NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of business and organization
Yulong
Eco-Materials Limited (“Yulong Eco-Materials” or the “Company”) is a holding company incorporated on March
10, 2011, under the laws of the Cayman Islands. The Company has no substantive operations other than holding all of the outstanding
share capital of China Xing De (BVI) Limited (“Yulong BVI”). In turn, Yulong BVI is a holding company holding all
of the outstanding share capital of China Xing De (Hong Kong) Limited (“Yulong HK”). Yulong HK is also a holding company
holding all of the outstanding equity capital of Zhengzhou Xing De Enterprise Management & Consulting Co., Ltd. (“Yulong
WFOE”).
The
Company is a vertically integrated manufacturer of eco-friendly building products. The Company operates principally from the city
of Pingdingshan, Henan Province, in the People’s Republic of China (the “PRC” or “China”). The Company
produces fly-ash bricks and ready-mixed concrete, and since April 2015, hauls and processes construction waste, with which it
produces crushed construction waste or recycled aggregates, and bricks made from recycled aggregates, or recycled bricks. All
of the Company’s business activities are carried out by domestic Chinese companies that the Company controls through contractual
arrangements as follows: (1) Henan Jianyida Industrial Co., Ltd. (“Yulong Bricks”), which carries out the bricks business,
(2) Pingdingshan Hengji Concrete Co., Ltd. (“Yulong Concrete”) and Pingdingshan Hengji Industrial Co., Ltd. (“Yulong
Transport”), which carry out the concrete business, and (3) Pingdingshan Xulong Renewable Resource Co., Ltd. (“Yulong
Renewable”), which carries out the construction waste hauling and processing, or recycling, business. The contractual arrangements
are comprised of a series of agreements entered into by each of these four companies and their shareholders, on the one hand,
and Yulong WFOE on the other hand (see “Contractual Arrangements” and “Note 3 – Variable Interest Entities”
below).
On
October 30, 2015, Pingdingshan Xulong Renewable Resource Co., Ltd. Shangqiu Branch was established and incorporated in the People’s
Republic of China. The entity is wholly owned by Pingdingshan Xulong Renewable Resource Co., Ltd. (“Yulong Renewable”)
and engages in construction waste hauling and processing for the city center in Shangqiu district.
Contractual
Arrangements
Although
current PRC regulations do not restrict or prohibit foreign investment in domestic Chinese companies that engage in businesses
such as those of Yulong Bricks, Yulong Concrete, Yulong Transport and Yulong Renewable (each a “Yulong operating company”
and collectively the “Yulong operating companies”), there is substantial uncertainty regarding the interpretation
and application of such regulations. As such, the Yulong operating companies are controlled through contractual arrangements in
lieu of direct equity ownership by the Company or any of its subsidiaries. Such contractual arrangements are a series of four
agreements (collectively the “Contractual Arrangements”) which significant terms are as follows:
Exclusive
Consulting Services and Operating Agreements
Pursuant
to the exclusive consulting and service agreement among Yulong WFOE, each Yulong operating company and its shareholders, Yulong
WFOE is engaged as exclusive provider of management consulting services to such Yulong operating company. For such services, the
Yulong operating company agrees to pay service fees determined based on all of its net profit after tax payments to Yulong WFOE
or Yulong WFOE has obligation to absorb all of the Yulong operating companies’ losses. The agreement remains in effect until
and unless all parties agree to its termination. Until such termination, the Yulong operating company may not enter into another
agreement for the provision of management consulting services without the prior consent of Yulong WFOE.
Option
Agreements
Pursuant
to the exclusive equity option agreement between the shareholders of each Yulong operating company and Yulong WFOE, such shareholders
jointly and severally grant Yulong WFOE an option to purchase their equity interests in such Yulong operating company. The purchase
price shall be the lowest price then permitted under applicable PRC laws. If the purchase price is greater than the registered
capital of such Yulong operating company, the shareholders are required to immediately return any amount in excess of the registered
capital to Yulong WFOE or its designee. Yulong WFOE may exercise such option at any time until it has acquired all equity interests
of such Yulong operating company, and freely transfer the option to any third party. The agreement will terminate at the earlier
of (i) the date on which all of the equity interests of such Yulong operating company has been transferred to Yulong WFOE or its
designee or (ii) the unilateral termination by Yulong WFOE.
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Equity
Pledge Agreements
Pursuant
to the equity interest pledge agreement between the shareholders of each Yulong operating company and Yulong WFOE, such shareholders
pledge all of their equity interests in such Yulong operating company to Yulong WFOE as collateral to secure the obligations of
such Yulong operating company under the exclusive consulting services and operating agreement. The shareholders may not transfer
or assign transfer or assign the pledged equity interests, or incur or allow any encumbrance that would jeopardize Yulong WFOE’s
interests, without Yulong WFOE’s prior approval. In the event of default, Yulong WFOE as the pledgee will be entitled to
certain rights and entitlements, including the priority in receiving payments by the evaluation or proceeds from the auction or
sale of whole or part of the pledged equity interests of such Yulong operating company. The agreement will terminate at the earlier
of (i) the date the shareholders have transferred all of their pledged equity interests pursuant to the option agreement or (ii)
two years from the satisfaction by such Yulong operating company of all its obligations under the exclusive consulting and service
agreement.
Voting
Rights Proxy and Financial Supporting Agreements
Pursuant
to the voting rights proxy and financial supporting agreement between the shareholders of each Yulong operating company and Yulong
WFOE, such shareholders have given Yulong WFOE an irrevocable proxy to act on their behalf on all matters pertaining to such Yulong
operating company and to exercise all of their rights as shareholders of such Yulong operating company, including the right to
attend shareholders meeting, to exercise voting rights and to transfer all or a part of their equity interests in such Yulong
operating company. In consideration of such granted rights, Yulong WFOE agrees to provide the necessary financial support to such
Yulong operating company whether or not such Yulong operating company incurs loss, and agrees not to request for repayment if
such Yulong operating company is unable to do so. The agreement will terminate at the earlier of (i) the date on which all of
the equity interests of such Yulong operating company have been transferred to Yulong WFOE or (ii) the unilateral termination
by Yulong WFOE.
As
a result of the foregoing contractual arrangements, which give Yulong WFOE effective control of the Yulong operating companies,
obligate Yulong WFOE to absorb all of the risk of loss from their activities, and enable Yulong WFOE to receive all of their expected
residual returns, the Company accounts for each Yulong operating company as a variable interest entity (“VIE”). Additionally,
as the parent company of Yulong WFOE, the Company is considered the primary beneficiary of the Yulong operating companies. Accordingly,
the Company consolidates the accounts of the Yulong operating companies for the years ended June 30, 2016 and 2015, in accordance
with Regulation S-X-3A-02 promulgated by the Securities Exchange Commission, and Accounting Standards Codification (“ASC”)
810-10, Consolidation.
