The accompanying notes are an integral
part of the consolidated financial statements
The accompanying notes are an integral part
of the consolidated financial statements
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 an energy producer which is
in the processing of transformation from providing multifunctional energy products to focus on providing clean burning energy located
in the People Republic of China (“PRC” or “China”). The Company currently generates only one kind of its
products, synthetic gas, although it could also produce raw coal, washed coal, “medium” or mid-coal and coal slurries,
coke, coke powder, coal tar, crude benzol and electricity before the Company closed its coal and coke production on December 2015,
and disposed its coal and coking assets during the first quarter of 2016. 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 that applied to the Company’s all coal mines, no raw coal mined by the Company since 2011.
The Company used to wash coal and generate
coke products. Due to increasing stringent environments requirements and the declining of the price of coke products, the Company
decided to suspend the production of washed coal and coke products since the beginning of December 2015 and sold the assets related
to coal washing and coking operations in January and March 2016 respectively, considering the change of policy and the environment
of the market.
The Company also generated electricity from
gas emitted during the coking process, which is used primarily to power the Company’s operations. The Company has not generated
any electricity since July 2014, because of one of our coking plant was closed and no gas emitted without coking process. The Company
holds equipment and related assets of electricity generation with the plan of using over supplied Synthetic gas which we generate
in our gasification facility to adjust balance of Synthetic gas generations and the demand.
The Company generates synthetic gas (“Syngas”)
which is converted from coke using the coke gasification facility since October 2014. Synthetic gas is clean-burning fuel which
was encouraged by the government. Syngas is the only products that the Company produces currently.
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 Company initially
planned to implement the UCG technology to all its coal mines once UCG construction completed and ensures it can achieve economic
efficiency. However, the development and economic effectiveness of UCG was out of the Company’s initial expectation. The
Company sold the whole project together with selling coal mines in March 2016.
On January 10, 2016, the Company entered into
a Credits and Debts Transfer Agreement with an unrelated third party, Wuhan Guangyao New Energy Automobile Operation Co., Ltd.
(“Guangyao”). As of December 31, 2015, the Company had certain credit assets (advance payments, including short-term
and long-term portions, and accounts receivable) with a book value of RMB 254,160,210.59 and outstanding debts (accounts payable,
interest payable, and short-term loans) with a book value of RMB 274,167,269.37. According to the Credits and Debts Transfer Agreement,
the Company transferred those credit assets and debts valued at December 31, 2015 to Guangyao in a lump sum. Guangyao will conduct
the collection and the clearance by itself. The Company shall compensate Guangyao regarding the difference of RMB 20,007,058.78
between the book value of the transferred credit assets and debts. The Company shall pay RMB 20,007,058.78 to Guangyao within 6
months after this Credits and Debts Transfer Agreement becomes effective. If it is not paid off timely, Guangyao has the right
to charge the Company at an annual interest rate of 4.5% for the then unpaid amount after 6 months of the effective date of this
agreement, until it is cleared. With regards to the Credits and Debts Transfer Agreement, Guangyao will be responsible to discuss
and negotiate with the Company’s creditors and debtors, and get unanimous consents from the creditors and debtors including
Bairui Trust Co., Ltd. Guangyao is also responsible for arbitration and lawsuits with other creditors and debtors during the performance
process of this agreement, and enforce the decisions of arbitration and lawsuits.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On January 25, 2016, the Company entered into
an Assets Transfer Agreement for 900,000 Tons of Coking Asset in Construction with Guangyao. As of December 31, 2015, the Company’s
900,000 tons of stamp-charging coking assets in construction are worth RMB 319,531,307.61. Based on the agreement, the Company
agrees to transfer to Guangyao the 900,000 tons of stamp-charging coking assets in construction for RMB 45,692,140. Guangyao shall
pay the Company all the payment agreed in this agreement within 6 months after this agreement becomes effective. If it is not paid
off timely, Guangyao will be charged at an annual interest rate of 4.5% for the then unpaid amount after 6 months of the effective
date of this agreement, until it is cleared.
Beginning from the earlier 2016, Chinese
Government implemented a series of policies to cut off or limit the national wide production capacity at various industries, including
governmental and private companies, to restructure the country’s economy, especially focus on crude steel related production
and coal and coke related industries. The changes of the policies from Chinese Government and the environment of macro-economy
had significantly limited the Company’s ability to resume its coal mining and coke production operations in the soon future.
Therefore, the Company disposed most of its coal and coke related business in March 2016.
On March 25, 2016, the Company entered
into an asset and equity transfer agreement with Pingdingshan Hongfeng Coal Processing and Coking Factory (“Hongfeng”).
In accordance with the transfer agreement, the Company sold its coking factory, coal related assets and the equity interest of
subsidiaries, including assets in Baofeng Coking, Underground Coal Gasification project, 100% of the equity interest of Baofeng
Hongchang Coal Co., Ltd. and Baofeng Shuangrui Coal Mining Co., Ltd., 60% of the equity interest of Baofeng Xingsheng Coal Mining
Co., Ltd., 100% of the equity interest of Henan Zhonghong Energy Investment Co., Ltd., and 100% of the equity interest of Baofeng
Hongrun Coal Chemical Co., Ltd., to Hongfeng for approximately $2.5 million or RMB 15,843,534.32 and reported an aggregate loss
of approximately $61 million. According to the agreement, Hongfeng will pay us 50% of the selling price within 6 months after this
agreement becomes effective and the remaining 50% of the selling price will be paid off after the titles to such assets and equity
interests are registered with the appropriate authorities. If any payments due for over 30 days are unpaid, Hongfeng will be charged
an interest expense at an annual interest rate of 10% for the then unpaid portion until it is fully paid.
