UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

þ

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended

September 30, 2015

 

or

 

¨

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from	_____________________ to ______________________
Commission File Number:	001-15931

 

 

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(Exact name of registrant as specified in its charter)

 

Florida	98-0695811
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
Kuanggong Road and Tiyu Road 10th Floor Chengshi Xin Yong She, Tiyu Road, Xinhua District Pingdingshan, Henan Province People’s Republic of China	467000
(Address of principal executive offices)	(Zip Code)

 

+86-3752882999

(Registrant’s telephone number, including area code)

SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No ¨

 

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 (Sec.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 þ No ¨

 

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

 

	Large Accelerated Filer    ¨	Accelerated Filer                      ¨
	Non-accelerated filer        ¨	Smaller reporting company     þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes ¨   No þ

 

As of November 13, 2015, the registrant had 23,960,217 shares of common stock outstanding.

 

 

TABLE OF CONTENTS

  

		Page Number
PART I.  FINANCIAL INFORMATION		4
Item 1.	Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets (unaudited)	4
	Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited)	5
	Condensed Consolidated Statements of Cash Flows (unaudited)	6
	Notes to the Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
PART II.  OTHER INFORMATION		48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	48
SIGNATURES		50

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

All statements contained in this report, other than statements of historical facts, that address future activities, events or developments, are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect,” “project,” “may,” “might,” “will,” the negative forms thereof, and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control. Actual results, performance or achievements may differ materially from those expressed or implied by forward-looking statements depending on a variety of important factors, including, but not limited to, weather, local, regional, national and global coke and coal price fluctuations, levels of coal and coke production in the region, the demand for raw materials such as iron and steel which require coke to produce, availability of financing and interest rates, competition, changes in, or failure to comply with, government regulations, costs, uncertainties and other effects of legal and other administrative proceedings, and other risks and uncertainties. Such risks and uncertainties are described in greater details in the “Risk Factors” section beginning on page 26 of the registrant’s annual report on Form 10-K for the year ended June 30, 2015 filed with the Securities and Exchange Commission (the “SEC”) on October 13, 2015 (the “Annual Report”).

 

Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the registrant’s business operations. The registrant is not undertaking to update or revise any forward-looking statement, whether as a result of new information, future events or circumstances or otherwise.

   

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

 

HONGLI CLEAN ENERGY TECHNOLOGIES CORP. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

		September 30,				June 30,
		2015				2015
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash		$	139,233			$	81,605
Accounts receivable, net			15,953,238				13,970,451
Other receivables and deposits			8,473				4,928,967
Inventories			5,947,825				3,191,605
Advances to suppliers			4,088,692				8,216,127
Prepaid expenses			-				16,670
Total current assets			26,137,461				30,405,425
PLANT AND EQUIPMENT, net			24,025,967				18,750,242
CONSTRUCTION IN PROGRESS			56,597,357				65,420,768
OTHER ASSETS
Security deposit			-				-
Prepayments			18,915,410				19,674,034
Intangible assets, net			54,021,548				56,355,185
Long-term investments			2,807,643				2,920,247
Other assets			110,170				114,589
Total other assets			75,854,771				79,064,055
Total assets		$	182,615,556			$	193,640,490
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturity of long term loans		$	43,159,496			$	44,471,220
Accounts payable, trade			275,501				70,164
Other payables and accrued liabilities			5,735,039				4,503,689
Other payables - related party			506,464				736,596
Acquisition payable			-				4,747,250
Customer deposits			77,210				80,306
Taxes payable			977,399				907,472
Current portion of warrants liability			-				289,481
Total current liabilities			50,731,109				55,806,178
LONG TERM LIABILITIES
Warrants liability			380,237				2,626,168
Total long term liabilities			380,237				2,626,168
Total liabilities			51,111,346				58,432,346
COMMITMENTS AND CONTINGENCIES
EQUITY
Common stock, $0.001 par value, 100,000,000 shares authorized, 23,960,217 shares issued and outstanding as of September 30 and June 30, 2015, respectively			23,960				23,960
Additional paid-in capital			6,846,397				6,846,397
Statutory reserves			3,689,941				3,689,941
Retained earnings			110,539,595				108,831,633
Accumulated other comprehensive income			6,072,717				11,484,613
Total Hongli Clean Energy Technologies Corp.'s equity			127,172,610				130,876,544
NONCONTROLLING INTERESTS			4,331,600				4,331,600
Total equity			131,504,210				135,208,144
Total liabilities and equity		$	182,615,556			$	193,640,490

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

HONGLI CLEAN ENERGY TECHNOLOGIES CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

 

		For the Three Months Ended September 30,
		2015				2014
REVENUE		$	6,442,238			$	13,573,836
COST OF REVENUE			4,337,321				11,292,494
GROSS PROFIT			2,104,917				2,281,342
OPERATING EXPENSES:
Selling			25,666				34,164
General and administrative			1,160,299				887,795
Total operating expenses			1,185,965				921,959
INCOME (LOSS) FROM OPERATIONS			918,952				1,359,383
OTHER INCOME (EXPENSE)
Interest income			32				102,251
Interest expense			(1,276,981	)			(1,497,213	)
Other finance expense			(4,945	)			(663	)
Change in fair value of warrants			2,535,412				(2,027,162	)
Total other income (expense), net			1,253,518				(3,422,787	)
INCOME (LOSSES) BEFORE INCOME TAXES			2,172,470				(2,063,404	)
PROVISION FOR INCOME TAXES			464,508				489,853
NET INCOME (LOSS)			1,707,962				(2,553,257	)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment			(5,411,896	)			(5,034	)
COMPREHENSIVE INCOME (LOSS)		$	(3,703,934	)		$	(2,558,291	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
Basic and diluted			23,960,217				21,310,527
EARNINGS (LOSSES) PER SHARE
Basic and diluted		$	0.07			$	(0.12	)

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

HONGLI CLEAN ENERGY TECHNOLOGIES CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the Three Months Ended September 30,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	1,707,962			$	(2,553,257	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation			381,353				279,032
Amortization and depletion			163,144				17,674
Change in fair value of warrants			(2,535,412	)			2,027,162
Bad debt expense			278,759				116,359
Amortization of prepaid expenses			16,670				8,333
Change in operating assets and liabilities
Accounts receivable, net			(2,984,556	)			(2,641,476	)
Other receivables			4,805,308				(72,829	)
Inventories			(2,924,859	)			3,224,546
Advances to suppliers			4,015,343				263,038
Accounts payable, trade			211,335				(2,303,148	)
Other payables and accrued liabilities			1,014,930				(675,686	)
Taxes payable			106,579				925,584
Net cash provided by (used in) operating activities			4,256,556				(1,384,668	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of loans receivable			-				4,500,000
Payments of gasification equipment			-				(7,026,661	)
Payments of coal mine acquisition			(4,636,439	)			-
Net cash provided by (used in) investing activities			(4,636,439	)			(2,526,661	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loans - CPL			1,362,700				-
Repayment of short-term loans - CPL			(1,045,892	)			-
Proceeds from issuance of common stock			-				13,204,538
Proceeds from (repayments to) related parties			(206,883	)			2,016,383
Net cash provided by (used in) financing activities			109,925				15,220,921
EFFECT OF EXCHANGE RATE ON CASH			327,586				78,629
INCREASE IN CASH			57,628				11,388,221
CASH, beginning of period			81,605				191,992
CASH, end of period		$	139,233			$	11,580,213
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income tax		$	316,152			$	336,180
Cash paid for interest expense, net of capitalized interest		$	-			$	2,123,933
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES
Common stock issued for a service fee		$	-			$	100,000
Issuance of warrants related to the sale of common stock		$	-			$	10,048,116
Transfer of construction in progress into plant and equipment		$	6,400,540			$	-

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Nature of business and organization

 

Hongli Clean Energy Technologies Corp. (“CETC” or the “Company”) (formerly known as SinoCoking Coal and Coke Chemical Industries, Inc.) was organized on December 31, 1996, under the laws of the State of Florida. Hongli Clean Energy Technologies Corp. was formerly named SinoCoking Coal and Coke Chemical Industries, Inc. The Company changed its name from SinoCoking Coal and Coke Chemical Industries, Inc. to Hongli Clean Energy Technologies Corp., effective on July 28, 2015 in NASDAQ.

 

The Company is a vertically-integrated producer of multifunctional energy products which is based in the People’s Republic of China (“PRC” or “China”). The Company’s products currently include washed coal, “medium” or mid-coal and coal slurries, coke, coke powder, coal tar, crude benzol, synthetic gas (“Syngas”) and electricity. All of the Company’s business operations are conducted by a variable interest entity (“VIE”), Henan Pingdingshan Hongli Coal & Coking Co., Ltd., (“Hongli”), which is controlled by Top Favour’s wholly-owned subsidiary, Pingdingshan Hongyuan Energy Science and Technology Development Co., Ltd. (“Hongyuan”), through a series of contractual arrangements.

 

Due to the continuing provincial-wide consolidation program in Henan since 2010, all small to mid-scale mines are required to be consolidated and undergo mandatory safety checks and inspections by relevant authorities before receiving clearance to resume coal mining operations. This requirement applies to all the Company’s mines. No raw coal mined since the mandatory safety checks applied to the Company since 2011. The Company is in the processing of seeking ways to restructure or resume the coal mine operations.

 

The Company washes coal purchased from third parties and generates coke products by using the coking factory leased from a third party currently. The Company also generates electricity from gas emitted during the coking process, which is used primarily to power the Company’s operations. As Hongguang Power mainly uses the gas produced during coking from our Baofeng plant to generate electricity, it has been temporarily closed following the closing of the Baofeng coking in July 2014. Thus, we did not generate any electricity during the three months ended September 30, 2015, but plan to resume our Hongguang Power operations in the future when we can do so.

 

The Company generates synthetic gas (“Syngas”) which is converted from coke using the coke gasification facility since October 2014. The Company completed the construction of the coke gasification facility for the conversion of coke into a clean-burning synthetic gas at the end of September 2014 and commenced its production in October 2014 (“Stage I facility”), which allowed the Company extend its operations into the clean-burning synthetic gas field.

 

On August 28, 2014, the Company entered into a cooperative agreement with North China Institute of Science and Technology regarding the current underground coal gasification (“UCG”) development to refine and implement a technology to convert the Company’s coal mines into Syngas. The UCG project was approved by a local governmental agency to be Science & Technology Practice Project. The UCG project was in the preliminary stage of construction which expects to complete in March 2016. Upon the relevant UCG construction completed and ensures that the new gasification facility can achieve economic efficiency, the Company will be able to implement the same techniques to the Company’s coal mines. However, if the new gasification facility cannot reach economic efficiency, the Company may not be able to resume its coal mine operations with the way of UCG.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying unaudited consolidated financial statements reflect the activities of the Company and each of the following entities:

 

Name		Background		Ownership
Top Favour		·   A British Virgin Islands company ·   Incorporated on July 2, 2008		100%
Hongyuan		·  A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”) ·  Incorporated on March 18, 2009 ·  Initial registered capital of $3 million, further increased to 12.5 million at November 2014, fully funded		100%
Hongli		·  A PRC limited liability company ·  Incorporated on June 5, 1996 ·  Initial registered capital of $1,055,248 or 8,808,000 Renminbi (“RMB”), further increased to $4,001,248 (approximately RMB 28,080,000) on August 26, 2010, fully funded ·  85.40% of equity interests held by Jianhua Lv, the Company’s Chief Executive Officer (“CEO”) and Chairman of the Board of Directors ·  Operates a branch, Baofeng Coking Factory (“Baofeng Coking”)		VIE by contractual arrangements
Baofeng Hongchang Coal Co., Ltd. (“Hongchang Coal”)		·  A PRC limited liability company ·  Incorporated on July 19, 2007 ·  Registered capital of $396,000 (approximately RMB 3,000,000) fully funded		VIE by contractual arrangements as a wholly-owned subsidiary of Hongli
Baofeng Shunli Coal Co., Ltd.(“Shunli Coal”)		·  A PRC limited liability company ·  Incorporated on August 13, 2009 ·  Registered capital of $461,700 (approximately RMB 3,000,000) fully funded ·  Acquired by Hongchang Coal on May 20, 2011 ·  Dissolved on July 4, 2012 and the mining right transferred to Hongchang.		VIE by contractual arrangements as an indirect wholly-owned subsidiary of Hongli
Baofeng Hongguang Power Co., Ltd. (“Hongguang Power”)		·  A PRC limited liability company ·  Incorporated on August 1, 2006 ·  Registered capital of $2,756,600 (approximately RMB 22,000,000) fully funded		VIE by contractual arrangements as a wholly-owned subsidiary of Hongli
Baofeng Xingsheng Coal Co., Ltd. (“Xingsheng Coal”)		·  A PRC limited liability company ·  Incorporated on December 6, 2007 ·  Registered capital of $559,400 (approximately RMB 3,634,600) fully funded ·  60% of equity ownership acquired by Hongli on May 20, 2011		VIE by contractual arrangements as a 60% owned subsidiary of Hongli
Baofeng Shuangrui Coal Co., Ltd. ( “Shuangrui Coal”)		·  A PRC limited liability company ·  Incorporated on March 17, 2009 ·  Registered capital of $620,200 (approximately RMB 4,029,960) fully funded ·  60% of equity ownership acquired by Hongli on May 20, 2011		VIE by contractual arrangements as a 100% owned subsidiary of Hongchang

 

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

  

		·  100% of equity ownership acquired by Hongchang on June 20, 2012
Zhonghong Energy Investment Company (“Zhonghong”)		·  A PRC company ·  Incorporated on December 30, 2010 ·  Registered capital of $7,842,800 (approximately RMB 51,000,000) fully funded equity interests of 100% held by three nominees on behalf of Hongli pursuant to share entrustment agreements		VIE by contractual arrangements as a wholly-owned subsidiary of Hongli
Baofeng Hongrun Coal Chemical Co., Ltd. (“Hongrun”)		·  A PRC limited liability company ·  Incorporated on May 17, 2011 ·  Registered capital of $4,620,000 (approximately RMB 30 million) fully funded		VIE by contractual arrangements as a wholly-owned subsidiary of Hongli

  

The Company believes that the equity owners of Hongli do not have the characteristics of a controlling financial interest, and that the Company is the primary beneficiary of the operations and residual returns of Hongli and, in the event of losses, would be required to absorb a majority of such losses. Accordingly, the Company consolidates Hongli’s results, assets and liabilities in the accompanying financial statements.

