ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our 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 basis 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. We adopted accounting policies in accordance with GAAP with regard to provisions, reserves, inventory valuation method, and depreciation that are consistent with requirements under Chinese income tax laws. Therefore, there were no significant deferred tax assets or liabilities recorded during the six months ended June 30, 2010. We adopted the provisions of ASC 740,Income Taxes, on January 1, 2009. This interpretation clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in our financial statements. The interpretation also provides guidance for the measurement and classification of tax positions, interest and penalties, and requires additional disclosure on an annual basis. The cumulative effect of the change was not material. Following implementation, the ongoing recognition of changes in measurement of uncertain tax positions will be reflected as a component of income tax expense. Interest and penalties incurred associated with unresolved income tax positions will continue to be included in other income (expense).


45





Recent Accounting Pronouncements





The FASB issued SFAS No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 in June 2009, which approved the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative United States accounting and reporting standards for all non-governmental entities, except for guidance issued by the SEC. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, in our consolidated financial statements, all references made to generally accepted accounting principles in the United States (GAAP) use the new Codification numbering system prescribed by the FASB. The adoption of this standard did not have an impact on our results of operations or financial statements.





Item 3. Quantitative and Qualitative Disclosures About Market Risk.





Smaller reporting companies are not required to provide the information required by this item.





Item 4. Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of March 31, 2011, pursuant to Rule 13a-15(b) under the Exchange Act.  Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.





A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.





Changes in Internal Control over Financial Reporting





No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




46





PART II - OTHER INFORMATION





Item 1. Legal Proceedings.





None.





Item 1A. Risk Factors.





Smaller reporting companies are not required to provide the information required by this item.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.





None.





Item 3. Defaults Upon Senior Securities.





None.





Item 4. (Removed and Reserved).





Item 5. Other Information.





None.





Item 6. Exhibits.





(a)  Exhibits




Exhibit Number

Description31.1

Certification of Chief Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





47




SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





BIRCH BRANCH, INC.Date: May 16, 2011
By:
/s/ Feng WangFeng WangPresident, Chief Executive Officer and

DirectorDate: May 16, 2011
By:
/s/ Lei WangLei WangChief Financial Officer




48