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 as registration , 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 (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 (RMB 3,000,000) fully funded
·
Consolidated
and merger Shunli’s coal in July 2014
·
Sold
out by Hongli on March 25, 2016
|
|
VIE by contractual arrangements as a wholly-owned subsidiary of
Hongli before it was sold out on March 25, 2016
|
|
Baofeng Hongguang Power Co., Ltd. (“Hongguang Power”)
|
|
·
A
PRC limited liability company
·
Incorporated
on August 1, 2006
·
Registered
capital of $2,756,600 (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 (RMB 3,634,600) fully funded
·
60%
of equity ownership acquired by Hongli on May 20, 2011
·
Sold
out by Hongli on March 25, 2016
|
|
VIE by contractual arrangements as a 60% owned subsidiary of Hongli
before it was sold out on March 25, 2016
|
|
Baofeng Shuangrui Coal Co., Ltd. ( “Shuangrui Coal”)
|
|
·
A
PRC limited liability company
·
Incorporated
on March 17, 2009
·
Registered
capital of $620,200 (RMB 4,029,960) fully funded
·
60%
of equity ownership acquired by Hongli on May 20, 2011
·
100%
of equity ownership acquired by Hongchang on June 20, 2012
·
Sold
out by Hongli together with Hongchang Coal on March 25, 2016
|
|
VIE by contractual arrangements as a 100% owned subsidiary of Hongchang
before it was sold out on March 25, 2016
|
|
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Zhonghong Energy Investment Company (“Zhonghong”)
|
|
·
A
PRC company
·
Incorporated
on December 30, 2010
·
Registered
capital of $7,842,800 (RMB51,000,000) fully funded equity interests of 100% held by three nominees on behalf of Hongli pursuant
to share entrustment agreements
·
Sold
out by Hongli on March 25, 2016
|
|
VIE by contractual arrangements as a wholly-owned subsidiary of Hongli before it was sold out on March 25, 2016.
|
|
Baofeng Hongrun Coal Chemical Co., Ltd. (“Hongrun”)
|
|
·
A
PRC limited liability company
·
Incorporated
on May 17, 2011
·
Registered
capital of $4,620,000 (RMB 30 million) fully funded
·
Sold
out by Hongli on March 25, 2016
|
|
VIE by contractual arrangements as a wholly-owned subsidiary of Hongli before it was sold out on March 25, 2016.
|
|
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:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
Total current assets
|
|
$
|
10,999,249
|
|
|
$
|
7,938,342
|
|
Total assets
|
|
$
|
28,308,007
|
|
|
$
|
176,470,756
|
|
Total current liabilities
|
|
$
|
33,967,435
|
|
|
$
|
90,206,205
|
|
Total liabilities
|
|
$
|
33,967,435
|
|
|
$
|
90,206,205
|
|
Presently, the Company’s coke gasification
related operations are carried out by Hongli. Except for coke gasification, other operations were halted and related assets and
equipment were sold as of March 31, 2016. Before halting and disposal of, operations were organized and allocated as follow: coking
operation should be carried out by Baofeng, coking coke and coal trading activities should be carried out by Hongli, electricity
generation should be carried out by Hongguang Power, and coal related operations should be carried out by Hongchang Coal, Shuangrui
Coal and Xingsheng Coal, respectively.
Liquidity and going concern
The accompanying unaudited financial statements
have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as
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. The Company’s ability to continue as a going concern
depends upon the liquidation of current assets. The Company entered into a Credit and debts Transfer Agreement to restructure our
current liabilities at January 2016 which made the Company has working capital in the amount to $8,659,608 as of March 31, 2016,
however, the Company disposed assets and equipment related to its coal and coking operations in January and March 2016, which result
net loss in the amount to $98,426,940 for the nine months ended of March 31, 2016. The Company’s operations scale was cut
largely and the remaining business of coke gasification has not stood up to make up the significantly contracting of coal and coking
business, all these has substantial doubt about the Company’s ability to continue as a going concern.
In an effort to improve its financial position
and operations, the Company is working to transform all its resource to invest in green and new energy business, included but not
limited to coke gasification and electricity generation. In addition, the management also do their effort to fund more capital
to extend its current coke gasification operation to make up operation result shortly. 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
Basic 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 nine months ended March 31, 2016
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. However, for Hongli’s subsidiaries
which were sold on March 25, 2016, including Hongchang Coal, Shunli Coal, Xingsheng Coal, Shuangrui Coal, Zhonghong, and Hongrun,
their operating results were consolidated in our financial statements for the periods prior to their sales. 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 are
comprised of 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
Since 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 nine months ended March 31, 2016 and 2015, the Company did not generate any electricity power because Hongguang Power was temporally
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 March 31, 2016 and June 30, 2015 were translated at RMB 6.45 to $1 and RMB 6.11 to $1, respectively. The average
translation rates applied to income and cash flow statement amounts were at RMB 6.39 to $1 and RMB 6.15 to $1 for the nine months
ended March 31, 2016 and 2015, 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 March 31, 2016:
|
|
Carrying value at
March 31, 2016
|
|
|
Fair value measurement at
March 31, 2016
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrants liability
|
|
$
|
111,094
|
|
|
$
|
-
|
|
|
$
|
111,094
|
|
|
$
|
-
|
|
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 March 31, 2016
and June 30, 2015:
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning fair value
|
|
$
|
2,915,649
|
|
|
$
|
16
|
|
Realized gain recorded in earnings
|
|
|
(2,804,555
|
)
|
|
|
(7,131,724
|
)
|
Granted financial instrument
|
|
|
-
|
|
|
|
10,047,357
|
|
Ending fair value
|
|
$
|
111,094
|
|
|
$
|
2,915,649
|
|
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
Number of shares exercisable
|
|
|
1,671,664
|
|
|
|
1,721,664
|
|
Range of exercise price
|
|
|
$6.38-48.00
|
|
|
|
$6.08-48.00
|
|
Stock price
|
|
|
$0.35
|
|
|
|
$1.75
|
|
Expected term (years)
|
|
|
1.02-2.98
|
|
|
|
0.00-3.24
|
|
Risk-free interest rate
|
|
|
3.03%
|
|
|
|
0.02-1.34%
|
|
Expected volatility
|
|
|
101.65-112.10%
|
|
|
|
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 nine months ended March 31, 2016 and 2015, the Company’s two long term investments were not considered impaired,
included the one of long-term investments disposed on March 25, 2016.