 

Selected financial data of Hongli and its subsidiaries is set forth below:

 

		September 30, 2015 (Unaudited)				June 30, 2015
Total current assets		$	12,767,831			$	7,938,342
Total assets		$	166,098,204			$	176,470,756
Total current liabilities		$	83,555,604			$	90,206,205
Total liabilities		$	83,555,604			$	90,206,205

 

Presently, the Company’s coking and coke gasification related operations are carried out by Baofeng Coking, Hongli engages in coke and coal trading activities, electricity generation is carried out by Hongguang Power. Our coal related operations, which should be carried out by Hongchang Coal, Shuangrui Coal and Xingsheng Coal, were halted; Hongchang Coal’s mining operations were halted in September 2011 and our other coal mining companies have halted operations since the provincial-wide mining moratorium was imposed in June 2010. The Company originally planned to transfer all coal related operations to a joint-venture between Zhonghong and Henan Province Coal Seam Gas Development and Utilization Co., Ltd. (“Henan Coal Seam Gas”)(see Note 12), However, due to the imposition of the provincial-wide mining moratorium since June 2010 in China, and the change of the Company’s original plan from developing coal mining operations to producing Syngas, the plan to transfer the related operations is halted and the Company will decide whether to execute the original plan based on the mining moratorium status and Syngas business development in the future. As of September 30, 2015 and the date of this filing, the Company’s coal related operations had not been transferred to the joint-venture, and Shuangrui Coal and Xingsheng Coal have had no operations since their acquisitions by the Company (see Note 20).

 

Liquidity and going concern

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. The going-concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. The Company’s ability to continue as a going concern depends upon the liquidation of current assets. As of September 30, 2015, the Company reported a working capital deficit in the amount to $24,593,648, which raises substantial doubt about the Company’s ability to continue as a going concern.

 

In an effort to improve its financial position, the Company is working to obtain new loans from banks, renew its current loans, and to increase sales of its higher profit margin products, coke and syngas. The Company continues to wait for the mine consolidation schedule to finalize. If the schedule should finalize by this fiscal year, the Company may be able to obtain lines of credit by pledging its mining rights as collateral. In addition, the Company keeps investing in developing the underground coal gasification techniques which may be able to be applied to its mining assets. Management believes that if successfully executed, the foregoing actions would enable the Company to continue as a going-concern.

  

 

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 – Summary of significant accounting policies

 

Basis of presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the three months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2016. The information included in this Form 10-Q should be read in conjunction with the “Management’s Discussion and Analysis” section, and the financial statements and notes thereto, included in the Annual Report.

 

Principles of consolidation

 

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The unaudited consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries – Top Favour and Hongyuan, and its VIEs – Hongli and its subsidiaries. All significant inter-company transactions and balances between the Company, its subsidiaries and VIEs are eliminated upon consolidation.

 

VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved are evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. As a result of the contractual arrangements described below, the Company, through Hongyuan, is obligated to absorb a majority of the risk of loss from Hongli’s activities and the Company is enabled to receive a majority of Hongli’s expected residual returns. The Company accounts for Hongli as a VIE and is the primary beneficiary. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. Management makes ongoing assessments of whether Hongyuan is the primary beneficiary of Hongli and its subsidiaries.

 

Accounting Standards Codification (“ASC”) 810 – “Consolidation” addresses whether certain types of entities referred to as VIEs, should be consolidated in a company’s consolidated financial statements. The contractual arrangements entered into between Hongyuan and Hongli comprises the following series of agreements:

 

(1)

a Consulting Services Agreement, through which Hongyuan has the right to advise, consult, manage and operate Hongli and its subsidiaries (“the Operating Companies”), collect, and own all of the respective net profits of the Operating Companies;

 

(2)

an Operating Agreement, through which Hongyuan has the right to recommend director candidates and appoint the senior executives of the Operating Companies, approve any transactions that may materially affect the assets, liabilities, rights or operations of the Operating Companies, and guarantee the contractual performance by the Operating Companies of any agreements with third parties, in exchange for a pledge by the Operating Companies of their respective accounts receivable and assets;

 

(3)

a Proxy Agreement, under which the equity holders of the Operating Companies have vested their voting control over the Operating Companies to Hongyuan and will only transfer their equity interests in the Operating Companies to Hongyuan or its designee(s);

 

(4)

an Option Agreement, under which the equity holders of the Operating Companies have granted Hongyuan the irrevocable right and option to acquire all of its equity interests in the Operating Companies, or, alternatively, all of the assets of the Operating Companies; and

 

(5)

an Equity Pledge Agreement, under which the equity holders of the Operating Companies have pledged all of their rights, title and interest in the Operating Companies to Hongyuan to guarantee the Operating Companies’ performance of their respective obligations under the Consulting Services Agreement.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Because Top Favour, Hongyuan and Hongli are under common control, the above contractual arrangements have been accounted for as a reorganization of entities and the consolidation of the Top Favour, Hongyuan and Hongli has been accounted for at the historical cost and prepared on the basis as if the contractual arrangements had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

Use of estimates

 

The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to materials that may contain coal that are the basis for future cash flow estimates and units-of-production depletion calculations; asset impairments; allowance for doubtful accounts and loans receivable; valuation allowances for deferred income taxes; reserves for contingencies; stock-based compensation and the fair value and accounting treatment for warrants. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates.

  

Stock-based compensation

 

The Company records share-based compensation expense based upon the grant date fair value of share-based awards. The value of the award is principally recognized as expense ratably over the requisite service periods. The Company uses the Black-Scholes Merton (“BSM”) option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates to determine fair value. The Company’s expected volatility assumption is based on the historical volatility of Company’s stock. The expected life assumption is primarily based on the simplified method of the terms of the options. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

Stock-based compensation expense is recognized based on awards expected to vest. U.S. GAAP require forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, when actual forfeitures differ from those estimates. There were no estimated forfeitures as the Company has a short history of issuing options.

 

Revenue recognition

 

Coal and coke sales are recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. This generally occurs when coal and coke is loaded onto trains or trucks at one of the Company’s loading facilities or at third party facilities.

 

Substantially, if not all, of the electricity generated by Hongguang Power is typically used internally by Baofeng Coking. Supply of surplus electricity generated by Hongguang Power to the national power grid is mandated by the local utilities board. The value of the surplus electricity supplied, if it exists, is calculated based on actual kilowatt-hours produced and transmitted and at a fixed rate determined under contract. During the three months ended September 30, 2015 and 2014, the Company did not generate any electricity power because Hongguang Power has been temporarily closed since July 2014.

 

The Company generally sells syngas under long-term agreements at fixed vending prices. In some cases, syngas may be sold with periodic price adjustments. Revenues are recognized when the products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.

 

Coal, coke and syngas sales represent the invoiced value of goods, net of a value-added tax (“VAT”), sales discounts and actual returns at the time when product is sold to the customer.

 

Foreign currency translation and other comprehensive income

 

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company, its subsidiaries and VIEs in the PRC is denominated in RMB.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

For the subsidiaries and VIEs whose functional currencies are other than the U.S. dollar, all assets and liabilities accounts were translated at the exchange rate on the balance sheet date; shareholders’ equity is translated at the historical rates and items in the statement of operations are translated at the average rate for the period. Items in the cash flow statement are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. The resulting transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations. 

 

The balance sheet amounts, with the exception of equity, at September 30 and June 30, 2015 were translated at RMB 6.35 to $1 and RMB 6.11 to $1, respectively. The average translation rates applied to income and cash flow statement amounts were at RMB 6.25 to $1 and RMB 6.16 to $1 for the three months ended September 30, 2015 and 2014, respectively.

 

Fair value of financial instruments

 

The Company uses a three-level valuation hierarchy for disclosures of fair value measurement. The carrying amounts reported in the accompanying consolidated balance sheets for receivables, payables and short term loans qualify as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available. The three levels of valuation hierarchy are defined as follows:

 

Level 1	Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3	Inputs to the valuation methodology are unobservable.

 

The Company determined that the carrying value of its long-term loans approximated their fair value using level 2 inputs by comparing the stated loan interest rate to the rate charged by the Bairui Trust on similar loans (see Note 13).

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015:

 

		Carrying value at September 30, 2015				Fair value measurement at September 30, 2015
						Level 1				Level 2				Level 3
Warrants liability		$	380,237			$	-			$	380,237			$	-

 

The following is a reconciliation of the beginning and ending balances of warrants liability measured at fair value on a recurring basis using observable inputs as of September 30 and June 30, 2015:

 

		September 30,				June 30,
		2015				2015
Beginning fair value		$	2,915,649			$	16
Realized gain recorded in earnings			(2,515,412	)			(7,131,724	)
Granted financial instrument			-				10,047,357
Ending fair value		$	380,237			$	2,915,649

 

		September 30, 2015				June 30, 2015
Number of shares exercisable			1,671,664				1,721,664
Range of exercise price		$	6.08-48.00			$	6.08-48.00
Stock price		$	0.44			$	1.75
Expected term (years)			1.53-3.82				0.00-4.07
Risk-free interest rate			0.49-1.10 %				0.02-1.34 %
Expected volatility			86-121 %				51-88 %

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain financial assets and liabilities at fair value on a non-recurring basis. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges. For the three months ended September 30, 2015 and 2014, the Company’s two long term investments were not considered impaired.

 

The Company did not identify any other assets and liabilities that are required to be presented on the consolidated balance sheets at fair value.

 

Cash

 

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents for cash flow statement purposes. Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the PRC and with banks in Hong Kong and in the United States.

 

Balances at financial institutions or state owned banks within the PRC are not covered by insurance. Balances at financial institutions in Hong Kong may, from time to time, exceed Hong Kong Deposit Protection Board’s insured limits. As of September 30 and June 30, 2015, the Company had $63,203 and $37,911 of cash deposits, which were not covered by insurance, respectively. The Company has not experienced any losses in such accounts.

 

Accounts receivable, net

 

During the normal course of business, the Company extends unsecured credit not exceeding three months to its customers. Management regularly reviews aging of receivables and changes in payment trends by its customers, and records an allowance when management believes collection of amounts due are at risk. Accounts receivables are considered past due after three months from the date credit was granted. Accounts considered uncollectible after exhaustive efforts to collect are written off. The Company regularly reviews the credit worthiness of its customers and, based on the results of the credit review, determines whether extended payment terms can be granted to or, in some cases, partial prepayment is required from certain customers. As of September 30 and June 30, 2015, $626,073 and $217,905 allowance for doubtful accounts was provided, respectively.

 

Other receivables and deposit

 

Other receivables include security deposit made for auction of purchasing non-performing assets, advances to employees for general business purposes and other short term non-traded receivables from unrelated parties, primarily as unsecured demand loans, with no stated interest rate or due date. Management regularly reviews aging of receivables and changes in payment trends and records a reserve when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off after exhaustive efforts at collection. There was no allowance for doubtful accounts provided as of September 30, 2015 or June 30, 2015, respectively.

 

Inventories

 

Inventories are stated at the lower of cost or market, using the weighted average cost method. Inventories consist of raw materials, supplies, work in process, and finished goods. Raw materials mainly consist of coal (mined and purchased), rail, steel, wood and additives used by the Company. The cost of finished goods includes (1) direct costs of raw materials, (2) direct labor, (3) indirect production costs, such as allocable utilities cost, and (4) indirect labor related to the production activities, such as assembling and packaging. Management compares the cost of inventories with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost. On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories equal to the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. When inventories are written-down to the lower of cost or market, they are not marked up subsequently based on changes in underlying facts and circumstances. As of September 30 and June 30, 2015, amount to $42,877 and $44,597 was reported as allowance for impairment.

 

Advances to suppliers

 

The Company advances monies or may legally assign its notes receivable-trade (which are guaranteed by banks) to certain suppliers for raw material purchases. Such advances are interest-free and unsecured. Management regularly reviews aging of advances to suppliers and changes in materials receiving trends and records an allowance when management believes collection of materials due are at risk. Advances aged over one year and considered uncollectible are written off after exhaustive efforts at collection. As of September 30 and June 30, 2015, $1,312,298 and $1,512,785 allowance for doubtful accounts was provided, respectively.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Plant and equipment, net

 

Plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments that extend the useful life are capitalized. When items of plant and equipment are retired or otherwise disposed, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Mine development costs are capitalized and amortized by the units of production method over estimated total amount of mineralized coal materials. Depreciation of plant and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

  

		Estimated useful life
Building and plant		20 years
Machinery and equipment		10-20 years
Other equipment		1-5 years
Transportation equipment		5-7 years

 

Construction-in-progress (“CIP”) includes direct costs of constructions for coke gasification facility, UCG underground safety improvement, and the Company’s new coking plant. Interest incurred during the period of construction, if material, is capitalized. For the three months ended September 30, 2015 and 2014, no interests were capitalized into CIP for construction is halted during the period. All other interest is expensed as incurred. CIP is not depreciated until such time the asset in question is completed and put into service.

 

Security deposit

 

A deposit was made to Henan Coal Seam Gas and is related to its joint venture with Zhonghong (see Note 12). Management regularly reviews aging of the deposit and changes in payment trends and records a reserve when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off after exhaustive efforts at collection. As of September 30 and June 30, 2015, $4,721,584 and $4,887,984 allowance for doubtful accounts was provided, respectively.

 

Intangible assets

 

Costs to obtain land use rights are recorded based on the fair value at acquisition and amortized over 36 to 40 years, the contractual period of the rights. Intangible assets with finite lives are amortized over their useful lives and reviewed at least annually for impairment.

 

Mining rights are capitalized at fair value when acquired, including amounts associated with any value beyond the total amount of mineralized coal materials, and amortized to operations as depletion expense using the units-of-production method over the estimated amount of mineralized coal materials. The Company’s coal mines are controlled through its VIEs, which control generally lasts until the mineralized coal materials are depleted.

 

Impairment of long - lived assets

 

The Company evaluates long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows, in accordance with the accounting guidance regarding “Disposal of Long-Lived Assets.” Recoverability is measured by comparing an asset’s carrying value to the related projected undiscounted cash flows generated by the long-lived asset or asset group, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. When the carrying value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss to the extent that the carrying value exceeds its fair value As of September 30 and June 30, 2015, $2,348,936 and $2,431,718 impairment reserve against long-lived assets. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Long-term investments

 

Investments in equity securities of privately-held companies in which the Company holds less than 20% voting interest and to which the Company does not have the ability to exercise significant influence are accounted for under the cost method.

 

Entities in which the Company has the ability to exercise significant influence, but does not have a controlling interest, are accounted for under the equity method. Significant influence is generally considered to exist when the Company has between 20% and 50% of ownership interest in the voting share, but other factors, such as representation on the board of directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.

  

The Company evaluates potential impairment whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. For investments carried at cost, the Company recognizes impairment in the event that the carrying value of the investment exceeds the Company’s proportionate share of the net book value of the investee. Management believes that no impairment charge was necessary as of September 30 and June 30, 2015.

 

Asset retirement cost and obligations

 

The Company accounts for the asset retirement cost and obligations to retire tangible long-lived assets in accordance with U.S. GAAP, which requires that the Company’s legal obligations associated with the retirement of long-lived assets be recognized at fair value at the time the obligations are incurred. Such obligations are incurred when development commences for underground mines or construction begins for support facilities, refuse areas and slurry ponds. If an entity has a conditional asset retirement obligation, a liability should be recognized when the fair value of the obligations can be reasonably estimated.