The
accompanying consolidated financial statements reflect the activities of Yulong Eco-Materials and each of the following entities:
Name
|
|
Background
|
|
Ownership
|
Yulong BVI
|
|
●
|
A British Virgin Islands
company
|
|
100%
|
|
|
●
|
Incorporated on June 15,
2011
|
|
|
Yulong HK
|
|
●
|
A Hong Kong company
|
|
100%
|
|
|
●
|
Incorporated on July 21,
2011
|
|
|
Yulong WFOE
|
|
●
|
A PRC limited liability company
and deemed a wholly foreign owned enterprise (“WFOE”)
|
|
100%
|
|
|
●
|
Incorporated on September
2, 2011
|
|
|
|
|
●
|
Registered capital of $9,935,303
fully funded
|
|
|
Yulong Bricks
|
|
●
|
A PRC limited liability company
|
|
VIE by contractual
|
|
|
●
|
Incorporated on September
20, 2006
|
|
arrangements
|
|
|
●
|
Registered capital of $4,395,000
(RMB 30,000,000) fully funded
|
|
|
|
|
●
|
Production and sales of fly-ash
bricks
|
|
|
Yulong Concrete
|
|
●
|
A PRC limited liability company
|
|
VIE by contractual
|
|
|
●
|
Incorporated on December
7, 2004
|
|
arrangements
|
|
|
●
|
Registered capital of $2,830,000
(RMB 20,000,000) fully funded
|
|
|
|
|
●
|
Production and sales of ready-mixed
concrete
|
|
|
Yulong Transport
|
|
●
|
A PRC limited liability company
|
|
VIE by contractual
|
|
|
●
|
Incorporated on July 13,
2009
|
|
arrangements
|
|
|
●
|
Registered capital of $1,465,464
(RMB 10,010,000) fully funded
|
|
|
|
|
●
|
Provide ready-mixed concrete
transportation services
|
|
|
Yulong Renewable
|
|
●
|
A PRC limited liability company
|
|
VIE by contractual
|
|
|
●
|
Incorporated on August 16,
2011
|
|
arrangements
|
|
|
●
|
Registered capital of $9,510,000
(RMB 60,000,000) fully funded
|
|
|
|
|
●
|
Hauling of construction waste;
production and sales of recycled aggregates and recycled bricks
|
|
|
|
|
●
|
Commenced operation in April
2015
|
|
|
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 – Summary of significant accounting policies
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance with the generally accepted accounting principles
in the United States of America (“U.S. GAAP”).
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company, its subsidiaries, and the VIEs. All intercompany transactions
and balances between the Company, its subsidiaries and the VIEs are eliminated upon consolidation.
Use of estimates and assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported in the accompanying consolidated financial statements and footnotes. Significant accounting estimates reflected
in the Company’s consolidated financial statements include the useful lives and impairment of property, plant and equipment,
collectability of receivables, realization of deferred tax assets, inventory valuation, warrant liabilities, stock-based compensation,
and the present value of the net minimum lease payments of the capital lease. Actual results could differ from these estimates.
Going
concern consideration
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America 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 on the financial
statements. The Company’s ability to continue as a going concern depends on the liquidation of its current assets. The Company’s
operation scale particularly Yulong Renewable was significantly downsized subsequent to June 30, 2016 due to environmental act
passed by the central government of PRC and Blue Sky Action Plan implemented by the province of Henan, PRC. The remaining business
of Yulong Bricks and Yulong Concrete has not sufficiently made up the cessation of Yulong Renewable’s business which raises
a substantial doubt about the Company’s ability to continue as a going concern.
In
an effort to maintain its financial position and operations, the Company has successfully entered into a remittance agreement
with one of its vendors to refund the prepayment for one of its construction projects in an amount of $15.7 million (RMB104.5
million). Moreover, the Company is working to pursue the potential acquirers for Yulong Renewable’s business. Beginning
January 2017, Yulong Bricks and Yulong Concrete gradually resumed their sales revenue by 15% from the Q1 and Q2 2017 level. The
Company has initiated negotiations with its financial institutions and lessors to extend the due date of the loan and lease obligations.
The founder has provided approximately $1.7 million (RMB 11.6 million) to fund the Company’s operations. The Company may
also continue to raise fund through private placement or issuance of shares to support the Company’s operational needs.
Management believes that the foregoing actions would enable the Company to continue as a going concern.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The Company’s Chinese subsidiary and the VIEs use the local currency,
Renminbi (RMB), as their functional currency as determined based on the criteria of ASC 830, “Foreign Currency Translation”.
Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China (the “PBOC”)
at the end of the period. Income and expense accounts are translated at the average translation rates and the equity accounts
are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive
income in the statement of equity. 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 as incurred.
Translation
adjustments included in accumulated other comprehensive income amounted to $(1,219,184) and $2,506,840 as of June 30,
2016 and 2015, respectively. The balance sheet amounts, with the exception of equity, at June 30, 2016 and 2015 were
translated at 6.64 RMB and 6.11 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The
average translation rate applied to statement of income and other comprehensive income accounts for the years ended June 30,
2016 and 2015 was 6.44 RMB and 6.14 RMB, respectively. Cash flows are also translated at the average translation rate for the periods,
therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding
balances on the consolidated balance sheet.
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Cash
and cash equivalents
Cash and cash equivalents consist of cash on
hand, demand deposits and time deposits placed with banks with state owned banks within the PRC and with banks in Hong Kong which
are unrestricted as to withdrawal and use and have original maturities of less than three months.
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 June 30, 2016 and 2015, the Company had approximately $2,734,015
(RMB18,165,703) and $16,393,414 (RMB100,143,029), respectively, of cash deposits which were not covered by insurance. The Company
has not experienced any losses in such accounts.
Restricted cash
Restricted cash consists of a third-party
escrow account in the United States of America. The usage of the amount in the escrow account needs approval from the underwriter.
Accounts
and other receivables, net
During
the normal course of business, the Company extends unsecured credit to its customers and others, as further discussed in Note
4. Management reviews its accounts receivable balances each reporting period to determine if an allowance for doubtful accounts
is required. An estimate for doubtful accounts is recorded based on the collectability of all accounts receivables, which takes
into account the number of days past due, collection history, identification of specific customer exposure and current economic
trends. Bad debts are written off against the allowance after all collection efforts have ceased. For the years ended June 30,
2016 and 2015, the Company recorded in the aggregate of approximately $3.9 million and $0 of allowances for doubtful accounts
against its accounts receivable and other receivables. The current year provision is based on the past due period over 9 months
of its customers.