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 March 31, 2016 and June 30, 2015, the Company had $51,511
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 March 31, 2016 and June 30, 2015, $0 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 were
$810 and $0 of allowances for doubtful accounts provided as of March 31, 2016 and 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 March 31, 2016 and June 30, 2015, amount to $746,990 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 March 31, 2016 and June 30, 2015, $0
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 recoverable proven and probable materials that may contain
coal. 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 nine months ended March
31, 2016 and 2015, 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 a joint venture between the Company and Henan Coal Seam Gas (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 March 31, 2016 and June 30, 2015,
$4,621,286 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 proven and probable materials that may contain coal, and amortized
to operations as depletion expense using the units-of-production method over the estimated proven and probable recoverable amounts.
The Company’s materials that may contain coal are controlled through its VIEs, which control generally lasts until the recoverable
materials that may contain coal 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. 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 March
31, 2016 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 March 31, 2016 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 nine months ended
March 31, 2016 and 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.
Non-controlling 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 nine months ended March
31, 2016 and 2015, there was no net income or loss attributable to such noncontrolling interests because Xingsheng Coal was not
operational during such periods. On March 25, 2016, the Company entered into an asset and equity transfer agreement with Hongfeng
to sell its coal and coke related assets and subsidiaries, which included Xingsheng Coal. Therefore, no non-controlling interests
were reported as of March 31, 2016.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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. 2014-9, “Revenue from Contracts with
Customers” (“ASU 2014-9”). ASU 2014-9 provides for a single comprehensive principles-based standard for the recognition
of revenue across all industries through the application of the following five-step process:
Step 1: Identify the contract(s)
with a customer.
Step 2: Identify the performance
obligations in the contract.
Step 3: Determine the transaction
price.
Step 4: Allocate the transaction
price to the performance obligations in the contract.
Step 5: Recognize revenue when
(or as) the entity satisfies a performance obligation.
The updated guidance related to revenue recognition
which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts
for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance requires that
an entity 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 guidance is effective for us starting on
January 1, 2017. We are currently evaluating the impact this guidance will have on our combined financial position, results of
operations and cash flows.
In April 2015, the
FASB issued guidance to simplify the presentation of debt issuance costs. This new guidance requires 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. This new guidance will be effective for us beginning July 1, 2016. We are currently evaluating
the impact of this standard on our consolidated financial statements.
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 year ended June 30, 2016.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In November 2015,
the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The standard requires
that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Entities
are currently required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified
statement of financial position. The amendments, which require non-current presentation only (by jurisdiction), are effective for
financial statements issued for annual periods beginning after December 15, 2016 with earlier application permitted as of the beginning
of an interim or annual reporting period. The guidance is to be applied either prospectively to all deferred tax liabilities and
assets or retrospectively to all periods presented. The Company elected to early adopt this standard, effective as of June 30,
2016. There was no impact from this adoption.
In January 2016, the
FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted
for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with
changes in fair value recognized in net income. The new guidance also changes certain disclosure requirements and other aspects
of current US GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of
the fiscal year of adoption. This standard is effective for fiscal years starting after December 15, 2017, including interim periods
within those fiscal years. The standard does not permit early adoption with the exception of certain targeted provisions. The Company
is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
In February 2016,
the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the
recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition
of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard,
disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty
of cash flows arising from leases. We anticipate this standard will have a material impact on our consolidated balance sheets,
and we are currently evaluating its impact.
In March 2016, the
Financial Accounting Standards Board (“FASB”) issued a new standard that changes the accounting for certain aspects
of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the
income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be
separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase
more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash
payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement,
and provides an accounting policy election to account for forfeitures as they occur. The Company is currently assessing the impact
and timing of adopting this guidance on its consolidated financial statements.
Note 3 – Concentration risk
For the three months ended March 31, 2016,
100% of the Company’s total revenues were from one customer. For the nine months ended March 31, 2016, 75.9% of the Company’s
total revenues were from two customers who accounted for 62.7%, and 13.2% of total revenues, respectively. For the three months
ended March 31, 2015, 78.2% of the Company’s total revenues were from four customers who accounted for 31.1%, 17.8%, 16.0%
and 13.3% of total revenues, respectively. For the nine months ended March 31, 2015, 52.5% of the Company’s total revenues
were from three customers who accounted for 22.0%, 15.9% and 14.6% of total revenues, respectively.
For the three months ended March 31, 2016,
the Company has no raw material purchases. For the nine months ended March 31, 2016, four main suppliers provided 50.5% of total
raw material purchases, each supplier accounting for 15.8%, 12.8%, 11.7% and 10.2% of total raw material purchases, respectively.
For the three months ended March 31, 2016, three main suppliers provided 91.8% of total raw material purchases, each supplier accounting
for 43.6%, 30.7% and 17.5% of total raw material purchases, respectively. For the nine months ended March 31, 2015, three main
suppliers provided 55.3% of total raw material purchases, 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:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
Security deposit for auction
|
|
$
|
-
|
|
|
$
|
4,910,949
|
|
Receivables related to disposals of assets and subsidiaries
|
|
|
6,439,195
|
|
|
|
-
|
|
Advances to employees
|
|
|
2,050
|
|
|
|
18,018
|
|
|
|
|
6,441,245
|
|
|
|
4,928,967
|
|
Less: allowance for doubtful accounts
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
$
|
6,440,435
|
|
|
$
|
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 (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 (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 (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 issues. On September 25, 2015, the Company had received the deposit of $4,910,949 or RMB 30 million from PRCCU.
Receivables related to disposals of assets and subsidiaries
On January 10, 2016, the Company entered into
a Credits and Debts Transfer Agreement with an unrelated third party, Wuhan Guangyao New Energy Automobile Operation Co., Ltd.