 

The obligation’s fair value is determined using discounted cash flow techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. Amortization of the related asset is calculated on a unit-of-production method by amortizing the total estimated cost over the salable materials that may contain coal as determined under SEC Industry Guide 7, multiplied by the production during the period.

 

Asset retirement costs generally include the cost of reclamation (the process of bringing the land back to its natural state after completion of exploration activities) and environmental remediation (the physical activity of taking steps to remediate, or remedy, any environmental damage caused).

 

In May 2009, the Henan Bureau of Finance and the Bureau of Land and Resource issued regulations requiring mining companies to file an evaluation report regarding the environmental impacts of their mining (the “Evaluation Report”) before December 31, 2010. The relevant authorities would then determine whether to approve the Evaluation Report after performing on-site investigation, and the asset retirement obligation would be determined by the authorities based on the approved filing. Such requirement was extended along with the extension of the provincial mine consolidation schedule, although the specific extension date has not been finalized by the relevant provincial authorities.

 

The Company did not record any asset retirement obligation as of September 30 and June 30, 2015 because the Company did not have sufficient information to reasonably estimate the fair value of such obligation. The range of time over which the Company may settle the obligation is unknown and cannot be reasonably estimated. In addition, the settlement method for the obligation cannot be reasonably determined. The amount of the obligation to be determined by the relevant authorities is affected by several factors, such as the extent of remediation required in and around the mining area, the methods to be used to remediate the mining site, and any government grants which may or may not be credited to the mining companies.

 

The Company will recognize the liability in the period in which sufficient information is available to reasonably estimate its fair value.

 

Income taxes

 

Deferred income taxes are provided on the asset and liability method for temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

 

 

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes were incurred during the three months ended September 30, 2015 and the year ended June 30, 2015.

  

Chinese income taxes

 

The Company’s subsidiary and VIEs that operate in the PRC are governed by the national and local income tax laws of that country (the “Income Tax Laws”), and are generally subject to a statutory income tax rate of 25% of taxable income, which is based on the net income reported in the statutory financial statements after appropriate tax adjustment.

 

Value added tax (“VAT”)

 

Sales revenue represents the invoiced value of goods, net of VAT. All of the Company’s coal and coke are sold in the PRC and subject to a VAT at a rate of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing finished products. The Company records VAT payable and VAT receivable net of payments in its consolidated financial statements. The VAT tax return is filed to offset the payables against the receivables.

 

Warrants liability

 

A contract is designated as an asset or a liability and is carried at fair value on the Company’s balance sheet, with any changes in fair value recorded in its results of operations. The Company then determines which options, warrants and embedded features require liability accounting and records the fair value as a derivative liability. The changes in the values of these instruments are shown in the accompanying consolidated statements of income and other comprehensive income as “change in fair value of warrants.”

 

In connection with the Company’s share exchange transaction in February 2010 with Top Favour, whereby Top Favour became a wholly-owned subsidiary of the Company (the “Share Exchange”), the Company adopted the provisions of an accounting standard regarding instruments that are indexed to an entity’s own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in equity in the statement of financial position would not be considered a derivative financial instrument. It provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception within the standards. As a result of adopting this accounting standard, all warrants issued after the Share Exchange are recorded as a liability because their strike price is denominated in U.S. dollars, while the Company’s functional currency is denominated in RMB.

 

All warrants issued before the Share Exchange, which were treated as equity pursuant to the derivative treatment exemption prior to the Share Exchange, are also no longer afforded equity treatment for the same reason. Since such warrants are no longer considered indexed to the Company’s own stock, all future changes in their fair value will be recognized currently in earnings until they are exercised or expire.

 

Noncontrolling interests

 

As further discussed in Note 20, noncontrolling interests mainly consist of a 40% equity interest of Xingsheng Coal owned by unrelated parties. For the three months ended September 30, 2015 and 2014, there was no net income or loss attributable to such noncontrolling interests because Xingsheng Coal was not operational during such periods.

 

Earnings (losses) per share

 

The Company reports earnings per share in accordance with the provisions of ASC – 260 “Earnings per Share.” This standard requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Dilution is computed by applying the treasury stock method. Under this method, option and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby are used to purchase common stock at the average market price during the period.

  

 

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Comprehensive income

 

Accounting standard regarding comprehensive income establishes requirements for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. This accounting standard defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, it also requires all items recognized under current accounting standards as components of comprehensive income to be reported in financial statement that is presented with the same prominence as other financial statements. The Company's only current component of comprehensive income is foreign currency translation adjustments.

  

Reclassifications

 

Certain reclassifications have been made to the prior periods’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or the sum of retained earnings and statutory reserves.

 

Recently issued accounting pronouncements

  

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs–Contracts with Customers (Subtopic 340-40). The amendments in ASU 2014-09 supersede most current revenue recognition requirements. The core principal of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company can apply the amendments using one of the following two methods: (i) retrospectively to each prior reporting period presented, or (ii) retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. In July 2015, the FASB issued ASU No. 2015-4, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year for all entities. Accordingly, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently assessing the timing of its adoption and the impact of adopting this guidance on its consolidated financial statements and the implementation approach to be used.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted on a retrospective basis. The Company elected to adopt ASU 2015-03 early, effective in the three months ended September 30, 2015.

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Entities are currently required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to measurement period adjustments that occur after the effective date of the guidance with earlier application permitted for financial statements that have not been issued. The Company elected to adopt ASU 2015-16 early, effective in the three months ended September 30, 2015.

 

Note 3 – Concentration risk

 

For the three months ended September 30, 2015, 88.7% of the Company’s total revenues were from five main customers who individually accounted for 34.1%, 17.8%, 13.9%, 12.5% and 10.4% of total revenues, respectively. For the three months ended September 30, 2014, 82.5% of the Company’s total revenues were from three main customers who individually accounted for 37.8%, 25.1% and 19.6% of total revenues, respectively. Accounts receivable of five main customers were 13.4%, 7.7%, 23.3%, 21.0% and 17.2% of the total accounts receivable balance at September 30, 2015, respectively. Accounts receivable of four main customers were 34.7%, 0.1%, 2.3%, and 20.7% of the total accounts receivable balance at June 30, 2015, respectively.

 

For the three months ended September 30, 2015, four main suppliers provided 50.5% of total raw material purchases, with each supplier individually accounting for 15.8%, 12.8%, 11.7% and 10.2% of total raw material purchases, respectively. For the three months ended September 30, 2014, four main suppliers provided 57.4% of total raw material purchases, with each supplier individually accounting for 17.8%, 15.7%, 12.6% and 11.3% of total raw material purchases, respectively. Accounts payables of four main suppliers were 3.4%, 3.9%, 6.2% and 4.0% of total accounts payable balance at September 30, 2015, respectively. Accounts payable of two main suppliers were 7.3% and 7.2% of total accounts payable balance at June 30, 2015, respectively.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 4 – Other receivables and deposit

  

Other receivables and deposit consisted of the following:

 

		September 30, 2015				June 30, 2015
Security deposit for auction		$	-			$	4,910,949
Advances to employees			8,473				18,018
			8,473				4,928,967
Less: allowance for doubtful accounts			-				-
		$	8,473			$	4,928,967

 

Security deposit for auction

 

On January 26, 2013, Hongli entered into an agreement with Pingdingshan Rural Credit Cooperative Union (“PRCCU”) to pay $3,249,285 (approximately RMB 20 million) as a security deposit to bid at an auction for some non-performing assets, including certain mining rights subject to the ongoing mine consolidation program, valued collectively at $19.5 million (approximately RMB 120 million). Should Hongli win the auction, the deposit would be applied against Hongli’s bid price for the assets. Otherwise, PRCCU would refund the deposit back to Hongli before December 31, 2013. On September 18, 2013, the parties entered into a supplemental agreement to postpone the auction date and to extend the deposit refund date to December 31, 2013. On September 26, 2013, the parties entered into another agreement for Hongli to pay $1,637,000 (approximately RMB 10 million) as additional security deposit. Should Hongli win the auction, this additional deposit would also be applied against Hongli’s bid price for the assets. Otherwise, PRCCU would refund the deposit back to Hongli before December 31, 2013. On December 30, 2013, the parties entered into a supplemental agreement to postpone the auction date and to extend the deposit refund date to December 31, 2014. On January 23, 2015, PRCCU issued a notice indicating that the transaction is terminated due to PRCCU’s internal problems. On September 25, 2015, the Company had fully received the deposit of $4,910,949 (approximately RMB 30 million) from PRCCU.

 

Note 5 – Loans receivable

 

On June 8, 2011, Capital Paradise Limited (“CPL”) or previously known as Ziben Tiantang Co., Ltd., an unrelated party, borrowed $10,044,200 from Top Favour, one of the Company’s consolidated entities, in an unsecured loan at an annual interest rate of 9.45%, with interest due every six months. The loan matured on June 7, 2012. On June 8, 2012, Top Favour and CPL entered into a supplemental agreement to extend the maturity date to December 7, 2012, and to decrease the interest rate to 7% annually.

 

On December 8, 2012, both parties entered into another supplemental agreement to extend the maturity date to June 8, 2013, with 7% annual interest rate. On June 8, 2013 both parties entered into another supplemental agreement to extend the maturity date to December 7, 2013, with 7% annual interest rate.

 

In August and September 2012, Top Favour loaned an additional $350,000 to CPL. This loan is unsecured and has an annual interest rate of 7%, and is due on August 11, 2013. On August 2, 2013, the Company and CPL entered into a supplemental agreement to extend the remaining balance due to December 31, 2013.

 

On October 7, 2014, Top Favour loaned an additional $200,000 to CPL with a short term maturity date on January 31, 2015. The additional loan of $200,000 was free of the interest charge and had been fully repaid in January 2015.

 

On January 27, 2014, both parties agreed on a repayment schedule whereby CPL will repay 50% of the outstanding principal and accrued interest thereon before June 30, 2014, and the balance and accrued interest thereon before December 31, 2014.

 

On August 2014, the Company collected $4.5 million from CPL as a repayment and all remaining principal was settled on January 15, 2015. On January 28, 2015 all outstanding interest payable, which both parties agreed accrued as of December 31, 2014, was cleaned.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three months ended September 30, 2015 and 2014, interest incomes from loans receivable amounted to $0 and $102,081, respectively.

 

Note 6 – Inventories

 

Inventories consisted of the following:

 

		September 30, 2015				June 30, 2015
Raw materials		$	527,235			$	31,074
Work in process			2,595,288				839,729
Supplies			14,111				21,177
Finished goods			2,854,068				2,344,222
Total			5,990,702				3,236,202
Less: allowance for impairment			(42,877	)			(44,597	)
Total inventories, net		$	5,947,825			$	3,191,605

 

Note 7 – Advances to suppliers

 

Advances to suppliers are monies deposited with or advanced to unrelated vendors for future inventory purchases, which consist mainly of raw coal purchases. Most of the Company’s vendors require a certain amount of funds to be deposited with them as a guarantee that the Company will receive its purchases on a timely basis and with favorable pricing.

 

Advances to suppliers amounted to $4,088,692 and $8,216,127 as of September 30 and June 30, 2015, respectively. As of September 30 and June 30, 2015, the Company recognized $1,312,298 and $1,512,785 as allowances for doubtful advance to supplier accounts. For the three months ended September 30, 2015, the Company reported a recovery gain from its allowance for doubtful accounts amounted to $144,405, and no allowance was provided for doubtful accounts for the three months ended September 30, 2014.

 

Note 8 – Plant and equipment, net

 

Plant and equipment consisted of the following:

 

		September 30, 2015				June 30, 2015
Buildings and improvements		$	10,764,631			$	11,196,358
Mine development cost			11,372,772				11,828,890
Machinery and equipment			21,379,050				15,606,700
Other equipment			397,506				413,449
Total			43,913,959				39,045,397
Less: accumulated depreciation			(17,539,056	)			(17,852,012	)
Less: impairment reserve			(2,348,936	)			(2,443,143
Total plant and equipment, net		$	24,025,967			$	18,750,242

 

During the fiscal year 2015, the Company accrued an impairment reserve over its plant and equipment in amount to $2,443,143 against its old coking facilities. No impairment reserve was accrued for the three months ended September 30, 2015 and 2014.

 

Depreciation expense amounted to $381,353, and $279,032 for the three months ended September 30, 2015 and 2014, respectively. No depreciation expense was incurred for mining-related assets due to the shutdown of all coal mine operations since September 2011.

 

Note 9 – Construction in progress (“CIP”)

 

CIP at September 30 and June 30, 2015 amounted to $56,597,357 and $65,420,768, respectively. CIP included the following projects:

 

1)

Construction project to build a new coking plant with annual production capacity of 900,000 tons of cokes was commenced on February 2010. Due to a lack of funding and change of market situation, the Company placed construction on hold at October 2012. It is unexpected when the market situation gets well enough and the funding is sufficient to resume the construction. As such, management is unable to estimate the completion date for CIP. No depreciation is provided for CIP until such time the asset in question is completed and placed into service. As of September 30 and June 30, 2015, the Company reported $27,669,786 and $28,779,513 in the construction in progress account.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

2)

Upgrade project to increase annual production capacity of the coke gasification facilities was commenced on November 2014, which is to reform the coke gasification equipment and to double the production capacity. The project was completed at July 2015. As of September 30 and June 30, 2015, the Company reported $0 and $6,553,513, respectively, in the construction in progress account.

 

3)

UCG underground safety construction was commenced in June 2015 to ensure that the Company’s coal mines will be complying with the legal safety requirements for underground coal gasification operations. As of September 30 and June 30, 2015, the Company reported $28,927,571 and $30,087,742 in the construction in progress account. The UCG underground safety construction was estimated to complete in December 2015.

 

The new coking plant, with an estimated construction cost of approximately $92.76 million (approximately RMB 578 million) originally, requires an additional $22.68 million (approximately RMB 144 million) to complete. Coke gasification equipment upgrade project - which was completed at July 2015. No additional funding requires for the UCG underground safety construction.

 

Project		Invested cost as of  September 30, 2015				Estimated cost to complete				Estimated total cost
New coking plant (1)		$	70,083,393			$	22,679,587			$	92,762,980
UCG underground safety project		$	28,927,571			$	-			$	28,927,571

 

(1)

Including payments of $22.5 million for the land use rights, $27.7 million reported in construction in progress, and $19.9 million prepayments made for constructions.

 

Note 10 – Prepayments

 

Prepayments presented advance for constructions which was consisted of the following:

 

		September 30,  2015				June 30,  2015
Baofeng new coking plant (1)		$	19,916,456			$	20,715,228
Gasification facility - Baofeng (2)			2,518,178				2,619,172
			22,434,634				23,334,400
Less: allowance for doubtful accounts			(3,519,224	)			(3,660,366
Total		$	18,915,410			$	19,674,034

 

(1)

At October, 2012, the Company had made prepayments of approximately $19.9 million (approximately RMB 126.5 million) toward construction of its new coking plant.