Inventories
Inventories
consist of raw materials and finished goods and are stated at the lower of cost or market, as determined using the weighted average
cost method. 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, it is not marked up subsequently based on changes in underlying facts and circumstances. As of June 30, 2016 and 2015,
the Company determined that no reserves for obsolescence were necessary.
Advances
to suppliers
The
Company advances money to certain suppliers for raw material purchases. Such advances are interest-free and unsecured. Management
regularly reviews the aging of such advances as well as delivery trends of purchased materials, and records an allowance when
it believes that delivery of materials due is at risk. Advances aged over one year and considered uncollectible are written off
after exhaustive efforts at collection. No allowance for doubtful accounts was considered necessary at the balance sheet dates.
Plant
and equipment
Plant
and equipment are stated at cost. Depreciation is provided over the estimated useful life of each class of depreciable assets
and is computed using the straight-line method over the useful lives of the assets are as follows:
|
|
Useful Life
|
Buildings and improvements
|
|
10-30
years
|
Machinery and equipment
|
|
5-10 years
|
Transportation equipment
|
|
5-10 years
|
Office equipment
|
|
3-5 years
|
The
Company accounts for all significant leases as either operating or capital. At lease inception, if the lease meets any of the
following four criteria, the Company will classify it as a capital lease; otherwise it will be treated as an operating lease:
(a) transfer of ownership to lessee at the end of the lease term, (b) bargain purchase option, (c) lease term is equal to 75%
or more of the estimated economic life of the leased property, or (d) the present value of the minimum lease payments is 90% or
more of the fair value of the leased asset.
The
cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or
loss is included in the consolidated statements of income and comprehensive income. Construction-in-progress represents
labor costs, materials, and capitalized interest incurred in connection with the construction. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as incurred. No depreciation is provided for
construction in progress until it is completed and placed into service. Expenditures for maintenance and repairs are charged to
earnings as incurred while additions, renewals and betterments are capitalized.
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Prepayments
Prepayments
represent advances made to certain suppliers for equipment purchases or advance made to contractors in connection with the Company’s
construction-in-progress. Prepayments also include advances made to a village committee in connection with acquiring land use
rights. Management regularly reviews aging of prepayments and records an allowance when management believes collection of equipment,
land use rights, or services to be performed due are at risk. Advances aged over one year and considered uncollectible are written
off after exhaustive efforts at collection. No allowance for doubtful accounts is considered necessary at the balance sheet dates.
Intangible
assets
Intangible
assets are carried at cost less accumulated amortization.
The
Company accounts for all significant leases of land use rights for purposes of classification as either operating or capital.
At lease inception, if the lease meets either of the following two criteria, the Company will classify it as a capital lease:
(a) transfer of ownership to lessee at the end of the lease term, or (b) bargain purchase option. Otherwise, the lease will be
treated as an operating lease.
Intangible
assets with finite useful lives are amortized using a straight-line method of amortization that reflects the estimated pattern
in which the economic benefits of the intangible asset are to be consumed. The original estimated useful life for the land use
rights of each entity is as follows:
Entity
|
|
Description
of assets
|
|
Estimated
useful life
|
|
Yulong Bricks
|
|
Land
use right
|
|
|
50
|
|
Yulong Concrete
|
|
Land use right
|
|
|
50
|
|
Yulong Renewable
|
|
Land use right
|
|
|
50
|
|
Intangible
assets are reviewed at least annually, more often when circumstances require, to determine whether their carrying values have
become impaired. The Company considers an asset to be impaired if its carrying value exceeds the future projected cash flows from
related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives.
Impairment
for long-lived assets
Long-lived assets, including buildings and
improvements, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances
(such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying
value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future
cash flows the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flows
expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the
carrying value of the asset. When the Company identifies an impairment, the Company reduce the carrying amount of the asset to
its estimated fair value based on a discounted cash flows approach or, when available and appropriate to comparable market values.
As of June 30, 2016, the Company has recorded $50.4 million provision on impairment on its long-lived assets on Yulong Renewable’s
buildings and improvements, equipment, vehicles and construction in progress for the year ended June 30, 2016.
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Fair
Values of Financial Instruments
ASC
Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information of financial instruments,
whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instruments. Topic 825 excludes certain financial instruments and all non-financial assets
and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying
value of the Company.
The
accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement
and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
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 and significant to the fair value.
The
Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable, notes payable and other
short-term payables, to approximate their fair values because of the short period of time between the origination of such instruments
and their expected realization. The Company determined that the carrying value of the noncurrent capital lease obligations approximated
their fair value using level 2 inputs by comparing the stated loan interest rate to the rate charged by the PBOC on similar loans.
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 June 30, 2016:
|
|
Carrying value at June 30,
2016
|
|
|
Fair value measurement at
June 30, 2016
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant liabilities
|
|
$
|
65,605
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
65,605
|
|
Certain
inputs used in the valuation of the Company’s warrants are observable and therefore considered level 2. However, as the
Company is a newly listed public reporting company and thus lacks historical volatility data, management concluded that level
3 fair valuation measurement is appropriate.
The
following is a reconciliation of the beginning and ending balances of warrant liabilities measured at fair value on a recurring
basis using observable inputs as of June 30, 2016:
|
|
June 30,
2016
|
|
Beginning fair value
|
|
$
|
-
|
|
Recognized fair value at issuance on July 1, 2015
|
|
|
475,380
|
|
Realized gain recorded in earnings
|
|
|
(409,775
|
)
|
Ending fair value
|
|
$
|
65,605
|
|
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue
recognition
The
Company recognizes revenue in accordance with ASC 605,
Revenue Recognition
, regarding revenue recognition which specifies
that revenue is realized or realizable and earned. Sales revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other obligations and collectability
is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer
deposits.
Revenue
represents the invoiced value of goods, net of a value added tax (“VAT”).
The
Company sells concrete and bricks primarily to major local real estate development and/or construction companies. Sales agreements
are signed with each customer. Each agreement has specific terms and conditions with the exception of delivery date and quantity,
which are provided when the customer issues an order pursuant to the agreement. The Company does not sell products to customers
on consignment basis. There is no right of return after products are delivered and accepted by the customer.
The
Company also provides transportation services for its concrete customers. Revenue is recognized upon delivery of the concrete.
Transportation services revenue is immaterial to the Company’s consolidated revenues for the periods presented in the accompanying
financial statements.