(“Guangyao”). As of December 31, 2015, the Company had certain credit assets (advance payments, including short-term
and long-term portions, and accounts receivable) with a book value of RMB 254,160,210.59 and outstanding debts (accounts payable,
interest payable, and short-term loans) with a book value of RMB 274,167,269.37. According to the Credits and Debts Transfer Agreement,
the Company transferred those credit assets and debts valued at December 31, 2015 to Guangyao in a lump sum. Guangyao will conduct
the collection and the clearance by itself. The Company shall compensate Guangyao regarding the difference of $3,102,182 or RMB
20,007,058.78 between the book value of the transferred credit assets and debts. The Company shall pay $3,102,182 or RMB 20,007,058.78
to Guangyao within 6 months after this Credits and Debts Transfer Agreement becomes effective. If it is not paid off timely, Guangyao
has the right to charge the Company at an annual interest rate of 4.5% for the then unpaid amount after 6 months of the effective
date of this agreement, until it is cleared. With regards to the Credits and Debts Transfer Agreement, Guangyao will be responsible
to discuss and negotiate with the Company’s creditors and debtors, and get unanimous consents from the creditors and debtors
including Bairui Trust Co., Ltd. Guangyao is also responsible for arbitration and lawsuits with other creditors and debtors during
the performance process of this agreement, and enforce the decisions of arbitration and lawsuits.
On January 25, 2016, the Company entered into
an Assets Transfer Agreement for 900,000 Tons of Coking Asset in Construction with Guangyao. As of December 31, 2015, the Company’s
900,000 tons of stamp-charging coking assets in construction are worth RMB 319,531,307.61. Based on the agreement, the Company
agrees to transfer to Guangyao the 900,000 tons of stamp-charging coking assets in construction for $7,084,768 or RMB 45,692,140.
Guangyao shall pay the Company all the payment agreed in this agreement within 6 months after this agreement becomes effective.
If it is not paid off timely, Guangyao will be charged at an annual interest rate of 4.5% for the then unpaid amount after 6 months
of the effective date of this agreement, until it is cleared.
Beginning from the earlier 2016, Chinese Government
implemented a series of policies to cut off or limit the national wide production capacity at various industries, including governmental
and private companies, to restructure the country’s economy, especially focus on crude steel related production and coal
and coke related industries. The changes of the policies from Chinese Government and the environment of macro-economy had significantly
limited the Company’s ability to resume its coal mining and coke production operations in the soon future. Therefore, the
Company disposed all its coal and coke related business in March 2016.
On March 25, 2016, the Company entered
into an asset and equity transfer agreement with Pingdingshan Hongfeng Coal Processing and Coking Factory (“Hongfeng”).
In accordance with the transfer agreement, the Company sold its coking factory, coal related assets and subsidiaries, including
assets in Baofeng Coking, Underground Coal Gasification project, 100% of the equity interest of Baofeng Hongchang Coal Co., Ltd.
and Baofeng Shuangrui Coal Mining Co., Ltd., 60% of the equity interest of Baofeng Xingsheng Coal Mining Co., Ltd., 100% of the
equity interest of Henan Zhonghong Energy Investment Co., Ltd., and 100% of the equity interest of Baofeng Hongrun Coal Chemical
Co., Ltd., to Hongfeng for approximately $2.5 million or RMB 15,843,534.32 and reported an aggregate loss of approximately $61
million. According to the agreement, Hongfeng will pay us 50% of the selling price within 6 months after this agreement becomes
effective and the remaining 50% of the selling price will be paid off after the titles to such assets and equity interests are
registered with the appropriate authorities. If any payments due for over 30 days are unpaid, Hongfeng will be charged an interest
expense at an annual interest rate of 10% for the then unpaid portion until it is fully paid.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
For the three months ended March 31, 2016 and
2015, no interest income was from loans receivable. For the nine months ended March 31, 2016 and 2015, interest incomes from loans
receivable amounted to $0 and $164,400, respectively.
Note 6 – Inventories
Inventories consisted of the following:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
31,074
|
|
Work in process
|
|
|
-
|
|
|
|
839,729
|
|
Supplies
|
|
|
2,690
|
|
|
|
21,177
|
|
Finished goods
|
|
|
1,454,819
|
|
|
|
2,344,222
|
|
Total
|
|
|
1,457,509
|
|
|
|
3,236,202
|
|
Less: impairment reserve
|
|
|
(746,990
|
)
|
|
|
(44,597
|
)
|
Total inventories, net
|
|
$
|
710,519
|
|
|
$
|
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.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Advances to suppliers amounted to $0 and $8,216,127
as of March 31, 2016 and June 30, 2015, respectively. As of March 31, 2016 and June 30, 2015, the Company reported $0 and $1,512,785
as allowances for doubtful advance to suppliers accounts.
For the three months ended March 31, 2016 and
2015, the Company provided allowance for the long-term outstanding advances amounted to $0 and $667,175 respectively. For the nine
months ended March 31, 2016 and 2015, the Company provided allowance for long-term outstanding advances amounted to $1,191,305
and $667,175, respectively.
Note 8 – Plant and equipment, net
Plant and equipment consisted of the following:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
Buildings and improvements
|
|
$
|
6,579,065
|
|
|
$
|
11,196,358
|
|
Mine development cost
|
|
|
-
|
|
|
|
11,828,890
|
|
Machinery and equipment
|
|
|
18,130,633
|
|
|
|
15,606,700
|
|
Other equipment
|
|
|
218,488
|
|
|
|
413,449
|
|
Total
|
|
|
24,928,186
|
|
|
|
39,045,397
|
|
Less: accumulated depreciation
|
|
|
(8,575,052
|
)
|
|
|
(17,852,012
|
)
|
Less: impairment reserve
|
|
|
(1,888,745
|
)
|
|
|
(2,443,143
|
)
|
Total plant and equipment, net
|
|
$
|
14,464,389
|
|
|
$
|
18,750,242
|
|
As of March 31, 2016 and June 30, 2015, the
Company reported an impairment reserve over its plant and equipment in amount to $1,888,745 and $2,443,143, respectively.
