Shun Cheng HK... (OTC BB:BRBH)

On May 1, 2012, Birch Branch, Inc. (the “Company”) dismissed Samuel H. Wong & Co., LLP (“SHW”, or the “Former Accountant”), and on the same day engaged Malone Bailey LLP (“Malone Bailey”) as its independent registered public accounting firm. The decision to change independent registered public accounting firms was approved and ratified by the Company’s Board of Directors.

The report of SHW, the Former Accountant, on the Company’s financial statements for the fiscal years ended December 31, 2010 and December 31, 2011 did not contain any adverse opinions or disclaimer of opinions, nor were the reports qualified or modified as to uncertainty, audit scope or accounting principles. Furthermore, the Former Accountant’s reports did not include any disclosure of uncertainty regarding the Company’s ability to continue as a going concern. Additionally, during the fiscal years 2010 and 2011 and any subsequent interim period through May 1, 2012, while SHW was engaged by the Company, there was no disagreement with SHW on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure with respect to the Company, which disagreement, if not resolved to the satisfaction of SHW, would have caused it to make reference to the subject matter of the disagreement in connection with its report.

Prior to engaging Malone Bailey, the Company did not consult with Malone Bailey regarding (i) the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinions that might be rendered by Malone Bailey on the Company’s financial statements, and Malone Bailey did not provide any written or oral advice that was an important factor considered by the Company in reaching a decision as to any such accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as that term is described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K), or a reportable event (as that term is described in Item 304(a)(1)(v) of Regulation S-K).

The Company has provided SWH with a copy of the disclosures to be included in Item 4.01 of this Current Report and requested that SWH furnish the Company with a letter addressed to the Securities and Exchange Commission (the “SEC”) stating whether or not SWH agrees with the foregoing statements.

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.

GeoTeam Note: Investors should tread carefully when considering an investment in PRC coal mining related companies as consolidation efforts continue.  There is the real risk that many will be forced to consolidate with larger, more established entities.

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.

During the year ended Decemebr 31, 2010, SC Coke made capital expenditures of $57 million.  These capital expenditures were primarily for purchases of coking equipment, upgrades and improvements to its coke production facility.
 
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 early 2011.  The testing and full ramp-up of this production capacity is anticipated to be completed in the first quarter of 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.

Net Income. SC Coke recorded net income of $7 million for the year ended Decemebr 31, 2010 compared to net income of $15.8 million for the year ended Decemebr 31, 2009. The decrease was primarily attributed to the decrease of $2.5 million of gain on investment and the increase of $6.4 million of interest expense.

On March 2, 2011, pursuant to Article III of the Company’s bylaws and Section 7-128-108 (1)(f) of the Colorado Business Corporation Act, the Board of Directors of Birch Branch, Inc.  dismissed David Chen as a member of the Board of Directors of the Company. The termination was not due to any disagreement between Mr. Chen and the Company on any matters related to the Company’s operations, policies (including accounting or financial policies), or practices, and it became effective immediately.

On March 2, 2011, pursuant to Article III of the Company’s bylaws, the Board of Directors of the Company elected Senshan Gong as a director of the Company, effective immediately. Mr. Gong was elected to serve on the Board of Director until the next annual shareholders’ meeting of the Company.

Mr. Gong is a director of the Company. He has many years of oversea listing experience for Chinese operating companies. From September 2006 to May 2008, Mr. Gong served as the Manager of the Investment Analysis Department of Jinbao Intelligence United Venture Investment (Beijing) Co., Ltd. (“Jinbao”) where he was in charge of the site survey, material analysis and project selection during the early stage of Jinbao’s overseas listing process. Since June 2008, Mr. Gong has been serving as the Project Manager of USA Wall Street Capital United Investment Group Limited, the Company’s financing consultant. In that capacity, Mr. Gong has been coordinating the communication between the Company and its Chinese and U.S. legal counsels, auditors, and various other agencies to assist the Company in fulfilling its reporting obligations.

On November 15, 2010, Mr. Wang Feng resigned as the Chief Financial Officer of Birch Branch, Inc. effective immediately. Mr. Wang’s resignation was tendered voluntarily and not due to any disagreement with the Company on any matters related to the Company’s operations, policies, or practices. After his resignation, Mr. Wang Feng will continue to serve as the Company’s Chief Executive Officer.

On November 15, 2010, the board of directors of the Company appointed Mr. Wang Lei as the Chief Financial Officer of the Company.

Shun Cheng HK completes completes previously contemplated reverse merger.