Revenue
from the CWM business includes sales of recycled aggregates and recycled bricks. Sales agreements are signed with each customer.
Revenue is recognized similar to sales of concrete and bricks.
CWM
revenue also includes revenue from the following activities:
|
●
|
Hauling construction waste. The Company operates a fleet
of trucks to haul the waste, consisting primarily of bricks and concrete, from construction and demolition sites. Revenue is recognized
upon completion of hauling per truckload.
|
|
●
|
Processing construction waste at mobile recycling stations.
Revenue is recognized either per cubic meter of waste processed or when processing at a jobsite is completed, depending on the
contract terms.
|
|
●
|
Subcontracting waste hauling projects. The Company occasionally
subcontracts waste hauling projects, whereby the subcontractors are the primary obligors to complete these projects, and the Company
does not have any general credit risk as the services are prepaid by the customers. Sales and subcontracting costs from these
subcontract arrangements are recorded at the net amount in accordance with ASC 605-45.
|
Recycling
revenues includes sales of recycled aggregates and recycled bricks. Sales agreements are signed with each customer. Revenue is
recognized similar to sales of concrete and bricks.
Recycling
revenue also include hauling services of construction waste. The Company operates a fleet of trucks to haul construction waste,
consisting primarily of bricks and concrete, from construction and demolition sites. Revenue is recognized upon completion of
hauling from the construction and demolition sites per truckloads.
Shipping
and handling
Shipping
and handling costs pertaining to raw material purchases are included in cost of revenue.
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Shipping
costs incurred in the delivery of products and depreciation expenses for transportation equipment (under Yulong Transport) are
included in selling expense. Shipping costs amounted to $285,246 and $316,256 for the years ended June 30, 2016 and 2015, respectively.
Depreciation expense amounted to $36,687 and $188,662 for the years ended June 30, 2016 and 2015, respectively.
Concentration
of risk
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. As of June 30, 2016 and 2015, $2,734,015 and $16,393,414 were deposited with various major
financial institutions located in the PRC, respectively. While management believes that these financial institutions are of high
credit quality, it also continually monitors their credit worthiness. Historically, deposits in Chinese banks are secure due to
state policy to protect depositor interests. However, China promulgated a Bankruptcy Law in August 2006 that came into effect
on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures
to provide for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the current Bankruptcy Law, a Chinese bank may
file bankruptcy if it deems itself to be insolvent. In addition, since China’s concession to the World Trade Organization,
foreign banks have been gradually permitted to operate in China and have intensified competition in many aspects, especially since
the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy at the institutions that
the Company maintains deposits has increased. In the event of bankruptcy, the Company is unlikely to reclaim its deposits in full
since it is unlikely to be classified as a secured creditor under PRC laws.
Accounts
receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is
mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding
balances. The Company maintains reserves for estimated credit losses, and such losses have generally been within expectations.
Customer
and vendor concentration risk
For
the years ended June 30, 2016 and 2015, no customer accounted for more than 10% of the Company’s total revenues.
As
of June 30, 2016, two customers accounted for 26% and 19% of the Company’s total accounts receivable, respectively. As of
June 30, 2015, two customers accounted for 12% and 11% of the Company’s total accounts receivable, respectively.
For
the year ended June 30, 2016, four major suppliers accounted for 26%, 18%, 16% and 10% of the Company’s total purchases.
For the year ended June 30, 2015, four major suppliers accounted for 19%, 19%, 14% and 13% of the Company’s total purchases.
As
of June 30, 2016, five suppliers accounted for 21%, 19%, 16%, 16% and 11% of the Company’s accounts payable balances. As
of June 30, 2015, three suppliers accounted for 32%, 23% and 18% of the Company’s accounts payable balances.
Income
taxes
The
Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will
be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the
deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies ASC 740,
Accounting
for Income Taxes
, to account for uncertainty in income taxes and the evaluation of a tax position is a two-step process. The
first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including
the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure
a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial
statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized
upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet
the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold
is no longer met.
As of June 30, 2016, Yulong WFOE and the
VIEs have each filed income tax returns in China for the years ended December 31, 2010 to 2015. All such tax returns are subject
to examination by the Chinese taxing authorities.
Warrant liabilities
A contract is designated as an asset or
a liability and is carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s
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
condensed consolidated statements of income and other comprehensive income as “change in fair value of warrant liabilities”.
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
ordinary shares and (b) classified in stockholders’ 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. All warrants issued with the strike price denominated in US dollar were recorded as derivative liability because
the strike price of the warrants is denominated in US dollar, a currency other than the Company’s functional currency RMB.
Earnings per share
Earnings per share are calculated in accordance
with ASC 260-10,
Earnings per Share
. Basic earnings per share are computed by dividing net income attributable to holders
of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per ordinary
share reflect the potential dilution that could occur if securities to issue ordinary shares were exercised. The dilutive effect
of outstanding share-based awards is reflected in the diluted earnings per share by application of the treasury stock method.
Comprehensive income
Comprehensive income is defined to include
all changes in shareholders’ equity except those resulting from investments by owners and distributions to owners. Among
other disclosures, ASC 220-10,
Comprehensive Income
, requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company adopted ASU No. 2011-05 by presenting items of net income and other comprehensive
income in one continuous statement, the Consolidated Statements of Income and Comprehensive Income.
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Employee benefit
The full-time employees of Yulong WFOE
and the VIEs are entitled to staff welfare benefits including medical care, housing fund, pension benefits and unemployment insurance,
which are government mandated defined contribution plans. The Company is required to accrue for these benefits based on certain
percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC regulations,
and make cash contributions to the state-sponsored plans out of the amounts accrued. Total expense for the plans was $55,540 and
$118,410 for the years ended June 30, 2016 and 2015, respectively.
Recent accounting pronouncements
Revenue Recognition:
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606
(ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09
is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration
that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle
and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required
under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is
effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period
presented with the option to elect certain practical expedients as defined within ASU 2014-09 (full retrospective method); or (ii)
retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing
certain additional disclosures as defined per ASU 2014-09 (modified retrospective method). We are currently assessing the impact
to our consolidated financial statements, and have not yet selected a transition approach.
In April 2016, the FASB
issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
The
objective is to clarify the two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance,
while retaining the related principles for these areas. The ASU affects the guidance in ASU 2014-09,
Revenue from Contracts
with Customers (Topic 606),
which is not yet effective. The effective date and transition requirements for this ASU are the
same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
defers the effective date of ASU 2014-09
by one year. Management is evaluating the effect, if any, on the Company’s financial position, results of operations or cash
flows.