Depreciation expense amounted to $392,133 and
$400,032 for the three months ended March 31, 2016 and 2015, respectively, and $1,179,704 and $1,052,240 for the nine months ended
March 31, 2016 and 2015, respectively. No depreciation expense was incurred for mining-related assets due to the shutdown of all
coal mine operations since September 2011.
On March 25, 2016, the Company entered
into an asset and equity transfer agreement with Pingdingshan Hongfeng Coal Processing and Coking Factory (“Hongfeng”).
In accordance with the transfer agreement, the Company sold its coking factory, coal related assets and subsidiaries, including
Hongchang Coal, Shunli Coal, Xingsheng Coal, Shuangrui Coal, Zhonghong, and Hongrun, to Hongfeng for approximately $2.5 million
or RMB 15,843,534.32 and reported an aggregate loss of approximately $61 million.
Note 9 – Construction in progress
(“CIP”)
CIP at March 31, 2016 and June 30, 2015 amounted
to $0 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. On January 25, 2016, the Company entered into an assets transfer agreement to sell the assets related to this incomplete new coking plant to a third party for the consideration of RMB 45,692,140 or approximately $7 million. As of March 31, 2016 and June 30, 2015, the Company reported $0 and $28,779,513 in the construction in progress account.
|
|
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 March 31, 2016 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. On March 25, 2016, the Company entered into an asset and equity transfer agreement to sell its coking factory, coal related assets and subsidiaries to a third party, including the UCG underground safety construction. As of March 31, 2016 and June 30, 2015, the Company reported $0 and $30,087,742 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
Note 10 – Prepayments
Prepayments presented advances for constructions
which consisted of the following:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
Baofeng new coking plant (1)
|
|
$
|
-
|
|
|
$
|
20,715,228
|
|
Gasification facility - Baofeng (2)
|
|
|
-
|
|
|
|
2,619,172
|
|
|
|
|
-
|
|
|
|
23,334,400
|
|
Less: allowance for doubtful accounts
|
|
|
-
|
|
|
|
(3,660,366
|
|
Total
|
|
$
|
-
|
|
|
$
|
19,674,034
|
|
|
(1)
|
At October, 2012, the Company had made prepayments of approximately $19.5 million (RMB 126.5 million) toward construction of its new coking plant. These prepayments were restructured and sold on January 25, 2016 through a Credit and Debt Transfer Agreement (See Note20).
|
|
(2)
|
The Company entered into a construction agreement on June 16, 2015 to build 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 $2,464,686 (RMB 16 million) in June 2015 to a contractor. On March 25, 016, the Company entered into an asset and equity transfer agreement to sell its coking factory, coal related assets and subsidiaries to a third party, including prepayments for UCG.
|
Note 11 – Intangible assets
Intangible assets consisted of the following:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
Land use rights (1)
|
|
$
|
2,430,803
|
|
|
$
|
26,441,707
|
|
Mining rights (2)
|
|
|
-
|
|
|
|
44,432,997
|
|
Total intangible assets
|
|
|
2,430,803
|
|
|
|
70,874,704
|
|
Accumulated amortization – land use rights
|
|
|
(827,148
|
)
|
|
|
(819,795
|
)
|
Accumulated depletion – mining rights
|
|
|
-
|
|
|
|
(13,699,724
|
)
|
Total intangible assets, net
|
|
$
|
1,603,655
|
|
|
$
|
56,355,185
|
|
|
(1)
|
A land use right with initial cost approximately $22.5 million (RMB 145,850,000) used for Baofeng new coking plant. was disposed on January 10, 2016 through an assets transfer agreement
|
|
(2)
|
The Company’s mining rights which hold by its subsidiaries, Hongchang Coal and Shuangrui Coal, were sold on March 25, 2016 through an asset and equity transfer agreement. (See Note 20)
|
Amortization expense for the three months ended
March 31, 2016 and 2015 amounted to $15,858, and $17,718, respectively. Amortization expense for the nine months ended March 31,
2016 and 2015 amounted to $383,685 and $53,126, respectively. During the three months ended December 31, 2015, the Company recorded
an impairment loss of approximately $19 million for the land use right used for the Baofeng new coking plant. 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
|
|
$
|
17,025
|
|
2017
|
|
|
68,098
|
|
2018
|
|
|
68,098
|
|
2019
|
|
|
68,098
|
|
2020
|
|
|
68,098
|
|
Thereafter
|
|
|
1,307,181
|
|
Total
|
|
$
|
1,596,598
|
|
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 (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 and nine months ended March 31, 2016and 2015.
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 (RMB 100 million). As of June 30, 2012, approximately $3.17 million (RMB 20 million) was funded, of which $1.6 million
(RMB 9.8 million) was paid by Zhonghong. The remaining registered capital was due on April 20, 2013, of which approximately $6.2
million (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. On March 25, 2016, the Company terminated above cooperations
with Henan Coal Seam Gas by selling out Zhonghong together with the Company’s subsidiaries and assets related to coal and
coking operations through a Business and Assets Transfer Agreement. (See Note 20)
In addition, a deposit of $4,881,224 (RMB 30,000,000)
was made on December 23, 2011 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.
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.
For the three and nine months ended March 31,
2016 and 2015, there was no equity investment income or loss reported in our financial statements.
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 (RMB 360 million)
with annual interest of 6.3%, of which approximately $29.2 million (RMB 180 million) would be due on April 2, 2013, and approximately
$29.2 million (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.
On November 30, 2011, the parties entered into
a supplemental agreement pursuant to which approximately $4.88 million (RMB 30 million) with annual interest of 6.3% became due
on October 2, 2012, approximately $16.23 million (RMB 100 million) with annual interest of 6.3%, became due on April 2, 2013, approximately
$8.11 million (RMB 50 million) with annual interest of 6.3% became due on October 2, 2013, and approximately $29.2 million (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 (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 (RMB 80 million) as follows: (a) $3.25 million (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 (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 (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.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On October 1, 2013, the parties executed an
extension agreement, for the remaining balance of approximately $50.3 million (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 (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 (RMB 80 million) of the outstanding
$50.3 million (RMB 310 million) loan principal.