 

(2)

The Company entered into a construction agreement on June 16, 2015 to build an underground coal gasification (“UCG”) facility which was approved by the Science and Technology Bureau of Baofeng County as an advanced technology development project with using the refining technology authorized from North China Institutes of Science and Technology. The Company made prepayments of approximately $2,518,178 (approximately RMB 16 million) in June 2015 to a contractor and the construction was scheduled to be completed at March 2016.

  

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 11 – Intangible assets

 

Intangible assets consisted of the following:

 

		September 30, 2015				June 30,  2015
Land use rights (1)		$	25,422,125			$	26,441,707
Mining rights			42,719,678				44,432,997
Total intangible assets			68,141,803				70,874,704
Accumulated amortization – land use rights			(948,786	)			(819,795	)
Accumulated depletion – mining rights			(13,171,469	)			(13,699,724	)
Total intangible assets, net		$	54,021,548			$	56,355,185

 

(1)

Included the land use right of $22,954,767 used for Baofeng new coking plant. Its useful life was likely determined, through the certificate of the land use right which should be grant by the relevant authorities, is in the processing of granting.

  

Amortization expense for the three months ended September 30, 2015 and 2014 amounted to $163,144, and $17,674, respectively. No depletion was incurred due to the shutdown of all coal mine operations since September 2011. Depletion expense will be charged to cost of revenue in the period incurred using the unit-of-production method.

 

Amortization expense of the land use rights for the next five years and thereafter is as follows:

 

Year ending June 30,		Amortization expense
2016		$	489,431
2017			652,575
2018			652,575
2019			652,575
2020			652,575
Thereafter			21,373,608
Total		$	24,473,339

 

Note 12 – Long-term investments and security deposit

 

Long-term investments consisted of investments accounted for using the cost or equity methods.

 

In February 2011, the Company invested approximately $1.3 million (approximately RMB 8 million) in Pingdingshan Xinhua District Rural Cooperative Bank (“Cooperative Bank”). This investment represents 2.86% interest in Cooperative Bank, and is accounted for under the cost method. No investment income was received and recognized for the three months ended September 30, 2015 and 2014.

 

In April 2011, Hongyuan CSG was established by Zhonghong (49%) and Henan Coal Seam Gas (51%) as a joint venture. The total registered capital of Hongyuan CSG is approximately $15.85 million (approximately RMB 100 million). As of June 30, 2012, approximately $3.17 million (approximately RMB 20 million) was funded, of which $1.6 million (approximately RMB 9.8 million) was paid by Zhonghong. The remaining registered capital was due on April 20, 2013, of which approximately $6.2 million (approximately RMB 39.2 million) should be paid by Zhonghong. Zhonghong’s investment in Hongyuan CSG is accounted for under the equity method since Zhonghong has significant influence but not control. As of the date of this report, Zhonghong has not contributed the remaining registered capital, $6.2 million (approximately RMB 39.2 million), as Hongyuan CSG has remained inactive.

 

In addition, a deposit of $4,881,224 (approximately RMB30,000,000) was made on December 23, 2010 to Henan Coal Seam Gas in connection with the joint venture. Due to management’s review of the collectability of the deposit, the Company recognized $4,881,224 allowance against this deposit. At September 2015, the Company sued Henan Coal Seam Gas local court to repay the security deposit, the Company cannot anticipate if Henan Coal Seam Gas will repay the deposit at the date this report.

 

For the three months ended September 30, 2015 and 2014, there was no equity investment income or loss.

 

Note 13 – Loans

 

Loans from Bairui Trust

 

On April 2, 2011, Hongli entered into a loan agreement with Bairui Trust pursuant to which Bairui Trust agreed to loan Hongli approximately $58.4 million (approximately RMB 360 million) with annual interest of 6.3%, of which approximately $29.2 million (approximately RMB 180 million) would be due on April 2, 2013, and approximately $29.2 million (approximately RMB 180 million) on April 2, 2014. The loan was issued on April 3, 2011 and is guaranteed by Hongyuan and the Company’s CEO.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

On November 30, 2011, the parties entered into a supplemental agreement pursuant to which approximately $4.88 million (approximately RMB 30 million) with annual interest of 6.3% became due on October 2, 2012, approximately $16.23 million (approximately RMB 100 million) with annual interest of 6.3%, became due on April 2, 2013, approximately $8.11 million (approximately RMB 50 million) with annual interest of 6.3% became due on October 2, 2013, and approximately $29.2 million (approximately RMB 180 million) with annual interest of 6.3% became due on April 2, 2014.

 

For the loan due October 2, 2012, the parties entered into a separate agreement on October 8, 2012 to extend the due date to April 2, 2013 with an annual interest rate of 8.7% starting October 3, 2012. Such payment was repaid in full on December 25, 2012.

 

For the loan due April 2, 2013, the Company repaid $3.25 million (approximately RMB 20 million) on April 3, 2013, and entered into a separate agreement with Bairui Trust on April 23, 2013 to extend the due date for the remaining $13.01 million (approximately RMB 80 million) as follows: (a) $3.25 million (approximately RMB 20 million) was extended to December 2, 2013 with an annual interest rate of 6.3% starting April 23, 2013; (b) $4.88 million (approximately RMB 30 million) was extended to January 2, 2014 with an annual interest rate of 6.3% starting April 23, 2013; and (c) $4.88 million (approximately RMB 30 million) was extended to February 2, 2014 with an annual interest rate of 6.3% starting April 23, 2013. For the period between April 3, 2013 and April 23, 2013, Bairui Trust charged an additional 9.45% annual interest rate on the entire $13.01 million outstanding.

 

On October 1, 2013, the parties executed an extension agreement, for the remaining balance of approximately $50.3 million (approximately RMB 310 million) with 9.9% annual interest rate as follow:

 

Loan Amount (in USD)				Loan Amount (in RMB)				Extended Loan Repayment Date		New Interest Rate Period
$	8,114,380			¥	50,000,000			October 2, 2016		October 3, 2013 – October 2, 2016
	3,245,752				20,000,000			December 2, 2016		December 3, 2013 – December 2, 2016
	4,868,628				30,000,000			January 2, 2017		January 3, 2014 – January 2, 2017
	4,868,628				30,000,000			February 2, 2017		February 3, 2014 – February 2, 2017
	29,211,770				180,000,000			April 2, 2017		April 3, 2014 – April 2, 2017
$	50,309,158			¥	310,000,000

 

On April 2, 2014, the Company entered into another supplement agreement with Bairui Trust which replaced the extension agreement dated October 1, 2013, and repaid the principal $324,929 (approximately RMB 2,000,000). Per the supplement agreement, loans from Bairui Trust were changed as follows:

 

Loan Amount (in USD)				Loan Amount (in RMB)				Extended Loan Repayment Date		New Interest Rate Period
$	2,928,734			¥	18,000,000			April 2, 2015		December 3, 2013 – April 2, 2015
	4,881,224				30,000,000			April 2, 2015		January 3, 2014 – April 2, 2015
	4,881,224				30,000,000			April 2, 2015		February 3, 2014 – April 2, 2015
	8,135,373				50,000,000			January 2, 2015		October 3, 2013 – January 2, 2015
	29,287,340				180,000,000			October 2, 2015		April 3, 2014 – October 2, 2015
$	50,113,895			¥	308,000,000

 

According to the new supplement agreement dated April 2, 2014, the annual interest rate was changed from 9.9% to 11.88% and, for the period between December 3, 2013 and April 2, 2014, Bairui Trust charged the Company an additional 7.2% annual interest rate on $12.9 million (approximately RMB 80 million) of the outstanding $50.3 million (approximately RMB 310 million) loan principal.

 

On January 20, 2015, Hongli repaid the loan of $8,135,373 (approximately RMB 50,000,000) to Bairui Trust which was due on January 2, 2015.

 

On April 3, 2015, Hongli and Bairui Trust reached an agreement to extend the outstanding loans of $12,743,849 (approximately RMB 78,000,000) which due on April 2, 2015 to April 2, 2016 with the annual interest rate of 11.88%.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

On October 8, 2015, the Company and Bairui Trust entered into a supplemental agreement to extend the due date of one of its outstanding loans. The extended loan of $29,287,340 (approximately RMB 180 million) was due on October 2, 2015. In accordance with the supplemental agreement, the due date was re-scheduled to April 2, 2016.

 

As of September 30, 2015, the loans from Bairui Trust were as follows:

 

Loan Amount (in USD)				Loan Amount (in RMB)				Due Date		Interest Rate
$	12,276,118			¥	78,000,000			April 2, 2016			11.88	%
	28,329,504				180,000,000			April 2, 2016			11.88	%
$	40,605,622			¥	258,000,000

 

Loan from Capital Paradise Limited

 

On January 26, 2015, Top Favour and Capital Paradise Limited entered into an unsecured loan agreement in the amount of $2,960,000 with an annual interest rate of 7% and due on January 27, 2016. As of September 30, 2015, the outstanding loan from Capital Paradise Limited was $2,553,874.

 

Weight average interest rate and interest expense

 

Weighted average interest rate was 11.69% and 11.8% for the three months ended September 30, 2015 and 2014, respectively. Total interest expense for the three months ended September 30, 2015 and 2014 was $1,276,981 and $1,497,213, respectively. No interest was capitalized for the three months ended September 30, 2015 and 2014.

 

Note 14 – Other payables and accrued liabilities

 

Other payables and liabilities mainly consisted of retention payable, accrued registration fee, accrued salaries, interest payable, utilities, professional services and other general and administrative expenses.

 

Other payables and accrued liabilities consisted of the following:

 

		September 30,  2015				June 30,  2015
Retention payable (1)		$	918,505			$	955,343
Registration payable (2)			457,616				475,969
Other payable			334,401				200,933
Interest payable			3,814,887				2,658,239
Accrued liabilities (3)			209,630				213,205
Total		$	5,735,039			$	4,503,689

 

 

(1)

As of September 30, 2015, $918,505 ( approximately RMB 6,301,900) of construction deposit was retained by the Company for the security of the construction of the first stage coke gasification facility which was completed in September 2014 and reform the coke gasification equipment to double the production capacity which was completed at July 2015. The amount of deposit will be paid one year after the construction was completed, if no quality defection occurs during the period.

 

(2)

At September 30, 2015, the Company accrued a payable of $457,616 (approximately RMB 2,907,600) for land use right registration with relevant authorities to obtain the certificate, which was used as part of Baofeng new coking plant.

 

(3)

As of September 30 and June 30, 2015, $110,000 and $90,000 of salary payables included in accrued liabilities were payables to the Company’s CFO. As of September 30 and June 30, 2015, $25,000 and $0 of salary payables included in accrued liabilities were payables to the Company’s CEO.

 

Note 15 – Related party payables

 

Other payables-related parties represent advances from the Company’s CEO for working capital purpose. Advances from the CEO amounted to $506,464 and $736,596 at September 30 and June 30, 2015, respectively. Such advances are interest free, due on demand and will be settled in cash.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

During the three months ended September 30, 2015, the Company borrowed $7,994 from Mr. Jianhua Lv, the CEO of the Company, mainly used to pay off daily expenses, and an amount of $214,877 in advances from Mr. Jianhua Lv had been repaid before September 30, 2015. During the three months ended September 30, 2014, Mr. Lv repaid the interest payable of $2,017,946 to Baidu Trust on behalf of the Company.

 

Note 16 – Acquisition payables

 

On August 10, 2010, Hongli acquired 60% of the equity interest of Shuangrui Coal (see Note 20). During the year ended June 30, 2012, Hongli agreed to acquire the remaining 40%. The title thereof was transferred to Hongli, and Hongli had full control of Shuangrui Coal by June 30, 2012. The purchase price thereof was tentatively set at $4,544,053 (approximately RMB 29 million), subject to certain price adjustments to be finalized at closing. The balance is due on demand. As of September 30 and June 30, 2015, acquisition payable was $0 and $4,747,250, respectively, which represented the accrued purchase price for the remaining 40% of Shuangrui Coal. On September 25, 2015, the Company paid $4,747,250 to the former shareholders of Shuangrui Coal.

 

Note 17 – Taxes

 

Income tax

 

CETC is subject to the United States federal income tax provisions. Top Favour is a tax-exempt company incorporated in the British Virgin Islands.

 

All of the Company’s businesses are conducted by its PRC subsidiary and VIEs, namely Hongyuan, Hongli, Baofeng Coking, Hongchang Coal, Xingsheng Coal, Shuangrui Coal, Hongguang Power and Zhonghong. All of them are subject to 25% enterprise income tax rate in China.

 

The provision for income taxes consisted of the following:

 

		For the three months ended September 30,
		2015				2014
U.S. current income tax expense		$	-			$	-
BVI current income tax expense			-				-
PRC current income tax expense			464,508				489,853
Total		$	464,508			$	489,853

 

CETC has incurred a net operating loss for income tax purposes for 2015. As of September 30, 2015, the estimated net operating loss carry forwards for U.S. income tax purposes was approximately $3,063,000, which may be available to reduce future years taxable income. The net operating loss carry forward will expire through 2035 if not utilized. Management believes that the realization of the benefits arising from this loss appears to be uncertain due to the Company’s limited operating history and continuing losses for U.S. income tax purposes. Accordingly, the Company has provided a 100% valuation allowance at September 30 and June 30, 2015, respectively. Management reviews this valuation allowance periodically and makes adjustments as necessary.

 

The following table reconciles the valuation allowance for the three months ended September 30, 2015 and 2014 which consisted of the following:

 

		For the three months ended  September 30,
		2015				2014
Beginning balance		$	1,042,000			$	1,042,000
Additions			-				689,000
Ending balance		$	1,042,000			$	1,731,000

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Value added tax

 

The Company incurred VAT on sales and VAT on purchases in the PRC as follows:

 

		For the three months ended September 30,
		2015				2014
VAT on sales		$	1,692,635			$	3,863,167
VAT on purchase		$	1,701,579			$	2,817,948

 

Sales and purchases are recorded net of VAT collected and paid, as the Company acts as an agent for the PRC government.

 

Taxes payable

 

Taxes payable consisted of the followings:

 

		September 30,  2015				June 30,  2015
VAT		$	59,249			$	101,327
Income tax			754,343				633,098
Others			163,807				173,047
Total		$	977,399			$	907,472

 

Note 18 – Capital transactions

 

Common Stock:

 

On September 24, 2014, the Company completed a registered sale of its common stock with two institutional investors under its shelf registration statement on Form S-3 pursuant to a Securities Purchase Agreement executed on September 18, 2014. Gross proceeds from the offering were approximately $14.3 million in exchange of 2,818,845 shares of the Company’s common stock. After payment of expenses, the Company received approximately $13.2 million in net proceeds. In addition, the Company issued to the investors Series A warrants (“Warrants A”) to purchase an aggregate of 1,409,423 common shares and Series B warrants (“Warrants B”) to purchase an aggregate of 1,644,737 common shares. Under the Purchase Agreement, the investors also had an option to purchase additional 1,644,737 shares of the Company’s common stock and warrants – Series C (“Warrants C”) to purchase 822,369 shares of the Company’s common stock. If fully exercised, the Company would receive aggregate gross proceeds from the warrants of approximately $36.2 million.