Going Concern
Uncertainties
:
In August 2014, FASB issued ASU No. 2014-15,
Preparation of Financial Statements - Going Concern
(Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
. Under generally accepted
accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial
statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption
is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial
statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial
Statements-Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events
that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements
should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed
to determine whether to disclose information about the relevant conditions and events. The amendments in this Accounting Standards
Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. We do not expect the adoption of ASU 2014-15 to have material impact on our consolidated financial
position and results of operations.
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory
:
In July 2015, the FASB issued ASU No. 2015-11, an amendment to Topic 330 for simplifying the measurement of inventory. The update
requires that inventory be measured at the lower of cost and net realizable value where net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendment is intended to provide
clarification on the measurement and disclosure of inventory in Topic 330 and not intended for those clarifications to result in
any changes in practice. The ASU is effective for interim and annual periods beginning after December 15, 2016. Early application
is permitted for all entities and should be applied prospectively. We do not expect the adoption of ASU 2015-11 to have a material
impact on our consolidated financial position and results of operations.
Financial Instruments:
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments–Overall (Subtopic825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities
. The main objective in developing this ASU is enhancing the reporting model for
financial instruments to provide users of financial statements with more decision-useful information. The amendments in this ASU
address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For public business
entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. Earlier application is permitted as of the beginning of the fiscal year of adoption for public entities if the entity should
present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from
a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance
with the fair value option for financial instruments. The Company does not expect the adoption of ASU 2016-01 to have material
impact on its financial position, results of operations or cash flows.
Leases
:
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
The main objective is to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors
for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans
that file financial statements with the SEC. For all other entities, the ASU is effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2010. Early adoption is permitted for all entities.
The Company does not expect the adoption of ASU 2016-02 to have material impact on its financial position, results of operations
or cash flows.
Stock-based Compensation
:
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new guidance requires all income tax
effects of awards to be recognized in the income statement when the awards vest or are settled. It also requires the Company to
make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures
as they occur.
Statement of Cash
Flows
: In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash
, which
require that a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts
generally described as restricted cash and restricted cash equivalents. This ASU is effective for fiscal years beginning after
December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using
a retrospective approach. As a result, the Company will no longer present transfers between cash and cash equivalents and restricted
cash in the consolidated cash flow statements.
Business Combination:
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying
the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating
when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of 2018
on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated
financial statements.
Stock-based Compensation
:
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock compensation (Topic 718): Scope of modification
accounting” (“ASU 2017-09”). The purpose of the amendment is to clarify which changes to the terms or condition
of a share-based payment award require an entity to apply modification accounting. For all entities that offer share based payment
awards, ASU 2017-09 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company
is currently assessing the impact of ASU 2017-09 on its condensed consolidated financial statements.
Except for the ASU
above, in the period from January 1, 2017 to August 2017, the FASB has issued ASU No. 2017-01 through ASU 2017-011, which are
not expected to have a material impact on the consolidated financial statements upon adoption.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Variable interest entities
On September 2, 2011, Yulong WFOE entered
into the Contractual Arrangements with each Yulong operating company and its shareholders. The Contractual Arrangements were subsequently
amended on April 21, 2014, and again on June 24, 2015, with respect to Yulong Renewable. The significant terms of the Contractual
Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result of the Contractual
Arrangements, the Company classifies each Yulong operating company as a VIE.
VIEs are entities that have either a total
equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial
support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights,
right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable
interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate
the VIE. Yulong WFOE is deemed to have a controlling financial interest and be the primary beneficiary of each Yulong operating
company because it has both of the following characteristics:
|
(1)
|
The power to direct activities at each Yulong operating company that most significantly impact such entity’s economic performance, and
|
|
(2)
|
The obligation to absorb losses of, and the right to receive benefits from, each Yulong operating company that could potentially be significant to such entity.
|
Pursuant to the Contractual Arrangements,
each Yulong operating company pays service fees equal to all of its net profit after tax payments to Yulong WFOE. At the same time,
Yulong WFOE is obligated to absorb all of their losses. The Contractual Arrangements are designed so that the Yulong operating
companies operate for the benefit of Yulong WFOE and ultimately, the Company.
Accordingly, the accounts of the Yulong
operating companies are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition,
their financial positions and results of operations are included in the Company’s financial statements.
The Yulong operating companies are owned
and controlled by their founder, with the other shareholders holding equity interests on behalf and for the benefits of the founder.
Such arrangements are memorialized in agreements between the founder and the other shareholders entered into prior to the completion
of the share exchange transaction between the Company and Yulong BVI in December 2011 (see “Note 1 – Nature of business
and organization – Share Exchange Agreement” above). Through such arrangements, the founder can direct and cause Yulong
WFOE and the Yulong operating companies to enter into the Contractual Arrangements, and to amend such agreements as necessary,
at any time. Accordingly, beginning on July 1, 2011, Yulong BVI has been consolidating the accounts of the Yulong operating companies
because they were under common control since such time in accordance with ASC 805-50, Business Combination. For this reason, the
Contractual Arrangements have been accounted for as a reorganization of entities and the consolidation of the Yulong operating
companies through the Contractual Arrangements has been accounted for at historical cost and prepared on the basis as if the Contractual
Arrangements became effective as of the beginning of the first period presented on July 1, 2011 in the accompanying consolidated
financial statements.