On January 20, 2015, Hongli repaid the loan
of $8,135,373 (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 (RMB 78,000,000) which due on April 2, 2015 to April 2, 2016 with the
annual interest rate 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
or RMB 180 million was due on October 2, 2015. In accordance with the supplemental agreement, the due date was re-scheduled to
April 7, 2016.
The principal of the loan from Bairui Trust
and its related accrued interest payable was restructured and sold through a credit and debt transfer agreement on January 10,
2016. (See Note 20)
As of March 31, 2016 and June 30, 2015, the
loans from Bairui Trust were $0 and $42,234,154, respectively.
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 March 31, 2016 and June 30, 2015, the outstanding loan from Capital Paradise Limited was $273,769 and
$2,237,066.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Weight average interest rate and interest
expense
Weighted average interest rate was 7% and 11.68%
for the three months ended March 31, 2016 and 2015, respectively. Interest expense for the three months ended March 31, 2016 and
2015 was $4,778 and $1,255,062 respectively. No interest was capitalized for the three months ended March 31, 2016 and 2015.
Weighted average interest rate was 11.58% and
11.74% for the nine months ended March 31, 2016 and 2015, respectively. Total interest expense for the nine months ended March
31, 2016 and 2015 was $2,509,311 and $2,999,554, respectively. No interest was capitalized for the nine months ended March 31,
2016 and 2015.
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:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
Retention payable (1)
|
|
$
|
-
|
|
|
$
|
955,343
|
|
Registration payable (2)
|
|
|
-
|
|
|
|
475,969
|
|
Other payable
|
|
|
242,647
|
|
|
|
200,933
|
|
Interest payable
|
|
|
129,734
|
|
|
|
2,658,239
|
|
Accrued liabilities (3)
|
|
|
326,370
|
|
|
|
213,205
|
|
Total
|
|
$
|
698,751
|
|
|
$
|
4,503,689
|
|
|
(1)
|
Retention payable is deposit that retained by the Company for the security of the construction of the first stage coke gasification facility which was completed in September 2014. The amount of deposit will be paid one year after the construction was completed, if no quality defection occurs during the period. On January 10, 2016, the payable was sold with other assets and liabilities through the Credit and Debt Transfer Agreement. (See Note 20)
|
|
(2)
|
Registration payable is the amount the Company accrued for land use right registration with relevant authorities to obtain the certificate, which was used as part of Baofeng new coking plant. On January 10, 2016, the payable was sold with other assets and liabilities through the Credit and Debt Transfer Agreement. (See Note 20)
|
|
(3)
|
As of March 31, 2016 and June 30, 2015, $140,000 and $90,000 of salary payables included in accrued liabilities were payables to the Company’s CFO. As of March 31, 2016 and June 30, 2015, $145,000 and $0 of salary payables included in accrued liabilities were payables to the Company’s CEO.
|
Note 15 – Related party payables
Other payables to related parties represent
loans from the Company’s CEO for working capital purpose. Loans from the CEO amounted to $576,075 and $736,596 at March 31,
2016 and June 30, 2015, respectively. Such loans are interest free and due on demand.
During the nine months ended March 31, 2016,
the Company borrowed $116,312 from Mr. Jianhua Lv, the CEO of the Company, mainly used to pay off daily expenses, and an amount
of $242,827 loaned from Mr. Jianhua Lv had been repaid before March 31, 2016. During the nine months ended March 31, 2015, Mr.
Lv paid the interest payable of $2,017,946 to Bairui Trust on behalf of the Company.
Note 16 – Acquisition payables
On August 10, 2010, Hongli acquired 60% of
the equity interest of Shuangrui Coal. 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 approximately $4,544,053 (RMB 28 million), subject to certain price adjustments to be finalized at closing.
The balance is due on demand. As of March 31, 2016 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.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. On March 25, 2016, Hongchang Coal, Xingsheng
Coal, Shuangrui Coal, and Zhonghong had been disposed.
The provision for income taxes consisted of
the following:
|
|
For the three months ended
March 31,
|
|
|
For the nine months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
U.S. current income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
BVI current income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PRC current income tax expense
|
|
|
-
|
|
|
|
719,551
|
|
|
|
851,866
|
|
|
|
1,712,995
|
|
Total
|
|
$
|
-
|
|
|
$
|
719,551
|
|
|
$
|
851,866
|
|
|
$
|
1,712,995
|
|
CETC has incurred a net operating loss for
income tax purposes for 2015. As of March 31, 2016, 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 March 31, 2016 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 and nine months ended March 31, 2016 and 2015 which consisted of the following:
|
|
For the three months ended
March 31,
|
|
|
For the nine months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
1,042,000
|
|
|
$
|
1,042,000
|
|
|
$
|
1,042,000
|
|
|
$
|
1,042,000
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
1,042,000
|
|
|
$
|
1,042,000
|
|
|
$
|
1,042,000
|
|
|
$
|
1,042,000
|
|
Value added tax
The Company incurred VAT on sales and VAT on
purchases in the PRC as follows:
|
|
For the three months ended
March 31,
|
|
|
For the nine months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
VAT on sales
|
|
$
|
760,235
|
|
|
$
|
3,280,167
|
|
|
$
|
3,433,921
|
|
|
$
|
11,207,331
|
|
VAT on purchase
|
|
$
|
2,367
|
|
|
$
|
2,374,541
|
|
|
$
|
1,803,393
|
|
|
$
|
8,329,437
|
|
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:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
VAT
|
|
$
|
335,240
|
|
|
$
|
101,327
|
|
Income tax
|
|
|
-
|
|
|
|
633,098
|
|
Others
|
|
|
25,506
|
|
|
|
173,047
|
|
Total
|
|
$
|
360,746
|
|
|
$
|
907,472
|
|
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(9,185
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2015
|
|
|
1,644,737
|
|
|
|
-
|
|
|
|
1,644,737
|
|
Granted
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(1,644,737
|
)
|
|
|
-
|
|
|
|
(1,644,737
|
)
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, March 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
As of March 31, 2016 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 $111,094and $2,915,649 at March 31, 2016 and June 30, 2015, respectively.