 

Options:

 

Under the 2002 Stock Option Plan for Directors, options exercisable for 1,666 shares of the Company’s common stock at $36.00 per share were granted on October 11, 2002, and expired on October 15, 2012. Options exercisable for 3,126 shares of the Company’s common stock at $96.00 per share were granted on November 16, 2004, and expired on November 16, 2014.

 

Under the 1999 Stock Option Plan, options exercisable for 6,059 shares of the Company’s common stock at $96.00 per share were granted on November 14, 2004, and expired on November 14, 2014. Such options were fully vested before the Share Exchange on February 5, 2010.

 

On September 24, 2014, the Company closed an initial offering with two institutional investors pursuant to a securities purchase agreement (“Purchase Agreement) date on September 18, 2014. Under the Purchase Agreement, the investors also had an option to purchase additional 1,644,737 shares of the Company’s common stock and warrants – Series C (“Warrants C”) to purchase 822,369 shares of the Company’s common stock for a period beginning six months and one day from September 24, 2014 and ending ten months from September 24, 2014. The expiration date for Warrants C will be the fourth anniversary of September 24, 2014. This option was expired on July 24, 2015 without exercising.

 

The following is a summary of changes in options activities:

 

		Outstanding options
		Exercisable				Un-exercisable				Total
Outstanding, June 30, 2014			9,185				-				9,185
Granted			1,644,737				-				1,644,737
Forfeited			(9,185	)			-				(9,185	)
Exercised			-				-				-
Outstanding, June 30, 2015			1,644,737				-				1,644,737
Granted							-
Forfeited			(1,644,737	)			-				(1,644,737	)
Exercised			-				-				-
Outstanding, September 30, 2015			-				-				-

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Warrants

 

As of September 30 and June 30, 2015, warrants that were exercisable for 1,671,664 shares and 1,721,664 shares, respectively, of the Company’s common stock were recorded as derivative instruments. The value of warrant liabilities was $380,237 and $2,915,649 at September 30 and June 30, 2015, respectively. The decrease (increase) in fair value of warrants was $2,535,412 and $(2,027,162) for the three months ended September 30, 2015 and 2014, respectively, and was recorded as gain (loss) on change in fair value of warrants.

 

On September 24, 2014, the Company closed an initial offering with two institutional investors pursuant to a securities purchase agreement (“Purchase Agreement”) dated on September 18, 2014. The initial offering included Warrants A and Warrants B. The Warrants A grants investors to purchase an aggregate of 1,409,423 shares of the Company’s common stock, which is exercisable immediately as of the date of the issuance, which was September 24, 2014, at an exercise price of $6.38 per common share and will be expired after four years from the date of issuance. Warrants B to purchase 1,644,737 shares of common stock at an exercise price of $6.08 are exercisable for six months starting from September 24, 2014 and may become exercisable only to the extent that the Company does not have an effective registration statement available for the shares underlying such warrants and in any event expire after certain registration conditions are satisfied. The expiration date for Warrants B will be (1) if no registration failure has occurred, the date will be July 25, 2015, or (2) if a registration failure has occurred, the date will be September 24, 2018. As of September 30, 2015, Warrants B were not exercisable.

 

Under the Purchase Agreement, the investors also had an option to purchase additional 1,644,737 shares of the Company’s common stock and Warrants C to purchase 822,369 shares of the Company’s common stock for a period beginning six months and one day from September 24, 2014 and ending ten months from September 24, 2014. The expiration date for Warrants C will be the fourth anniversary of September 24, 2014.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following is a summary of changes in warrant activities:

 

		Existing Warrants at $48 (1)				Investor Warrants at $12 (2)				Callable Warrants at $12 (3) (6)								Callable Warrants at $6 (4) (6)				Callable Warrants at $15 (5) (6)				Warrants A at $6.38 (7)				Placement Agent Warrants at $6.38 (8)				Warrants B at $6.08 (9)				Warrants C at $6.08 (10)				Total
Outstanding, June 30, 2014			36,973				590,446				3,082,027				117,163				30,244				50,000				-				-				-				-				3,906,853
Granted			-				-				-				-				-				-				1,409,423				225,268				1,644,737				822,369				4,101,797
Forfeited			-				(590,446	)			(3,082,027	)			(117,163	)			(30,244	)			-				-				-				-				-				(3,819,880	)
Exercised			-				-				-				-				-				-				-				-				-				-				-
Outstanding, June 30, 2015			36,973				-				-				-				-				50,000				1,409,423				225,268				1,644,737				822,369				4,188,770
Granted			-				-				-				-				-				-				-				-				-				-				-
Forfeited			-				-				-				-				-				(50,000	)			-				-				(1,644,737	)			-				(1,694,737	)
Exercised			-				-				-				-				-				-				-				-				-				-				-
Outstanding September 30, 2015			36,973				-				-				-				-				-				1,409,423				225,268				-				822,369				2,494,033

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)

The warrants underlying 36,973 shares are exercisable at any time until April 9, 2017, with remaining contractual term of 1.53 years as of September 30, 2015.

 

(2)

The warrants underlying 590,446 shares are exercisable at any time until February 5, 2015. This warrant was forfeited without exercising as of September 30, 2015.

 

(3)

The warrants underlying 3,082,027 shares and 117,163 shares are exercisable at any time until March 11, 2015 and March 18, 2015, respectively, this warrant was forfeited without exercising as of September 30, 2015.

 

(4)

The warrants underlying 30,244 shares are exercisable until March 11, 2015, this warrant was forfeited without exercising as of September 30, 2015.

 

(5)

The warrants underlying 50,000 shares are exercisable until July 1, 2015. This warrant was forfeited without exercising at September 30, 2015.

 

(6)

The callable warrants are exercisable for a period of five years from the date of issuance, and are callable at the Company’s election six months after the date of issuance if the Company’s common stock trades at a price equal to at least 150% of the exercise price with an average trading volume of at least 150,000 shares of common stock (as adjusted for any stock splits, stock dividends, combination and the like) per trading date for at least 10 consecutive trading days, and the underlying shares of common stock are registered.

 

(7)

Warrants A underlying 1,409,423 shares are exercisable at any time until September 24, 2018, with remaining contractual term of 2.99 years as of September 30, 2015.

 

(8)

The warrants issued to the placement agent underlying 225,268 shares are exercisable at any time until September 24, 2018, with remaining contractual term of 2.99 years as of September 30, 2015.

 

(9)

Warrants B to purchase 1,644,737 shares of common stock are exercisable for six months starting from September 24, 2014 and may become exercisable only to the extent that the Company does not have an effective registration statement available for the shares underlying such warrants and in any event expire after certain registration conditions are satisfied. The expiration date for Warrants B will be (1) if no registration failure has occurred, the date will be July 25, 2015, or (2) if a registration failure has occurred, the date will be September 24, 2018. As of September 30, 2015, Warrants B were forfeited without exercising.

  

(10)

Under the Share Purchase agreement, the investors were granted an option to purchase additional 1,644,737 shares of the Company’s common stock and Warrants C to purchase 822,369 shares of the Company’s common stock for a period beginning March 25, 2015 and ending July 24, 2015. The expiration date for Warrants C will be the fourth anniversary of September 24, 2014.

 

Note 19 – Earnings (losses) per share

 

The following is a reconciliation of the basic and diluted earnings (losses) per share computation:

 

		For the three months ended September 30,
		2015				2014
Net income (loss)		$	1,707,962			$	(2,553,257	)
Weight average shares used in basic and diluted computation			23,960,217				21,310,527
Earnings (losses) per share – basic and diluted		$	0.07			$	(0.12	)

 

The Company had warrants and options exercisable for 2,494,033 shares and 5,833,507 shares of common stock in the aggregate at September 30 and June 30, 2015, respectively. For the three months ended September 30, 2015 and 2014, all outstanding options and warrants were excluded from the diluted earnings (losses) per share calculation since they were anti-dilutive.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 20 - Coal mine acquisitions

 

On May 20, 2011, the Company acquired 60% of the equity interests of Shuangrui Coal and Xingsheng Coal, and 100% of the equity interests of Shunli Coal.

 

In August and September 2011, the Company entered into supplemental agreements with the sellers of these three companies (collectively the “Supplement Agreements”) to memorialize certain agreed terms that were not reflected in the original purchase agreements. Specifically, all assets and liabilities of each company on or before the closing of the Company’s acquisition, other than such company’s mining rights, would be disposed of and assumed by the sellers as soon as practicable. At June 30, 2011, the Company’s acquisition of these three companies included only their mining rights, as all other assets and liabilities were being disposed of by the sellers, and none of the three companies was operational. Therefore, the operating results of these three companies (other than with respect to their mining rights) from May 20, 2011 through June 30, 2015, which were mainly from disposing assets and liabilities (other than their mining rights), are not included in the accompanying consolidated financial statements.

 

Although the Company has acquired the equity interests of these three entities, the parties’ intention, as memorialized in the Supplemental Agreements, is for the Company to acquire only their mining rights while all other assets and liabilities remain with the sellers. Thus, the respective purchase prices have been allocated solely to the mining rights.

 

Acquisition of Shuangrui Coal

 

On August 10, 2010, Hongli entered into an equity purchase agreement to acquire 60% of Shuangrui Coal, which operates Shuangrui coal mine, for a consideration of approximately $6.4 million (approximately RMB 42 million), payable in cash. Transfer of such equity interests to Hongli, and registration of such transfer with the appropriate PRC authorities, were completed on May 20, 2011. As memorialized in the Supplement Agreement with the sellers, all assets and liabilities of Shuangrui Coal at the time of Hongli’s acquisition, other than its mining rights, are to be disposed of and/or assumed by the sellers. As such, Hongli’s acquisition consideration is equivalent to the purchase price for 60% ownership of Shuangrui’s mining rights. As of June 30, 2015, approximately $6.66 million (approximately RMB 41 million) was paid. During the year ended June 30, 2012, Hongli acquired the remaining 40% and then transferred 100% of its ownership to Hongchang. As a result, the Company accrued $4,463,200 (approximately RMB 29 million) payable to Shuangrui Coal’s sellers (see Note 16) which had been fully repaid at September 25, 2015.

 

Acquisition of Xingsheng Coal

 

On August 10, 2010, Hongli entered into an equity purchase agreement to acquire 60% of Xingsheng Coal, which operates the Xingsheng Mine, for a consideration of approximately $6.7 million (approximately RMB 42 million), payable in cash. Transfer of such equity interests to Hongli, and registration of such transfer with the appropriate PRC authorities, were completed on May 20, 2011. As memorialized in the Supplement Agreement with the sellers, all assets and liabilities of Xingsheng Coal at the time of Hongli’s acquisition, other than its mining rights, are to be disposed of and/or assumed by the sellers. As such, Hongli’s acquisition consideration is equivalent to the purchase price for 60% ownership of Xingsheng’s mining rights. The purchase price was paid in full in June 2011.

 

Acquisition of Shunli Coal

 

On May 19, 2011, Hongchang Coal entered into an equity purchase agreement to acquire 100% of Shunli Coal, which operates the Shunli Mine, for a consideration of approximately $6.7 million (approximately RMB 42 million), payable in cash. Transfer of such equity interests to Hongchang, and registration of such transfer with the appropriate PRC authorities, were completed on May 20, 2011. As memorialized in the Supplement Agreement with the sellers, all assets and liabilities of Shunli Coal at the time of Hongli’s acquisition, other than its mining rights, were to be disposed of and/or are assumed by the sellers. As such, Hongli’s acquisition consideration is equivalent to the purchase price for 100% ownership of Shunli’s mining rights. The purchase price was paid in full in June 2011. On July 2, 2012, Shunli Coal and Hongchang Coal entered into an agreement to transfer all of Shunli Coal’s mining rights to Hongchang Coal, in connection with the Company’s plans to consolidate mining areas under Hongchang Coal for future production. On July 4, 2012, Shunli Coal was dissolved.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Since the initial accounting for these acquisitions were for the mining rights only, the entire purchase price was allocated to the mining rights. The mining rights acquired are not being amortized because the businesses have not commenced any operations since their acquisitions.

 

Note 21 – Commitments and contingencies

 

Lease agreement

 

On April 12, 2013, the Company signed a lease agreement with Pingdingshan Hongfeng Coal Processing and Coking, Ltd., (“Hongfeng Coal”). Per the agreement, the Company may utilize Hongfeng Coal’s coke production facility, which has an annual capacity of 200,000 metric tons. In exchange, the Company agreed to pay Hongfeng Coal $9.60 (approximately RMB 60) per metric ton of coke produced from the leased facility. On April 8, 2014 and 2015, the Company renewed the agreement for another year, respectively.

 

Purchase commitment

 

The Company entered into several contracts with contractors and suppliers for Baofeng new coking plant:

 

		Aggregate contract amount				Payments made				Purchase commitment
Baofeng new coking plant		$	62,292,302			$	55,270,805			$	7,021,497

 

Note 22 – Statutory reserves

 

Applicable PRC laws and regulations require that before a foreign invested enterprise can legally distribute profits, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, after the statutory reserves. The statutory reserves include the statutory surplus reserve fund and the enterprise expansion fund.

 

Each of the Company’s subsidiary and VIEs in the PRC is required to transfer 10% of its net income, as determined in accordance with the PRC Company Law, to a statutory surplus reserve fund until such reserve balance reaches 50% of each such entity’s registered capital. The transfer must be made before distribution of any dividends to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholdings or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

 

The enterprise fund may be used to acquire plant and equipment or to increase the working capital to expend on production and operation of the business. No minimum contribution is required

 

As of September 30, 2015, the statutory surplus reserves of Hongchang Coal and Hongli had reached 50% of each entity’s registered capital. Hongguang Power, Shuangrui Coal, Xingsheng Coal and Shunli Coal did not make any contribution to the statutory reserve due to their respective operating loss. Zhonghong and Hongrun did not make any contribution as neither entity had operations.

 

Hongchang Coal is required by the PRC government to reserve safety and maintenance expense to the cost of production based on the actual quantity of coal exploited. The amount of reserves is determined within the unit price range provided by Ministry of Finance of PRC. Currently, Hongchang Coal reserves at RMB 6 per metric ton for safety expense and RMB 8.5 per metric ton for maintenance expense. Shuangrui Coal, Xingsheng Coal and Shunli Coal had no such reserve as of September 30, 2015.

 

  

HONGLI CLEAN ENERGY TECHNOLOGIES CORP.