The carrying amount of the VIEs’
consolidated assets and liabilities are as follows for the years indicated:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Current assets
|
|
$
|
10,068,142
|
|
|
$
|
26,547,906
|
|
Plant and equipment, net
|
|
|
7,425,446
|
|
|
|
41,267,655
|
|
Other noncurrent assets
|
|
|
18,306,223
|
|
|
|
9,489,571
|
|
Total assets
|
|
|
35,799,810
|
|
|
|
77,305,132
|
|
Total liabilities
|
|
|
33,130,293
|
|
|
|
29,529,680
|
|
Net assets
|
|
$
|
2,669,518
|
|
|
$
|
47,775,452
|
|
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The VIEs’ liabilities consist of
the following for the years indicated:
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Current liabilities:
|
|
|
|
|
|
|
Short term loan - banks
|
|
|
5,674,011
|
|
|
|
7,972,190
|
|
Accounts payable
|
|
|
1,710,881
|
|
|
|
1,726,158
|
|
Other payables and accrued liabilities
|
|
|
5,973,602
|
|
|
|
3,711,210
|
|
Payroll Payable
|
|
|
546,990
|
|
|
|
-
|
|
Other payables - related parties
|
|
|
1,907,458
|
|
|
|
2,273,869
|
|
Customer deposits
|
|
|
2,571,846
|
|
|
|
-
|
|
Taxes payable
|
|
|
1,497,583
|
|
|
|
1,098,093
|
|
Capital lease obligations-current
|
|
|
4,062,291
|
|
|
|
4,615,083
|
|
Intercompany payable
|
|
|
9,156,779
|
|
|
|
7,994,125
|
|
Total current liabilities
|
|
|
33,101,441
|
|
|
|
29,390,728
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Capital lease obligations-non-current
|
|
|
28,852
|
|
|
|
138,952
|
|
Total long term liabilities
|
|
|
28,852
|
|
|
|
138,952
|
|
Total liabilities
|
|
|
33,130,293
|
|
|
|
29,529,680
|
|
The operating results of the VIEs are as
follows:
|
|
Years ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
42,644,431
|
|
|
$
|
46,230,384
|
|
Gross profit
|
|
$
|
16,478,918
|
|
|
$
|
16,867,399
|
|
(Loss) Income from operations
|
|
$
|
(47,246,203
|
)
|
|
$
|
13,964,941
|
|
Net (loss) income
|
|
$
|
(51,341,078
|
)
|
|
$
|
9,786,060
|
|
Note 4 – Accounts receivable,
net
Accounts receivable, net consists of the
following for the years indicated:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Accounts receivable
|
|
$
|
9,666,112
|
|
|
$
|
9,329,495
|
|
Less: allowance for doubtful accounts
|
|
|
(3,937,778
|
)
|
|
|
-
|
|
Total accounts receivable, net
|
|
$
|
5,728,334
|
|
|
$
|
9,329,495
|
|
Movement of allowance for doubtful accounts is as follows for
the years indicated:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
-
|
|
Charge to expense (benefit)
|
|
|
4,067,144
|
|
|
|
-
|
|
Exchange rate effect
|
|
|
(129,366
|
)
|
|
|
-
|
|
Ending balance
|
|
$
|
3,937,778
|
|
|
$
|
-
|
|
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Deposits and other receivables
Deposits and other receivables consisted of the following:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Refundable deposits for equipment purchase
|
|
$
|
444,439
|
|
|
$
|
126,856
|
|
Deposit for outsourcing agreement
(1)
|
|
|
235,176
|
|
|
|
147,330
|
|
Deposit for new project
|
|
|
63,739
|
|
|
|
8,185
|
|
Advances to employees
(2)
|
|
|
240,474
|
|
|
|
3,782
|
|
Insurance compensation
|
|
|
15,874
|
|
|
|
-
|
|
Deposit with government agency
|
|
|
3,011
|
|
|
|
-
|
|
Total
|
|
$
|
1,002,713
|
|
|
$
|
286,153
|
|
Other receivables, non-current consisted of the following:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Refundable deposit – construction
(3)
|
|
$
|
15,727,696
|
|
|
$
|
-
|
|
Total
|
|
$
|
15,727,696
|
|
|
$
|
-
|
|
(1)
|
In December 2011, Yulong Bricks agreed to outsource some brick production to Pingdingshan Hongrui New Construction Materials Co., Ltd., an unrelated third party, and paid approximately $235,176 (RMB 900,000) as security deposit, which is due on demand.
|
|
|
(2)
|
The Company entrusts funds to its employees
to pay certain of its expenses in the normal course of business, particularly for projects or jobsites beyond Pingdingshan.
|
(3)
|
$15,727,696 (RMB104 million) related to the purchase of equipment, in connection with the construction of Yulong Renewable's waste recycling plant and factory construction, would be refundable based on the agreement entered with the contractor, Pingdingshan City HuaShen Trading Co. Ltd., subsequently on July 4, 2017 (see Note 8). The agreement stipulated that the contractor would refund the amount in five (5) equal installment amount on July 10, 2017, October 10, 2017, January 10, 2018, April 10, 2018 and July 10, 2018. The first installment of $3,010,085 was received subsequently in July 2017 as per the refund schedule.
|
Note 6 – Inventories
Inventories consisted of the following
for the years indicated:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Raw materials
|
|
$
|
285,459
|
|
|
$
|
267,560
|
|
Semi-finished byproduct
|
|
|
34,236
|
|
|
|
6,196
|
|
Finished goods
|
|
|
45,196
|
|
|
|
90,498
|
|
Total inventories
|
|
$
|
364,891
|
|
|
$
|
364,254
|
|
Raw materials for bricks consist primarily
of cement, gypsum, quicklime, aluminum powder and reclaimed fly-ash. Raw materials for concrete consist primarily of cement, admixture,
sand and pebble. The cost of finished goods includes direct costs of raw materials as well as direct labor used in production.
Indirect production costs at normal capacity such as utilities and indirect labor related to production such as assembling, shipping
and handling costs for purchasing are also included in the cost of inventory.
As of June 30, 2016 and 2015, management
believed that no inventory allowance was deemed necessary.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Plant and equipment,
net
Plant and equipment consisted of the following
for the years indicated:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Building and improvements
|
|
$
|
24,735,204
|
|
|
$
|
17,959,588
|
|
Machinery and equipment
|
|
|
7,335,708
|
|
|
|
7,861,193
|
|
Machinery and equipment under capital lease
|
|
|
2,099,839
|
|
|
|
1,883,535
|
|
Transportation equipment
|
|
|
855,598
|
|
|
|
938,202
|
|
Transportation equipment under capital lease
|
|
|
2,687,620
|
|
|
|
2,923,262
|
|
Office equipment
|
|
|
109,993
|
|
|
|
107,128
|
|
Construction-in-progress
|
|
|
27,111,181
|
|
|
|
16,889,716
|
|
Subtotal
|
|
|
64,935,143
|
|
|
|
48,562,624
|
|
Less: accumulated depreciation
|
|
|
(8,754,140
|
)
|
|
|
(7,294,969
|
)
|
Less: impairment reserve for fixed assets & CIP
|
|
|
(48,755,558
|
)
|
|
|
-
|
|
Total
|
|
$
|
7,425,445
|
|
|
$
|
41,267,655
|
|
As of June 30, 2016 and 2015, Yulong Renewable
has impairment reserves for its building and improvements, machinery and equipment, transportation equipment and construction-in-progress
of $48,755,558 and $0, respectively.