The decrease (increase) in fair value of warrants was $89,754 and $1,889,365 for the three months ended March 31, 2016 and 2015,
respectively, and $2,804,555 and $5,315,068 for the nine months ended March 31, 2016 and 2015, respectively, was recorded as gain
(loss) on change in fair value of warrants.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 2016, 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
|
)
|
|
|
(822,369
|
)
|
|
|
(2,517,106
|
)
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2016
|
|
|
36,973
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,409,423
|
|
|
|
225,268
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,671,664
|
|
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 1.02 years as of March 31, 2016.
|
|
(2)
|
The warrants underlying 590,446 shares are exercisable at any time until February 5, 2015. This warrant was forfeited without exercising as of March 31, 2016.
|
|
(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 March 31, 2016.
|
|
(4)
|
The warrants underlying 30,244 shares are exercisable until March 11, 2015, this warrant was forfeited without exercising as of March 31, 2016.
|
|
(5)
|
The warrants underlying 50,000 shares are exercisable until July 1, 2015. This warrant was forfeited without exercising March 31, 2016.
|
|
(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 2.48 years as of March 31, 2016.
|
|
(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 2.48 years as of March 31, 2016.
|
|
(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 March 31, 2016, Warrants B were not exercisable.
|
|
(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, , if the related option was exercised. Because that the option was expired on July 24, 2015 without exercising. As a result, Warrant C was expired accordingly.
|
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
March 31,
|
|
|
For the nine months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income (loss)
|
|
$
|
(51,956,086
|
)
|
|
$
|
2,989,851
|
|
|
$
|
(98,426,940
|
)
|
|
$
|
4,418,452
|
|
Weight average shares used in basic and diluted computation
|
|
|
23,960,217
|
|
|
|
23,960,217
|
|
|
|
23,960,217
|
|
|
|
23,076,987
|
|
Earnings (losses) per share – basic and diluted
|
|
$
|
(2.17
|
)
|
|
$
|
0.12
|
|
|
$
|
(4.11
|
)
|
|
$
|
0.19
|
|
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company had warrants and options exercisable
for 1,671,664 shares and 5,833,507 shares of common stock in the aggregate at March 31, 2016 and June 30, 2015, respectively. For
the three and nine months ended March 31, 2016 and 2015, all outstanding options and warrants were excluded from the diluted earnings
(losses) per share calculation since they were anti-dilutive.
Note 20 – Acquisitions and Disposal
Coal Mine acquisition
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. According to the acquisition
agreements, the Company’s acquisition of these three companies included only their mining rights, 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. On June 30, 2012, Hongli acquired the remaining 40% and then
transferred 100% of its ownership to Hongchang. 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.
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.
Disposal of assets and subsidiaries
On January 10, 2016, the Company entered into
a Credit and Debt Transfer Agreement with an unrelated third party, Wuhan Guangyao New Energy Automobile Operation Co., Ltd. (“Guangyao”).
As of December 31, 2015, The Company had certain credit assets (advance payments, including short-term and long-term portions,
and accounts receivable) with a book value of RMB 254,160,210.59 and outstanding debts (accounts payable, interest payable and
short-term loans) with a book value of RMB 274,167,269.37. According to the Credit and Debts Transfer Agreement, the Company transferred
those credit assets and debts valued at December 31, 2015 to Guangyao in a lump sum. Guangyao will conduct the collection and clearance
itself. The Company shall compensate Guangyao regarding the difference of RMB 20,007,058.78 between book value of the transferred
credit assets and debts. The Company shall pay RMB 20,007,058.78 to Guangyao within 6 months after this Credit and Debt Transfer
Agreement becomes effective. If it is not paid off timely, Guangyao has the right to charge the Company as an annual interest rate
of 4.5% for the then unpaid amount after 6 months of the effective date of this agreement, until it is cleared. With regarding
to the Credits and Debts Transfer Agreement, Guangyao will be responsible to discuss and negotiate with the Company’s creditors
and debtors, and get unanimous consent from the creditors and debtors including Bairui Trust Co., Ltd. Guangyao is also responsible
for arbitration and lawsuits with other creditors and debtors during the performance process of this agreement, and enforce the
decisions of arbitration and lawsuits.
On January 25, 2016, the Company entered into
an Assets Transfer Agreement for 900,000 Tons of Coking Asset in Construction with Guangyao. As of December 31, 2015, the Company’s
900,000 tons of stamp-charging coking assets in construction are worth RMB 319,531,307.61. Based on the agreement, the Company
agrees to transfer to Guangyao the 900,000 tons of stamp-charging coking assets in construction for RMB 45,692,140. Guangyao shall
pay the Company all the payment agreed in this agreement within 6 months after this agreement becomes effective. If it is not paid
off timely, Guangyao will be charged at an annual interest rate of 4.5% for the then unpaid amount after 6 months of the effective
date of this agreement, until it is cleared.
On March 25, 2016, the Company entered
into an asset and equity transfer agreement with Pingdingshan Hongfeng Coal Processing and Coking Factory (“Hongfeng”).