(FORMERLY KNOWN AS SINOCOKING COAL AND COKE CHEMICAL INDUSTRIES, INC.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The component of statutory reserves and the future contributions required pursuant to PRC Company Law are as follows:

 

		September 30,  2015				June 30,  2015				50% of registered capital				Future contributions required as of  September 30,  2015
Hongli		$	2,067,215			$	2,067,215			$	2,064,905			$	-
Hongguang Power			-				-				1,514,590				1,514,590
Hongchang Coal			218,361				218,361				218,361				-
Shuangrui Coal			-				-				310,105				310,105
Xingsheng Coal			-				-				279,682				279,682
Hongrun			-				-				2,310,000				2,310,000
Hongyuan			-				-				1,500,000				1,500,000
Zhonghong			-				-				1,521,990				1,521,990
Statutory surplus reserve			2,285,576				2,285,576				9,719,633				7,436,367
Mine reproduction reserve			1,404,365				1,404,365				-				-
Total		$	3,689,941			$	3,689,941			$	9,719,633			$	7,436,367

 

Note 23 – Revenues by products

 

The Company considers itself, including its coal mining and coking operations and the sales of its coal and coke products, to be operating within one reportable segment. All of the Company’s products are sold within the PRC. Major products and respective for the three months ended September 30, 2015 and 2014 are summarized as follows:

 

		For three months ended September 30,
		2015				2014
Coke		$	2,199,694			$	11,190,216
Coal tar			349,833				465,322
Crude benzol			148,364				378,790
Coal slurries			-				101,954
Mid-coal			217,893				362,264
Washed coal			-				1,075,290
Syngas			3,526,454				-
Total		$	6,442,238			$	13,573,836

 

Note 24 – Litigation and Contingency

 

The Company is involved in a legal proceeding in the ordinary course of its business. The proceeding, described in the paragraph below, is a claim for a commercial dispute. Although management of the Company cannot predict the ultimate outcome of the legal proceeding with certainty, it believes that the ultimate resolution of the Company’s legal proceeding, including any amounts it may be required to pay in excess of amounts reserved, will not have a material effect on the Company’s consolidated financial statements.

 

On May 26, 2015, the Company filed a complaint against Henan Province Coal Seam Gas Development and Utilization Co., Ltd. (“Henan Coal Seam Gas”) with the Intermediated People’s Court in Zhengzhou City. In the complaint the Company indicated that Henan Coal Seam Gas should pay back a loan from the Company of $4,712,584 or RMB 30,000,000, with interest of RMB 8,592,326.04 plus the interest from May 27, 2015 to actual payment date. An unfavorable outcome in this litigation, which management does not believe is probable, could not have a material effect on the Company’s business, financial condition or results of operations.

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of our operations and financial condition for the three months ended September 30, 2015 and 2014 should be read in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.

 

Overview

 

We are a vertically-integrated producer of clean energy products located in Henan Province, People’s Republic of China (“PRC” or “China”). Our products currently include washed coal, “medium” or mid-coal and coal slurries, coke, coke powder, coal tar and crude benzol, synthetic gas (“syngas”) and electricity. We have generated syngas converted from coke with our coke gasification facility since October 2014. We also can generate electricity from gas emitted during the coking process, which we can use primarily to power our operations. (At this time we are not able to generate electricity, but plan to resume operations in the future when we are able to do so.) We anticipate continuing to reduce our reliance on coal products and expand into the clean energy industry.

 

The construction of the coke gasification facility to further process coke into a clean-burning synthetic gas was completed at the ended of September 2014 and commenced its production in October 2014 (“Stage I facility”), which allowed us to extend the operations into the clean-burning synthetic field. The Stage I facility has initially designed with annual capacity of 219,000,000 cubic meters of syngas or 25,000 cubic meters of syngas per hour. In November 2014, with one month operating experience at running the Stage I facility, we conducted a technique upgrade on the Stage I facility to increase the designed capacity of the facility (Stage II facility). The upgrade project was started from November 2014 and fully completed on July 2015. With the completion of the technique upgrade, the Stage I facility’s designed annual coke gasification capacity was expanded to 438,000,000 cubic meters of syngas or 50,000 cubic meters of syngas per hour.

 

With more experience and the improvement of technology of the coke gasification from running our existing facilities, we believe that we could further expand our operations to other demanding areas with installation of more coke gasification facilities to overcome syngas distribution limitation.

 

On August 28, 2014, we entered into a cooperative agreement with the North China Institute of Science and Technology regarding underground coal gasification technique (“UCG”) development to refine and implement advanced techniques to convert our coal into syngas. Our ultimate target is to build a UCG facility with an annual production capacity of 7,708,800,000 cubic meters of syngas or 880,000 cubic meters of syngas per hour in all four of our coal mines. The UCG project was approved by the Science and Technology Bureau of Baofeng County as a local Scientific and Technological Practical Project, and it was granted the privilege to refine the coal under Baofeng Coking Factory as a trial project for UCG technique development. We commenced the construction of the trial project in June 2015. This UCG trial project is under supervision of the Science and Technology Bureau of Baofeng County and North China Institute of Science and Technology (“Supervisors”) and requires further tests and approval from the Supervisors upon our completion of construction and equipment installation. This UCG trial project is divided into several stages and each stage requires a periodical acceptance test conducted by the Supervisors. It is anticipated that the construction of this trial project will be completed in March 2016, and is estimated to cost up to $5 million to complete construction. Once the construction is completed, it requires another 6 month of preliminary operations for final testing which will be monitored by the Supervisors. With the final approval from the Supervisors, we will be able to implement our UCG techniques in our coal mines.

 

 

We also commenced our underground safety project, which initially for the coal mining safety constructions, in all of our existing coal mines to comply with the legal safety requirements. Once we obtain the final approval from the Supervisors at Baofeng Scientific and Technological Practical Project, we would be able to implement our UCG techniques in our coal mines.

 

With the coke and coal gasification implementation plans, we are in the process of transforming from being a producer of coal and coke products to a multifunctional energy company engaged in providing coal, coke, and clean-burning syngas.

 

Our business operations are conducted by Henan Province Pingdingshan Hongli Coal & Coke Co., Ltd. (“Hongli”), which we control through contractual arrangements that Hongli and its owners have entered into with Pingdingshan Hongyuan Energy Science and Technology Development Co., Ltd. (“Hongyuan”), a wholly-owned subsidiary of Top Favour Limited (“Top Favour”), a British Virgin Island company and our wholly owned subsidiary. These contractual arrangements provide for management and control rights, and in addition entitle us to receive the earnings and control the assets of Hongli. Other than our interests in the contractual arrangements, we do not own any equity interests in Hongli.

 

As of September 30, 2015:

 

·

Coking related operations, including coke gasification, are carried out by Hongli and its branch, Baofeng Coking Factory (“Baofeng Coking”), and a coking facility (the “Hongfeng plant”) we leased from Pingdingshan Hongfeng Coal Processing and Coking, Ltd. Starting from July 2014, Baofeng plant has been temporarily closed as its old facilities cannot comply with the new coking industry entry standards of the country. It is now pending for upgrade in order to better assist the UCG project development in the future.

 

·

Coal related operations, including underground coal gasification, are under the following three subsidiaries of Hongli, although all mining activities are currently on hold as a result of the ongoing mining moratorium:

	(1)	Baofeng Hongchang Coal Co., Ltd. (“Hongchang Coal”);
	(2)	Baofeng Shuangrui Coal Mining Co., Ltd. (“Shuangrui Coal”), which is wholly owned by Hongchang Coal; and
	(3)	Baofeng Xingsheng Coal Mining Co., Ltd. (“Xingsheng Coal”).

 

·

Electricity generation is carried out by Baofeng Hongguang Environment Protection Electricity Generating Co., Ltd. (“Hongguang Power”), also a wholly owned subsidiary of Hongli. As Hongguang Power mainly uses the gas produced during coking from our Baofeng plant to generate electricity, it has been temporarily closed following the Baofeng plant closing in July 2014. Thus, we did not generate any electricity during three months ended September 30, 2015 and 2014, but plan to resume our Hongguang Power operations in the future when we are able to do so.

 

The coal-related activities for the periods discussed below are those coal trading activities of Hongli and Baofeng Coking. Hongchang Coal’s mining operations were halted in September 2011 and our other coal mining companies have halted operations since the provincial-wide mining moratorium was imposed in June 2010. As of the date of this report, we do not know when the mining moratorium will be lifted, or when we can resume our mining operations, if at all.

 

We are in the process of developing the UCG technique project. If we can obtain success in developing the UCG techniques to allow us to convert our coal materials into syngas, we could be able to apply the techniques to all our existing coal mines.

 

We initially intend to transfer all coal mining operations from Hongli’s subsidiaries to a joint-venture established with Henan Province Coal Seam Gas Development and Utilization Co., Ltd. (“Henan Coal Seam Gas”), a state-owned enterprise and qualified provincial-level coal mine consolidator. The joint-venture, Henan Hongyuan Coal Seam Gas Engineering Technology Co., Ltd. (“Hongyuan CSG”), has been established, although our planned transfer of coal related activities to Hongyuan CSG has not been carried out as of the date of this Report. Our interests in Hongyuan CSG are held by Henan Zhonghong Energy Investment Co., Ltd. (“Zhonghong”), which equity interests are presently held on Hongli’s behalf and for its benefit by three nominees pursuant to share entrustment agreements. However, due to the imposition of the provincial-wide mining moratorium since June 2010, and the change of the Company’s original plan from developing coal mining operations to producing syngas, the plan to transfer the related operations was halted and we will decide whether to execute the original plan based on the mining moratorium status and syngas business development in the future.

 

 

Results of Operations

 

Our revenue for the three months ended September 30, 2015 decreased by approximately 52.54% from a year ago as a result of government policies aimed at reducing fuel consumption and pollution in the popular industries and the soft demand in the real estate markets which affected demand for steel and as result, coal and coke products. Also, the provincial environmental protection inspection by the government in early September 2015 weakened the demand for coal and coke. The decrease of revenues from coal and coke products was offset partly by revenues from our clean-burning syngas product which was generated and sold beginning in October 2014.

 

We extended our business into clean-burning products beginning in October 2014. With improvement of our operating technology and expansion of the production capacity of the clean-burning gas, we expect that syngas will contribute a higher proportion of our future revenues.

 

On a macro level, management has observed the following trends, which may have a direct adverse impact on our current operations in the near future: (1) the domestic coke market is expected to remain soft until the Chinese steel industry can work through its oversupply of crude steel, which may take some time absent any sudden, sharp uptick in the economy; (2) the slower economy, along with the continuing oversupply of coal and coke-related products, will keep the prices of coal and coke-related products lower; and (3) the Chinese government is likely to continue to encourage and support the development of China’s clean-energy industry, including clean-burning syngas. We expect our development of our syngas business will complement this current policy trend.

 

Comparison of the three months ended September 30, 2015 and 2014.

 

Revenue

 

Revenues decreased by $7,131,598 or 52.54% to $6,442,238 as compared to the same period last year. Such decrease resulted from decreased sales of coal, coal tar, crude benzol, coal slurry, washed coal and mid coal, offset by increased sales of syngas. Revenue and quantity sold by product type for the three months ended September 30, 2015 and 2014 are as follows:

 

		Coke				Coal				Syngas				Total
Revenue
Three months ended September 30, 2014		$	12,034,328			$	1,539,508			$	-			$	13,573,836
Three months ended September 30, 2015			2,697,891				217,893				3,526,454				6,442,238
Increase (decrease) in $		$	(9,336,437	)		$	(1,321,615	)		$	3,526,454			$	(7,131,598	)
Increase (decrease) in %			(77.58	)%			(85.85	)%			N/A				(52.54	)%
Quantity sold (metric tons/ cubic meter)
Three months ended September 30, 2014			60,357				18,515				-				78,872
Three months ended September 30, 2015			20,783				7,600				35,843,052				35,871,435
Increase (decrease) in metric tons(T)/ cubic meter (M3)		T	(39,574	)		T	(10,915	)		M3	35,843,052				35,792,563
Increase (decrease) in %			(65.57	)%			(58.95	)%			N/A				45,380.57	%

 

 

We derived 42% of our revenue from coke products for the three months ended September 30, 2015, as compared to 89% in the same period last year; 3% of our revenue from coal products for the three months ended September 30, 2015 as compared to 11% in the same period last year; and 55% from syngas products for the three months ended September 30, 2015 as compared to 0% in the same period last year.

 

The shifting percentages reflect changes from our current operating strategies in consideration of market conditions and changes in government policies. The stricter environmental requirements and the weaker performance of the real estate industry weakened demands for coal and coke. Environmentally friendly products, such as our syngas, are more in line with the trends of future energy development. Through the gradual transformation of our operating strategies and product portfolios, our products can be closer to the future market demands. We believe that this change will bring positive contributions to our future business development.

 

Coke products include finished coke (a key raw material for producing steel), coke powder (a smaller-grained coke that can be produced along with coke and used by non-ferrous metallurgical industry), coal tar, and crude benzol. Coal tar and crude benzol are by-products of the coke manufacturing process, each of which has various industrial applications.

 

Coal products include unprocessed metallurgical coal, processed or washed coal, mid-coal and coal slurries, which are by-products of the coal washing process and used primarily to generate electricity and for heating. As used in this discussion and analysis, unless otherwise indicated, “coke” includes both coke and coke powder, and “raw coal” includes coal that is unwashed and relatively unprocessed, as well as mid-coal and coal slurries.

 

Syngas products were generated from our coke gasification facility, which was completed and commenced its production in October 2014. Syngas is widely used in various industries as well as used as a heating fuel in residential areas.

 

Average selling prices per metric ton of our coal and coke products, and average selling prices per cubic meter of syngas for the three months ended September 30, 2015 and 2014 are as follows:

 

Average Selling Price of Coke Products

 

		Coke				Coal tar				Crude benzol
Three months ended September 30, 2014		$	191			$	319			$	1,041
Three months ended September 30, 2015			116				238				404
Increase (decrease) in $		$	(75	)		$	(81	)		$	(637	)
Increase (decrease) in %			(39.27	)%			(25.39	)%			(61.19	)%

 

Average Selling Price of Coal Products

 

		Coal slurries				Mid-coal				Washed coal
Three months ended September 30, 2014		$	28			$	49			$	146
Three months ended September 30, 2015			N/A				29				N/A
Increase (decrease) in $		$	N/A			$	(20	)		$	N/A
Increase (decrease) in %			N/A				(40.82	)%			N/A

 

 

Average Selling Price of Syngas

 

		Syngas
Three months ended September 30, 2014		$	-
Three months ended September 30, 2015			0.10
Increase (decrease) in $		$	0.10
Increase (decrease) in %			N/A

 

Generally, our selling prices are driven by a number of factors, including the particular composition and quality of the coal or coke we sell, their prevailing market prices locally and throughout China, as well as in the global marketplace, timing of sales, delivery terms, and our relationships with our customers and our negotiations of their purchase orders. The selling prices of all coke products and coal products decreased over the three months ended September, 2015 compared to the same period in 2014 resulting from the oversupply of coke and coal products in the market.