Construction-in-progress represents labor
costs and materials incurred in connection with the construction of office building, employee facilities, equipment and machinery
for Yulong Renewable, office building for Yulong Concrete, and an autoclave for Yulong Bricks. No depreciation is provided for
construction-in-progress until it is completed and placed into service. Approximately in Q4 2016, the central government of the
People's of Republic of China passed Air Pollution Control Act and enforced Air Pollution Control Action Plan. The province of
Henan of People's Republic of China implemented "Province of Henan Blue Sky Action Plan" on various industries such as
construction materials, coal mining. Due to the Air Pollution Control Act and Blue Sky Action Plan, Yulong Renewable is required
to comply with the new environmental regulations and its construction projects were placed on hold since August 2016. Yulong Renewable
CIP primarily included the following projects:
Yulong Renewable commenced a construction
of the waste recycling plant and brick production plant in 2015. Total budget for these constructions is approximately $44.4million,
of which approximately $8.2 million (RMB 54.4 million) was transferred to fixed assets in the fiscal year ended June 30, 2016.
The entity placed the plant construction on hold in August 2016 and accordingly, provided an impairment reserve for the related
construction-in-progress amount, $7.8 million (RMB 51.6 million) as of June 30, 2016.
In March 2016, the Company commenced a
construction of environmental product testing and solid waste resource utilization center in Zhengzhou, PRC. Total budget for
the construction of this center is approximately 45.2 million (RMB 300 million). As of June 30, 2016, the Company has incurred
approximately $34.8 million (RMB 231.7 million) in construction-in-progress pertinent to this construction and has paid $34.3
million (RMB 227.7 million) to the contractor. In August 2016, the Company placed this construction project on hold. In July 2017,
the Company signed a cancellation agreement with the contractor by which the project prepayment, $15.7 million (RMB 104 million)
would be refundable by the contractor in five (5) equal installments commencing in July 2017. The first installment of $3,010,085
was received subsequently in July 2017 as per the refund schedule. This amount of $15,727,696 was presented as other receivable,
non-current, on the consolidated balance sheets. The remaining construction-in-progress balance related to this construction,
approximately $19.1 million (RMB126.8 million), was considered suspended and the Company recorded an impairment provision for
the entire amount, $19.1 million (RMB 126.8 million).
Additional Yulong Renewable placed other
CIP projects on hold in August 2016 and placed an impairment reserve against the related CIP expenditures such as designer's fee,
exploration fee and equipment in a total amount of $0.2 million (RMB 1.56 million).
Construction-in-progress consisted of the
following as of June 30, 2016:
Construction-in-progress description
|
|
Value
|
|
|
Estimated
completion date
|
|
Estimated additional cost to complete
|
|
Office buildings, staff facilities, equipment and machinery
(1)
|
|
$
|
4,251
|
|
|
Early 2018
|
|
$
|
-
|
|
Autoclave installation
(2)
|
|
$
|
7,106
|
|
|
Early 2018
|
|
$
|
-
|
|
Total
|
|
$
|
11,357
|
|
|
|
|
$
|
-
|
|
Depreciation expense is $2,114,469 and
$1,697,465 for the years ended June 30, 2016 and 2015, respectively.
YULONG
ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Machinery and equipment under capital lease
In March 2014, the Company entered into
a lease agreement with a third party to lease an excavator for two years for approximately $149,000 (RMB 908,240). The lease requires
a one-time payment of $37,952 and an additional $5,828 as a security deposit paid in March 2014, monthly lease payments of approximately
$5,000 from June 2014 to May 2016, with interest rate per annum of 8.8%. The ownership of the trucks will transfer to the Company
if there is no default of the lease payments at the end of the lease term (see Note 12). As of June 30, 2016, the outstanding balance
of the capital lease obligation is $28,535.
In March 2014, the Company entered into
a lease agreement with a third party to lease a loader for eighteen months for approximately $57,000 (RMB 345,780). The lease requires
a one-time payment of $17,758 and an additional $5,549 as a security deposit paid in March 2014, monthly lease payments of approximately
$3,000 from June 2014 to November 2015, with interest rate per annum of 8.5%. The ownership of the trucks will transfer to the
Company if there is no default of the lease payments at the end of the lease term (see Note 12). As of June 30, 2016, the Company
paid off the lease and ownership of the machines was transferred to the Company.
In September 2014, the Company entered
into a lease agreement with a third party to lease an excavator for two years for approximately $210,000 (RMB 1,285,000). The lease
requires a one-time payment of $54,506 and an additional $8,414 as a security deposit paid in October 2014, monthly lease payments
of approximately $8,000 from November 2014 to October 2016, with interest rate per annum of 8.7%. The ownership of the excavator
will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 12). As of June
30, 2016, the outstanding balance of the capital lease obligation is $137,504.
In September 2014, the Company entered
into a lease agreement with a third party to lease an excavator for two years for approximately $146,000 (RMB 890,000). The lease
requires a one-time payment of $37,952 and an additional $5,828 as a security deposit paid in October 2014, monthly lease payments
of approximately $5,000 from November 2014 to October 2016, with interest rate per annum of 8.7%. The ownership of the excavator
will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 12). As of June
30, 2016, the outstanding balance of the capital lease obligation is $95,236.
In September 2014, the Company entered
into a lease agreement with a third party to lease a loader for eighteen months for approximately $55,000 (RMB 339,000). The lease
requires a one-time payment of $17,758 and an additional $5,549 as a security deposit paid in October 2014, monthly lease payments
of approximately $3,000 from November 2014 to April 2016, with interest rate per annum of 8.3%. The ownership of the loader will
transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 12). In May 2016, the
lessor verbally agreed to extend the due date to October 2016. As of June 30, 2016, the outstanding balance of the capital lease
obligation is $38,733.
In September 2014, the Company entered
into a lease agreement with a third party to lease a loader for eighteen months for approximately $55,000 (RMB 338,000). The lease
requires a one-time payment of $17,706 and an additional $5,533 as a security deposit paid in October 2014, monthly lease payments
of approximately $3,000 from November 2014 to April 2016, with interest rate per annum of 8.3%. The ownership of the loader will
transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 12). As of June 30,
2016, the outstanding balance of the capital lease obligation is $38,619.
In June 2015, the Company entered into
a lease agreement with a third party to lease a loader for eighteen months for approximately $49,666(RMB 330,000). The lease requires
a one-time payment of $15,893 which includes $4,967 as a security deposit paid in June 2015, monthly lease payments of approximately
$2,359 from August 2015 to January 2017, with interest rate per annum of 9.525%. The ownership of the loader will transfer to the
Company if there is no default of the lease payments at the end of the lease term (see Note 12).
In June 2015, the Company entered into
a lease agreement with a third party to lease a loader for eighteen months for approximately $50,658 (RMB 336,600). The lease requires
a down payment of $16,182 which includes $5,056 as a security deposit paid in June 2015, monthly lease payments of approximately
$2,401 from August 2015 to Jan 2017, with interest rate per annum of 9.525%. The ownership of the loader will transfer to the Company
if there is no default of the lease payments at the end of the lease term (see Note 12).