In accordance with the transfer agreement, the Company sold its coking factory, coal related assets and the equity interest of
subsidiaries, including assets in Baofeng Coking, Underground Coal Gasification project, 100% of the equity interest of Baofeng
Hongchang Coal Co., Ltd. and Baofeng Shuangrui Coal Mining Co., Ltd., 60% of the equity interest of Baofeng Xingsheng Coal Mining
Co., Ltd., 100% of the equity interest of Henan Zhonghong Energy Investment Co., Ltd., and 100% of the equity interest of Baofeng
Hongrun Coal Chemical Co., Ltd., to Hongfeng for approximately $2.5 million or RMB 15,843,534.32 and reported an aggregate loss
of approximately $61 million. The asset and equity sold in the agreement included the following:
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Selling price
|
|
$
|
2,477,569
|
|
|
|
|
|
|
Cost of assets and equity disposed:
|
|
|
|
|
Cost of the equity interest of subsidiaries
|
|
|
(32,512,192
|
)
|
Incomplete construction for underground coal gasification
|
|
|
(31,244,185
|
)
|
Coal and coke related equipment and facility
|
|
|
(68,573
|
)
|
|
|
|
|
|
Loss from disposal of assets and equity
|
|
$
|
(61,347,381
|
)
|
According to the agreement, Hongfeng will
pay us 50% of the selling price within 6 months after this agreement becomes effective and the remaining 50% of the selling price
will be paid off after the titles to such assets and equity interests are registered with the appropriate authorities. If any payments
due for over 30 days are unpaid, Hongfeng will be charged an interest expense at an annual interest rate of 10% for the then unpaid
portion until it is fully paid.
Note 21 – Commitments and contingencies
Lease agreement
On April 12, 2013, the Company signed a
lease agreement with Pingdingshan Hongfeng Coal Processing and Coking, Factory (“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 (RMB 60) per metric ton of coke produced from the leased facility. This
agreement was terminated on November 30, 2015.
On November 25, 2015, the Company entered
into a lease agreement with Pingdingshan Hongfeng Coal Processing and Coking Factory (“Hongfeng”) to lease in an area
for our coke gasification facilities which built in there. Per the agreement, the Company pay Hongfeng for the land use right leased
in amount to $7,908 (RMB 50,000) per month.
Purchase commitment
The Company entered into several contracts
with contractors and suppliers for Baofeng new coking plant which had been sold on January 2016. (See Note 20), no further
payments were necessary for these contracts as of March 31, 2016:
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
On March 25, 2016, the Company entered
into an asset and equity transfer agreement with Pingdingshan Hongfeng Coal Processing and Coking Factory (“Hongfeng”).
In accordance with the transfer agreement, the Company sold its coking factory, coal related assets and the equity interest of
subsidiaries, including assets in Baofeng Coking, Underground Coal Gasification project, 100% of the equity interest of Baofeng
Hongchang Coal Co., Ltd. and Baofeng Shuangrui Coal Mining Co., Ltd., 60% of the equity interest of Baofeng Xingsheng Coal Mining
Co., Ltd., 100% of the equity interest of Henan Zhonghong Energy Investment Co., Ltd., and 100% of the equity interest of Baofeng
Hongrun Coal Chemical Co., Ltd., to Hongfeng for approximately $2.5 million or RMB 15,843,534.32 and reported an aggregate loss
of approximately $61 million. (See Note 20)
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2016, the statutory surplus reserves of Hongli
had reached 50% of its registered capital. Hongguang Power and Hongyuan did not make any contribution to the statutory
reserve due to their respective operating loss.
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. Hongchang Coal contributed mine reproduction
reserve amount to $1,404,365 before it was sold on March 25, 2016.
The component of statutory reserves and the
future contributions required pursuant to PRC Company Law are as follows:
|
|
March 31,
2016
|
|
|
June 30,
2015
|
|
|
50% of registered
capital
|
|
|
Future
contributions
required as of
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hongli
|
|
$
|
2,067,215
|
|
|
$
|
2,067,215
|
|
|
$
|
2,064,905
|
|
|
$
|
-
|
|
Hongguang Power
|
|
|
-
|
|
|
|
-
|
|
|
|
1,514,590
|
|
|
|
1,514,590
|
|
Hongchang Coal
|
|
|
-
|
|
|
|
218,361
|
|
|
|
218,361
|
|
|
|
-
|
|
Hongyuan
|
|
|
-
|
|
|
|
-
|
|
|
|
12,500,000
|
|
|
|
6,250,000
|
|
Statutory surplus reserve
|
|
|
2,285,576
|
|
|
|
2,285,576
|
|
|
|
20,719,633
|
|
|
|
7,764,590
|
|
Mine reproduction reserve
|
|
|
-
|
|
|
|
1,404,365
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
2,285,576
|
|
|
$
|
3,689,941
|
|
|
$
|
20,719,633
|
|
|
$
|
7,764,590
|
|
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 and nine months ended March
31, 2016 and 2015 are summarized as follows:
|
|
For three months ended
March 31,
|
|
|
For the nine months ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Coke
|
|
$
|
-
|
|
|
$
|
4,766,487
|
|
|
$
|
2,696,429
|
|
|
$
|
23,709,539
|
|
Coal tar
|
|
|
-
|
|
|
|
365,112
|
|
|
|
588,085
|
|
|
|
1,236,546
|
|
Crude benzol
|
|
|
-
|
|
|
|
154,497
|
|
|
|
257,532
|
|
|
|
825,061
|
|
Coal slurries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101,954
|
|
Mid-coal
|
|
|
-
|
|
|
|
455,053
|
|
|
|
217,893
|
|
|
|
1,220,173
|
|
Washed coal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,759,861
|
|
Syngas
|
|
|
4,516,107
|
|
|
|
5,118,984
|
|
|
|
12,562,767
|
|
|
|
7,258,155
|
|
Total
|
|
$
|
4,516,107
|
|
|
$
|
10,860,134
|
|
|
$
|
16,322,706
|
|
|
$
|
37,111,289
|
|
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 amount
reserved, will not have a materials effect on the Company’s consolidated financial statements.
HONGLI CLEAN ENERGY TECHNOLOGIES CORP.
(FORMERLY KNOWN AS SINOCOKING COAL AND COKE
CHEMICAL INDUSTRIES, INC.)
NOTES TO UNAUDITED 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. On December 23, 2015, the Court issued a judgment that Henan Coal Seam Gas must repay
RMB 19,800,000 to us and pay RMB 154,942 of the case fee while we are required to pay RMB 79,820 of case fee. The judgment
payable was not transferred to Hongfeng under March 2016 agreement. 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.