 

The average price of coke was calculated based on the weighted average price of coke and coke powder. The average price of raw coal was calculated based on the weighted average price of unprocessed coal, coal slurries and mid-coal. We noted that the average selling prices for coal products were also influenced by changes in the coal mixtures (with different grades and heat content) that we sold to our customers.

 

Average price of syngas was contracted approximately at $0.10 or RMB 0.62 per cubic meter (M³). We have long-term syngas supply agreements with our customers to provide syngas at a fixed vending price of $0.10 or RMB 0.62 per cubic meters (M³). In some cases, syngas may be sold with periodic price adjustments.

 

Revenue and quantity sold of each coke product for the three months ended September 30, 2015 and 2014 are as follows:

 

		Coke				Coal tar				Crude benzol				Total
Revenues
Three months ended September 30, 2014		$	11,190,216			$	465,322			$	378,790			$	12,034,328
Three months ended September 30, 2015			2,199,694				349,833				148,364				2,697,891
Increase (decrease) in $		$	(8,990,522	)		$	(115,489	)		$	(230,426	)		$	(9,336,437	)
Increase (decrease) in %			(80.34	)%			(24.82	)%			(60.83	)%			(77.58	)%
Quantity sold (metric tons)
Three months ended September 30, 2014			58,535				1,458				364				60,357
Three months ended September 30, 2015			18,948				1,468				367				20,783
Increase (decrease) in metric tons			(39,587	)			10				3				(39,574	)
Increase (decrease) in %			(67.63	)%			0.69	%			0.82	%			(65.57	)%

 

 

Coke revenues decreased 80.34% in the three months ended September 30, 2015 resulting from a 67.63% decrease in coke quantities and a 39.27% decrease in the coke average selling price. Due to demand structure changes and the price of the coke products, no coke powder has been produced or sold since the beginning of fiscal year 2015. Our by-product revenues from coal tar decreased 24.82% in the three months ended September 30, 2015 resulting from a 0.69% increase in the coal tar quantities and a 25.39% decrease of the coke tar average selling price, and our revenues from crude benzol decreased by 60.83% in the three months ended September 30, 2015 resulting from a 0.82% increase in crude benzol quantities and offset by a 61.19% decrease in the crude benzol average selling price.

 

Because coke market demand was still weak and we used coke to produce our new clean-burning syngas, our revenues from coke products decreased continuously.

 

Revenue and quantity sold of each coal product for the three months ended September 30, 2015 and 2014 are as follows:

 

		Coal slurries				Mid-coal				Washed coal				Total
Revenues
Three months ended September 30, 2014		$	101,954			$	362,264			$	1,075,290			$	1,539,508
Three months ended September 30, 2015			-				217,893				-				217,893
Increase (decrease) in $		$	(101,954	)		$	(144,371	)		$	(1,075,290	)		$	(1,321,615	)
Increase (decrease) in %			(100.00	)%			(39.85	)%			(100.00	)%			(85.85	)%
Quantity sold (metric tons)
Three months ended September 30, 2014			3,674				7,460				7,381				18,515
Three months ended September 30, 2015			-				7,600				-				7,600
Increase (decrease) in metric tons			(3,674	)			140				(7,381	)			(10,915	)
Increase (decrease) in %			(100.00	)%			1.88	%			(100.00	)%			(58.95	)%

 

Our coal revenue continued to suffer from unstable and unpredictable raw coal supply from our coal mines affected by the ongoing mining moratorium. We are unable to anticipate when the moratorium or policy will change to allow us to reopen our mining activities. We had no raw coal revenue for the three months ended September 30, 2015 and 2014.

 

We purchase raw coal from third parties and wash coal for our coking processing. In response to the higher price of raw coal used to make washed coal, we have adapted our coal washing process to increase washed coal yield. Doing so has also resulted in less coal slurries but more mid-coal being produced, which when combined with the effect of selling price changes, resulted in the revenue fluctuations for both mid-coal and coal slurries.

 

There was no revenue from washed coal for the three months ended September 30, 2015 resulting from the average price of washed coal kept declining and the gross margin was getting thinner and limited availability of raw coal with which to produce washed coal to meet our coking processing.

 

Revenue and quantity sold of syngas product for the three months ended September 30, 2015 and 2014 are as follows:

 

 

		Syngas
Revenue
Three months ended September 30, 2014		$	-
Three months ended September 30, 2015			3,526,454
Increase (decrease) in $		$	3,526,454
Increase (decrease) in %			N/A
Quantity sold (cubic meter)
Three months ended September 30, 2014			-
Three months ended September 30, 2015			35,843,052
Increase (decrease) in cubic meter (M3)			35,843,052
Increase (decrease) in %			N/A

 

Our syngas operation was launched in October 2014. Thus, we do not have historical data as compared to the results of operations for the three months ended September 30, 2015. Our revenues from syngas have increased since commencement of our syngas operations in October 2014. All sales of syngas were delivered by the pipeline and all syngas was delivered as it was generated in our conversion ovens. Our coke gasification capacity has increased month to month from October 2014 to September 30, 2015. However, the provincial environmental protection inspection by the government in early September 2015 greatly weakened the demand for coal and coke. The decrease of revenues from coal and coke products also adversely affected revenues from our clean-burning syngas product, which was generated and sold beginning in October 2014. Over the long term, we believe that revenues from syngas will keep increasing along with the improvement of our production techniques and the expansion of our production capacity.

 

Cost of Revenue

 

Cost of revenues decreased by 61.59%, from $11,292,494 to $4,337,321 in the three months ended September 30, 2015 compared to the same period last year. The decrease was mainly driven by lower sale volumes for our coal and coke products. However, the decrease from our coal and coke sales was partially offset by the increased sales from our syngas operations whose revenues contributed a higher gross profit margin.

 

Gross Profit

 

Gross profit in the three months ended September 30, 2015 was $2,104,917, a decrease of $176,425 or 7.73% from $2,281,342 for the three months ended September 30, 2015 as compared to the same period last year. The decrease was mainly because the sales of coal and coke declined despite of the higher gross profit contributed from the sales of syngas which raised our annual gross margin from 16.81% to 32.67%.

 

Operating Expenses

 

Operating expenses, which consist of selling expenses and general and administrative expenses, was $1,185,965 in the three months ended September 30, 2015, an increase of $264,006 or 28.64% from $921,959 as compare to the same period of 2014. Selling expenses decreased by $8.498 or 24.87%, to $25,666 in the three months ended September 30, 2015, resulting from a slight reduction in expenses relating to selling activities. General and administrative expenses increased by $272,504 or 30.69%, to $1,160,299 in the three months ended September 30, 2015, mainly due to: 1) bad debt expense for doubtful accounts increased to $162,400 in the three months ended September 30, 2015 and, 2) depreciation expense increased to $102,321 in the three months ended September 30, 2015 as the Hongguan and Baofeng coal-related operations were closed beginning in July 2014.

 

Other Income and Expense

 

Other income and expense includes interest expense, interest income and other finance expenses, income and expense not related to our principal operations, and change in fair value of warrants.

 

Interest expense, mainly resulting from interest accrued for the loans from Bairui and Capital Paradise Limited (“CPL”), was $1,276,981 in the three months ended September 30, 2015, a decrease of $220,232 or 14.71%, from $1,497,213 as compared to the same period of 2014, which mainly resulted from the decrease of the principal of the loans from Bairui.

 

 

Interest income decreased by $102,219 or 99.97% to $32 for the three months ended September 30, 2015 from $102,251 for the same period of 2014 due to the collection of loans from CPL on August 2014 and January 2015. Other finance expenses, which consist of bank service fees and currency exchange gain or loss, were $4,945 for the three months ended September 30, 2015, an increase of $4,282 or 644.34%, from $663 for the same period of 2014.

 

We also recorded income from the change of fair value of warrants in the amount of $2,535,412 for the three months ended September 30, 2015, compared to an expense of $2,027,162 for the three months ended September 30, 2014. The income from change of fair value of warrants was mainly the result of the increase in volatility of our stock price during the comparable period and the expired warrants and options without exercising which were related to the September 24, 2014 Security Purchase Agreement under which we issued 2,818,845 shares of common stock attached with Series A warrants to purchase an aggregate of 1,409,423 common shares and Series B warrants to purchase an aggregate of 1,644,737 common shares.

 

As a result of the foregoing, we had other income of $1,253,518 for the three months ended September 30, 2015 compared other expense of $3,422,787 for the three months ended September 30, 2014.

 

Provision for Income Taxes

 

Provision for income tax decreased by $25,345 in the three months ended September 30, 2015 from the same period in 2014, due to the decrease of our taxable operating incomes from our consolidated subsidiaries.

 

Net income (loss)

 

We reported net income of $1,707,962 in the three months ended September 30, 2015, including the change of $2,535,412 in fair value of warrants, as compared to a net loss of $2,553,257 for the same period in 2014.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At September 30, 2015, we had a working capital deficit in the amount to $24,593,648 as compared to a working capital deficit in the amount to $25,400,753 at June 30, 2015. The decrease reflects several adverse factors, including: 1) coal acquisition payment of $4,636,439, 2) a proceeds from a loan from CPL of $316,808, 3) received repayment from the Pingdingshan Rural Credit Cooperative Union (“PRCCU”) of $4,796,316 in September 2015 and, 4) reclassification of the short-term warrants liabilities which decreased by $289,481.

 

Our accounts have accordingly been prepared in accordance with U.S. GAAP on a going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. Our ability to continue as a going concern depends upon expenditure requirements and repayments of our short-term loans and long-term loans with Bairui Trust and CPL as and when they become due.

 

In an effort to improve our financial position, we intend to negotiate with Bairui Trust to extend our loan maturity date, and to increase sales of higher margin products such as syngas, coal tar, and crude benzol. In the meantime, we are still waiting for the mining moratorium to conclude. If and when that occurs, we should be able to obtain a line of credit to facilitate additional liquidity by pledging our mining rights. Management believes that these and other actions taken can provide us the opportunity to continue as a going-concern.

 

 

In summary, our cash flows are as follows:

 

		For the three months ended September 30,
		2015				2014
Net cash provided by (used in) operating activities		$	4,256,556			$	(1,384,668	)
Net cash used in investing activities		$	(4,636,439	)		$	(2,526,661	)
Net cash provided by financing activities		$	109,925			$	15,220,921

 

Net Cash Provided by (Used in) Operating Activities

 

Net cash provided by operating activities for the three months ended September 30, 2015 was approximately $4.26 million as compared to net cash used in operating activities of approximately $1.38 million for the three months ended September 30, 2014. Except for $1,695,486 in non-cash adjustments such as depreciation, amortization and depletion, bad debt expenses, impairment reserves and change in fair value of warrants which increased our cash-based net income, net operating inflow for the three months ended September 30, 2015 resulted from the following factors: (1) other receivables decreased by $4,805,308 due to the collection of the deposit for an assets auction, (2) advance to suppliers decreased by $4,015,343 due to the receipt of raw material, which is prepaid in advance, (3) accounts payable increase by $211,335, (4) our taxes payable increased by $106,579 due to the payables of VAT tax and income tax which were scheduled to be paid in October 2015, and (5) an increase of $1,014,930 from other payables and accrued liabilities, which due to the increasing unpaid interest expense. Cash inflow was mainly offset as follows: (1) our account receivable increased by $2,984,556, due to longer credit terms offered to customers to promote the syngas sales, (2) inventories increased by $2,924,859 due to sales slowed down markedly.

 

Net cash used in operating activities for the three months ended September 30, 2014 was approximately $1.38 million as compared to net cash used in operating activities of approximately $0.56 million for the same period last year. Except for $2,448,560 in non-cash adjustment such as depreciation, amortization and depletion, bad debt allowance and change in fair value of warrants which increased our cash-based net loss, net operating inflow for the three months ended September 30, 2014 resulted from the following factors: (1) inventories decrease by $3,224,546 due to credit line was rose to two new customers and sales to these customers was increased, resulted in the finished goods decreased; (2) advances to suppliers decreased by $263,038, due to tightening control of our prepayments; (3) our taxes payable increase by $925,584 due to VAT payable which was scheduled to be paid on October 2014. Cash inflow was mainly offset as follows: (1) our account receivable increased by $2,641,476, due to Hongli rose the credit line to its two new customers during the period; (2) accounts payable decreased by $2,303,148 mainly due to less raw materials purchase during the period; and (3) other payables and accrued liabilities decreased by $675,686 due to the payment of interest related to Bairui Trust over the period.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities for the three months September 30, 2015 was approximately $4.64 million. During the three months ended September 30, 2015, we repaid $4,747,250 to the former shareholders of Shuangrui Coal which was related to our Shuangrui Coal acquisition in prior years.

 

Net cash used in investing activities for three months ended September 30, 2014 was approximately $2.53 million. We collected loan receivables of $4.5 million from CPL and invested $7.0 million in coke gasification construction.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities was approximately $0.11 million in the three months ended September 30, 2015. During the three months ended September 30, 2015, we repaid a loan from our shareholder and CEO, Mr. Jianhua Lv, in an amount of approximately $0.21 million. During the same period, we obtained an additional loan from CPL of $0.32 million.

 

Net cash provided by financing activities was approximately $15.22 million in the three months ended September 30, 2015. During the three months ended September 30, 2014, we completed a registered sale of 2,818,845 shares of our common stock with net consideration of $13.2 million and obtained an additional loan from our shareholder and CEO, Mr. Lv, which amounted to approximately $2.0 million. Such loans are made without interest and are payable on demand.

 

 

Capital Resources

 

Funding for our business activities has historically been provided by cash flow from operations, short-term loan financing, and loans from our shareholder and CEO, Mr. Jianhua Lv, and also the private placement of our securities.

 

On April 2, 2011, Hongli entered into a loan agreement with Bairui Trust, pursuant to which Bairui Trust agreed to loan Hongli RMB 360 million (approximately $57.06 million), of which RMB 180 million was due on April 2, 2013, and RMB 180 million on April 2, 2014, with annual interest rate of 6.3%. Bairui Trust made the loan to Hongli on April 3, 2011. On November 30, 2011, Hongli entered into a supplemental agreement with Bairui Trust to amend the terms such that RMB 30 million (approximately $4.8 million) would be due on October 2, 2012, RMB 100 million (approximately $15.8 million) on April 2, 2013, RMB 50 million (approximately $7.9 million) on October 2, 2013, and RMB 180 million (approximately $28.5 million) on April 2, 2014. We made the October 2, 2012 payment on December 25, 2012, including outstanding interest charge for late payment. We repaid $3.2 million (approximately RMB 20 million) on April 3, 2013, and entered into another supplemental agreement with Bairui Trust on April 23, 2013 to extend the due date for the remaining $12.7 million (approximately RMB 80 million). Of such remaining principal, the due date for $3.2 million (approximately RMB 20 million) has been extended to December 2, 2013 with an annual interest rate of 6.3% starting from April 23, 2013. The due date for $4.8 million (approximately RMB 30 million) has been extended to January 2, 2014 with an annual interest rate of 6.3% starting from April 23, 2013. The due date for $4.8 million (approximately RMB 30 million) was extended to February 2, 2014 with an annual interest rate of 6.3% starting from April 23, 2013. Between April 3, 2013 and April 23, 2013, Bairui Trust charged a 9.45% annual interest rate on the entire $12.7 million outstanding.