Company Snapshot:

Produces refined coal and metallurgical coke and coal and coke byproducts in Henan Province in the central region of the People’s Republic of China

Industry Snapshot:

• The PRC coke manufacturing industry is highly competitive. 
   
• 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; 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 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 correspondingly 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.  Correspondingly, the price and demand for coke has also evidenced 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.
  
• 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 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.

Post Merger Share Calculation if the transaction is completed:

•   1,708,123: Pre reverse merger outstanding shares 
•     435,123 : Shares cancelled as part of the Share Exchange
• 30,233,750: Newly issued shares of Common Stock  
•   1,922,833: Shares from warrants
•      222,222: Shares issued to a financial consultant @ exercise price of $4.50
•      318,250: Shares issued for consulting services

Note: A second warrant was also issued to SCM Capital, LLC for the purchase, at the same exercise price, of 6% of the number of shares of common stock issued and outstanding immediately following the closing of a private financing resulting in gross proceeds of $25 million or more, less 1,922,833.

GeoTeam® best effort calculation of total post reverse merger shares assuming full conversions:  33,970,055

Financial Snapshot: 2010 vs 2009 (First quarter ended March)

Revenue: $53.7 million vs. $21.8 million 
Net Income: $1.1 million vs. to a net loss of $0.7 million

As SC Coke continues to grow, it continues to require capital infusions. Under its current business strategy, SC Coke’s ability to grow will depend on the availability of additional funds, suitable acquisition targets or joint venture partners at an acceptable cost, meeting SC Coke's liability requirements, and working capital. SC Coke's ability to compete effectively, to reach agreements with acquisition targets on commercially reasonable terms, to secure critical financing and to attract professional technicians are critical to its success. SC Coke will need additional funds to finance its expansion plans and may need additional financing to make future acquisitions, continue improving its coal processing facilities, and to obtain regulatory approvals for its operations. Should such needs arise, SC Coke intends to seek additional funds through public or private equity or debt financing, strategic transactions and/or from other sources.

SC Coke’s total consolidated short- and long-term debt as of March 31, 2010 was $163.26 million. 

From time to time, SC Coke provides guarantees of loans and other obligations for other, unrelated local enterprises.

• As of December 31, 2009, SC Coke had seven guarantees of approximately $33.5 million in total principal outstanding with terms up to five years
• At March 31, 2010, SC Coke had ten guarantees of approximately $44.4 million in total principal outstanding with terms up to five years.
  

The PRC historically has been deficient in western style management and financial reporting concepts and practices, as well as in modern banking, and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC and we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards.
 
Our ability to manage our operations and growth requires us to maintain effective operations, compliance and management controls, as well as internal control over financial reporting. Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States.  As a result of an evaluation of our internal control procedures we have identified material weakness in our internal control over financial reporting.  Specifically, SC Coke has determined that it has a material weakness related to its ability to prepare financial statements in accordance with GAAP.  SC Coke came to this conclusion based on the following significant deficiencies:

•  SC Coke holds a number of investments in other China-based companies.  SC Coke failed to properly identify the entities that required consolidation and the proper accounting treatment for the other entities where it did not have significant ownership or significant control and influence.
• SC Coke failed to perform appropriate inventory and sales cut-off during its year-end close procedures.
   
• SC Coke failed to properly reconcile its cash accounts during its year-end close procedures.
   
• SC Coke failed to identify significant GAAP disclosures during the preparation of its financial statements.

While SC Coke has begun to, or is intending to, take various measures to remediate the material weaknesses, and intends to continue to evaluate and strengthen its internal controls over financial reporting systems, these efforts require significant time and resources. If we are unable to establish adequate internal controls over financial reporting systems, we may encounter difficulties in the audit or review of our financial statements by our independent public accountants, which in turn may have a material adverse effect on our ability to comply with the reporting obligations imposed upon us by the SEC.

On May 14, 2010 Shun Cheng HK announced that it is in the initial stages of possibly consummating a reverse merger.

Company Snapshot:

Produces refined coal and metallurgical coke and coal and coke byproducts in Henan Province in the central region of the People’s Republic of China

Post Merger Share Calculation if the transaction is completed:

•  1,708,123: Pre reverse merger outstanding shares
• TBA: Shares of Common Stock issued in connection to the Bridge Investors
• TBA: Shares cancelled as part of the Share Exchange
• 30,233,750: Newly issued shares of Common Stock
• TBA:Shares from convertible notes associated with private placement
• TBA: Shares from warrants associated with private placement
• TBA: Share issued to financial institutions (Agents)

GeoTeam® best effort calculation of total post reverse merger shares assuming full conversions:  31,941,873

Financial Snapshot: TBA