 

On October 1, 2013, the parties executed an extension agreement, for the remaining balance of approximately $50.3 million (approximately RMB 310 million) with a 9.9% interest rate as follows: 

 

Loan Amount (in USD)				Loan Amount (in RMB)				Extended Loan Repayment Date		New Interest Rate Period
$	8,114,380			¥	50,000,000			October 2, 2016		October 3, 2013 – October 2, 2016
	3,245,752				20,000,000			December 2, 2016		December 3, 2013 – December 2, 2016
	4,868,628				30,000,000			January 2, 2017		January 3, 2014 – January 2, 2017
	4,868,628				30,000,000			February 2, 2017		February 3, 2014 – February 2, 2017
	29,211,770				180,000,000			April 2, 2017		April 3, 2014 – April 2, 2017
$	50,309,158			¥	310,000,000

 

On April 2, 2014, the Company entered into another supplement agreement with Bairui Trust which replaced the extension agreement dated October 1, 2013, and repaid principal in the amount of $324,929 (approximately RMB 2,000,000). Per the supplement agreement, loans from Bairui Trust were amended as follows:

 

Loan Amount (in USD)				Loan Amount (in RMB)				Extended Loan Repayment Date		New Interest Rate Period
$	2,928,734			¥	18,000,000			April 2, 2015		December 3, 2013	–	April 2,2015
	4,881,224				30,000,000			April 2, 2015		January 3, 2014	–	April 2,2015
	4,881,224				30,000,000			April 2, 2015		February 3, 2014	–	April 2,2015
	8,135,373				50,000,000			January 2, 2015		October 3, 2013	–	January 2,2015
	29,287,340				180,000,000			October 2, 2015		April 3, 2014	–	October 2, 2015
$	50,113,895			¥	308,000,000

  

According to the new supplement agreement, the annual interest rate was changed from 9.9% to 11.88% and, for the period between December 3, 2013 and April 2, 2014, Bairui Trust charged an additional 7.2% annual interest rate on $12.9 million (RMB 80 million) of the outstanding $50.3 million (RMB 310 million) loan principal.

 

On January 20, 2015, Hongli repaid the loan of $8,132,990 (approximately RMB 50,000,000) to Bairui Trust which was due on January 2, 2015.

 

 

On April 3, 2015, Hongli and Baitui Trust reached an agreement to extend the loans of approximately $12.74 million (approximately RMB 78,000,000) to April 2, 2016 with the annual interest of 11.88%.

 

On October 8, 2015, the Company and Bairui Trust entered into a supplemental agreement to extend the due date of one of its outstanding loans. The extended loan of $29,287,340 (approximately RMB 180 million) was due on October 2, 2015. In accordance with the supplemental agreement, the due date was extended to April 2, 2016.

 

As of September 30, 2015, the loans from Bairui Trust were as follows:

 

Loan Amount (in USD)				Loan Amount (in RMB)				Due Date		Interest Rate
$	12,276,118			¥	78,000,000			April 2, 2016			11.88	%
	28,329,504				180,000,000			April 2, 2016			11.88	%
$	40,605,622			¥	258,000,000

 

We intend to negotiate with Bairui Trust to further extend the maturity dates of these remaining outstanding loans by an additional two to three years, and to repay the loans through our operational cash flow. We cannot guarantee that we will be successful in such negotiations.

 

On January 26, 2015, Top Favour and Capital Paradise Limited entered into a loan agreement of $2,960,000 with an annual interest rate of 7% and maturity date of January 27, 2016. This loan is not secured by any collateral or guarantee. As of September 30, 2015, the outstanding loan from Capital Paradise Limited was $2,553,874.

 

Our business plan involves growing our business through:

 

(1)

Targeting changes to the coal and coke markets in which we currently operate, upgrading production technology and management to improve the quality of our products and lower the cost of our coke and coal products. And adjusting our product mix to increase sales of higher margin products such as syngas, coal tar, and crude benzol in order to hedge against unfavorable market conditions for coal and coke that we are facing;

 

(2)

Looking for opportunities to build long-term relationships with quality raw coal producers to ensure our supply of raw coal. Raw coal supply has been adequate in the past few year since the 2011 moratorium, but the quality and price and other business terms to purchase raw coal we need has not been stable enough and could affect our production of washed coal and coke products; and

 

(3)

Developing and installing a facility for the conversion of coal and coke products into clean-burning syngas. We also plan to expand our coke gasification capacity as we gain more experience in this field. We also started construction of a UCG project, which was approved and supported by the local government as a Scientific and Technological Practical Project. Once the UCG project is completed, we hope to be one of leading companies in China for UCG, which will help us execute our green energy strategy.

 

The following is expected to require capital resources:

 

·

New Coking Facility. We initially intend to use existing cash, cash flow from operations, bank loans, along with other finance arrangements such as extending our long term loan from Bairui Trust, to complete the construction of our new coking facility. Due to change of market conditions, we have slowed down the construction, but we plan to resume at full pace if and when market improves.

 

·

Coke gasification project. We had completed installation of our first stage coke gasification equipment on October 2014, which cost us approximately $8 million or RMB 49 million in total. After that, we invested an additional $6.6 million to commence a technology upgrade project on the existing coke gasification equipment to double the total production capacity to 50,000 cubic meters per hour. We are seeking other locations which have enough syngas demands in that area to expand our coke gasification business. We plan to determine whether to invest in more equipment, totaling approximately $30 million, within the coming two years based on our syngas operation development and market situation. All the investment will be funded from our operating cash flow, loans from third parties, or cooperation with other investors using our experience and technology.

 

 

·

Coal underground gasification project. On August 28, 2014, we entered in a cooperative agreement with the North China Institute of Science and Technology regarding UCG development to refine and implement a technology converting underground coals into syngas. Our ultimate target is to build a UCG facility with an annual production capacity of 7,708,800,000 cubic meters of syngas or 880,000 cubic meters of syngas per hour in all four of our coal mines.

 

Off-balance Sheet Arrangements

 

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. Other than warrants liability, we have not entered into any derivative contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in its 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 that engages in leasing, hedging or research and development services with us.

 

Critical Accounting Policies

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are described in Note 2 to our financial statements elsewhere in this Report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:

 

Revenue recognition

 

We recognize revenue from the sale of coal and coke, our principal products, at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations on our part exist and collectability is reasonably assured. This generally occurs when coal or coke is loaded onto trains or trucks at one of our loading facilities or at third-party facilities. Accordingly, management is required to apply its own judgment regarding collectability based on its experience and knowledge of its current customers, and thus exercise a certain degree of discretion.

 

Most, if not all, of the electricity generated by Hongguang Power is typically used internally by Baofeng Coking. Supply of surplus electricity generated by Hongguang Power to the national power grid is mandated by the local utilities board. The value of the surplus electricity supplied, if it exists, is calculated based on actual kilowatt-hours produced and transmitted and at a fixed rate determined under contract. As Hongguang Power mainly uses the gas produced during the coking procedure from our Baofeng plant to generate electricity, it has been temporarily closed following the Baofeng plant closing in July 2014. Thus, we did not generate any electricity in fiscal 2015, but plan to resume our Hongguang Power operations in the future when we are able to do so.

 

 

The Company generally sells syngas under long-term agreements at fixed vending prices. In some cases, syngas may be sold with periodic price adjustments. Revenues are recognized when the products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.

 

Coal, coke and syngas sales represent the invoiced value of goods, net of a value-added tax (“VAT”), sales discounts and actual returns at the time when product is sold to the customer.

 

Accounts receivables, trade

 

During the normal course of business, we extend unsecured credit not exceeding three months to our customers. Management regularly reviews aging of receivables and changes in payment trends by its customers, and records allowance when management believes collection of amounts due are at risk. Accounts receivables are considered past due after three months from the date credit was granted. Accounts considered uncollectible after exhaustive efforts to collect are written off. We regularly review the credit worthiness of our customers and, based on the results of such credit review, determine whether extended payment terms can be granted to or, in some cases, partial prepayment is required from certain customers. As of September 30 and June 30, 2015, $626,073 and $217,905 allowance for doubtful accounts was provided, respectively.

 

Intangible assets - mining rights, net

 

Mining rights are capitalized at fair value when acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion expense using the units-of-production method over the estimated proven and probable recoverable tons. Our materials that may contain coal are controlled through direct ownership by our VIEs which generally last until the recoverable materials that may contain coal are depleted.

 

Long-term investment

 

Entities in which we have the ability to exercise significant influence, but do not have a controlling interest, are accounted for under the equity method. Significant influence is generally considered to exist when we have between 20% and 50% of ownership interest in the voting stock, but other factors, such as representation on the board of directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.

 

Impairment of long-lived assets

 

We evaluate long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows, in accordance with the accounting guidance regarding “Disposal of Long-Lived Assets.” Recoverability is measured by comparing an asset’s carrying value to the related projected undiscounted cash flows generated by the long-lived asset or asset group, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. When the carrying value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss to the extent that the carrying value exceeds its fair value. As of September 30 and June 30, 2015, we have recognized impairment of $2,348,936 and $2,431,718 against long-lived assets. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and/or third party independent appraisals.

 

Recently issued accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs–Contracts with Customers (Subtopic 340-40). The amendments in ASU 2014-09 supersede most current revenue recognition requirements. The core principal of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company can apply the amendments using one of the following two methods: (i) retrospectively to each prior reporting period presented, or (ii) retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. In July 2015, the FASB issued ASU No. 2015-4, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year for all entities. Accordingly, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently assessing the timing of its adoption and the impact of adopting this guidance on its consolidated financial statements and the implementation approach to be used.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted on a retrospective basis. The Company elected to adopt ASU 2015-03 early, effective in the three months ended September 30, 2015.

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Entities are currently required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to measurement period adjustments that occur after the effective date of the guidance with earlier application permitted for financial statements that have not been issued. The Company elected to adopt ASU 2015-16 early, effective in the three months ended September 30, 2015.

 

  

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

General

 

We do not use derivative financial instruments and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, and short-term and long-term obligations. We generally consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents.

 

Currency Fluctuations and Foreign Currency Risk

 

Substantially all of our operations are conducted in China. All of our sales and purchases are conducted within China in RMB, which is the official currency of China. As a result, the effect of the fluctuations of exchange rates is considered minimal to our business operations.

 

Substantially all of our revenues and expenses are denominated in RMB. However, we use the United States dollar for financial reporting purposes. Conversion of RMB into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system. Although the PRC government has stated its intention to support the value of RMB, there can be no assurance that such exchange rate will not again become volatile or that RMB will not devalue significantly against the U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from our operations in China.

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our short-term and long-term obligations. Accordingly, fluctuations in applicable interest rates would not have a material impact on the fair value of these securities. At September 30, 2015, we had $139,233 in cash. A hypothetical 2% increase or decrease in applicable interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of these instruments.

 

 

Commodity Price Risk

 

Although we are endeavoring to expand our business into clean energy, our business is currently affected by prevailing market prices for coal and coke. However, we do not currently engage in any hedging activities, such as futures, forwards, or options contracts, with respect to any of our inputs or products.

   

Credit Risk

 

We are exposed to credit risk from our cash at bank and fixed deposits and accounts receivable. The credit risk on cash at bank and fixed deposits is limited because the counterparties are recognized financial institutions. Accounts receivable are subjected to credit evaluations. An allowance has been made for estimated irrecoverable amounts which have been determined by reference to past default experience and the current economic environment.

   

Inflation

 

Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

  

Company’s Operations are Substantially in Foreign Countries

 

Substantially all of our operations are conducted in China and are subject to various political, economic, and other risks and uncertainties inherent in conducting business in China. Among other risks, our operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations. Additional information regarding such risks can be found under the heading “Risk Factors” in this Report.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

(a)	Evaluation of Controls and Procedures

 

Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2015. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, our disclosure controls and procedures were ineffective. The ineffectiveness is due to the scarcity of qualified employees who are capable of assisting the company to fulfill its US Securities Law Reporting obligations.

 

(b)	Changes in Internal Control over Financial Reporting

 

There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

 

None

 

ITEM 1A.

RISK FACTORS.

 

There have been no material changes to the Company’s risk factors which are included and described in our Annual Report. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

   

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None

  

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

The disclosures required by Item 4 are not applicable to our operations, as the Company has no mining operations in the United States.

 

ITEM 5.

OTHER INFORMATION.

 

On May 26, 2015, the Company filed a complaint against Henan Province Coal Seam Gas Development and Utilization Co., Ltd. (“Henan Coal Seam Gas”) with the Intermediated People’s Court in Zhengzhou City. In the complaint the Company demanded that Henan Coal Seam Gas pay back the security deposit (characterized as a loan) from the Company of RMB 30,000,000 (approximately $4,712,584 at the exchange rate at the time the complaint was filed), with interest of RMB 8,592,326.04, plus the interest from May 27, 2015 to actual repayment date.

  

ITEM 6.

EXHIBITS

 

Exhibit Number		Description
3.1		Articles of Incorporation, as amended (1)
3.2		Articles of Amendment to Articles of Incorporation (2)
3.3		Articles of Amendment to Articles of Incorporation (3)
3.4		Bylaws (1)
3.5		Amended and Restated By-laws (3)
4.1		Specimen Stock Certificate of Hongli Clean Energy Technologies Corp. (3)
31.1		Certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2		Certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  *
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  *
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  *
99.1		Press release dated November 13, 2015 *

  

101. INS		XBRL Instance Document *
101. SCH		XBRL Taxonomy Extension Schema Document *
101. CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

 

 

101. DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101. LAB		XBRL Taxonomy Extension Label Linkbase Document*
101. PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Filed herewith.

  

(1)

Incorporated by reference to the Form 10-SB filed by the Company with the Securities and Exchange Commission on November 18, 1999.

   

(2)

Incorporated by reference to the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on February 8, 2011.

 

(3)

Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended June 30, 2015 filed by the Company with the SEC on October 13, 2015.

 

 

SIGNATURES

 

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

 

	HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
Dated: November 13, 2015	By:	/s/ Jianhua Lv
		Jianhua Lv
		Chief Executive Officer
		(Principal Executive Officer)
Dated: November 13, 2015	By:	/s/ Song Lv
		Song Lv
		Chief Financial Officer
		(Principal Financial and Accounting Officer)