In June 2015, the Company entered into
a lease agreement with a third party to lease a digging machine for eighteen months for approximately $136,690 (RMB 908,240). The
lease requires a down payment of $34,893 which includes $5,358 security deposit paid in June 2015, monthly lease payments of approximately
$4,886 from August 2015 to July 2017, with interest rate per annum of 9.6%. The ownership of the loader will transfer to the Company
if there is no default of the lease payments at the end of the lease term (see Note 12).
In June 2015, the Company entered into
a lease agreement with a third party to lease a digging machine for eighteen months for approximately $136,694 (RMB 908,240). The
lease requires a one-time down payment of $34,893 which includes 5,358 security deposit paid in June 2015, monthly lease payments
of approximately $4,886 from August 2015 to July 2017, with interest rate per annum of 9.6%. The ownership of the loader will transfer
to the Company if there is no default of the lease payments at the end of the lease term (see Note 12).
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transportation equipment under capital leases
In October 2012, the Company entered into
a lease agreement with a third party to lease ten waste hauling trucks for two years for approximately of $673,000 (RMB 4,114,208),
including $52,057 (RMB 318,000) as security deposits and $67,936 (RMB 415,000) for insurance. The lease also requires a one-time
payment of $163,701 in April 2013 and monthly lease payments of approximately $26,000 originally from June 2013 to May 2015, with
interest rate at 18.2% per annum. The ownership of the trucks has been transferred to the Company with an attached lien that will
be removed if there is no default of the lease payments at the end of the extended lease term (see Note 12). As of June 30, 2016,
the Company paid off the lease and ownership of the machines was transferred to the Company. The Company placed these machines
into service in June 2013, and they have accordingly been capitalized.
In November 2012, the Company entered into
another lease agreement with a third party to lease ten waste hauling trucks for two years for approximately of $659,000 (RMB 4,027,225),
including $52,057 (RMB 318,000) as security deposits and $56,968 (RMB 348,000) for insurance. The lease also requires a one-time
payment of $163,704 on April 30, 2013, monthly lease payments of approximately $32,000 from July 2013 to June 2014, and monthly
lease payments of approximately $16,000 originally from July 2014 to June 2015, with interest rate at 16.8 % per annum. The ownership
of the trucks has been transfer to the Company with an attached lien that will be removed if there is no default of the lease payments
at the end of the extended lease term (see Note 12). As of 30 June 2016, the amount outstanding was $122,362 (RMB 813,036).
In January 2014, the Company entered into
a memorandum of understanding to lease 100 waste hauling trucks with a third party for approximately $68,000 (RMB 418,000) per
truck. In July 2014, the Company entered into a binding agreement with the same party to lease the first 30 trucks for two years
for approximately $1,820,000 (RMB 11,115,000), or approximately $61,000 (RMB 370,500) per truck. The lease also requires a one-time
payment of $383,058 (RMB 2,340,000) as security deposit paid in July 2014 and monthly lease payments of approximately $89,000 from
August 2014 to July 2016, with interest rate at 15.6% per annum. The Company has an option to purchase the vehicles for $491 if
there is no default of the lease payments at the end of the lease term (see Note 12). As of June 30, 2016, 30 trucks have been
leased.
Purchase of Mobile Recycling Stations
The Company recognized approximately $123,478 and $297,000 of
interest expense related to the above capital lease equipment for the years ended June 30, 2016 and 2015, respectively.
The Company
recognized approximately $762,560 and $693,000 of depreciation expense related to the above capital lease equipment for the years
ended June 30, 2016 and 2015, respectively.
The carrying value of leased assets under
capital leases consists of the following for the years indicated:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Machinery and equipment
|
|
$
|
2,099,839
|
|
|
$
|
1,883,535
|
|
Transportation equipment
|
|
|
2,687,620
|
|
|
|
2,923,262
|
|
Subtotal
|
|
|
4,787,459
|
|
|
|
4,806,797
|
|
Less: accumulated depreciation
|
|
|
(1,691,606
|
)
|
|
|
(1,036,884
|
)
|
Less: impairment provision
|
|
|
(3,095,853
|
)
|
|
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
3,769,913
|
|
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Prepayments, net
Prepayments consisted of the following for the years indicated:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Prepayment for equipment purchase
|
|
$
|
15,050
|
|
|
$
|
21,281
|
|
Prepayment for construction
(a)
|
|
|
2,769,652
|
|
|
|
3,637,467
|
|
Subtotal
|
|
|
2,784,702
|
|
|
|
3,658,748
|
|
Reserve for prepayment for construction
(a)
|
|
|
(2,769,652
|
)
|
|
|
-
|
|
Total prepayment, net
|
|
$
|
15,050
|
|
|
$
|
3,658,748
|
|
(a)
|
Prepayment for construction in advance was made in connection with the construction factory of Yulong Renewable. We had prepaid the construction fees in advance approximately $2,769,652 (RMB18,402,479) to our construction vendors, Henan Sanjian and Henan Guangshen. Due to the new environmental regulations and policies implemented by the central government of PRC and the Environmental Protection Bureau of Henan Province (see Note 7), the factory construction project was placed on hold since August 2016. We placed a reserve for the entire amount of the prepaid construction fee, $2,769,652 (RMB 18,402,479) as there is an uncertainty in the refundable status of the construction vendors.
|
Note 9 – Intangibles, net
Intangible assets consisted of the following
for the years indicated:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Land use rights under capital lease
|
|
$
|
4,843,458
|
|
|
$
|
5,267,495
|
|
Less: accumulated amortization
|
|
|
(425,701
|
)
|
|
|
(354,119
|
)
|
Less: impairment reserve
|
|
|
(2,253,966
|
)
|
|
|
-
|
|
Total
|
|
$
|
2,163,791
|
|
|
$
|
4,913,376
|
|
Land use rights under capital leases
All land in the PRC is state-owned, but
the government can grant “land use rights”. The Company acquired three land use rights in 2007, 2009 and 2015
for a total of $4,974,614 (RMB 30,388,600) and incurred $292,881 (RMB 1,789,135) of associated costs. The Company has not completed
the ownership transfer registration for such rights. Pursuant to supplement land usage reimbursement agreements between Yulong
Bricks and the Villagers’ Committee of Xiwuzhuang Village dated February 12, 2014, between Yulong Concrete and the Villagers’
Committee of Gaozhuang Village dated February 12, 2014, and between Yulong Renewable and the Villagers’ Committee of Lvzhuang
Village dated September 6, 2015, the purchase price may be accounted for as lease expenses over 50 years, which will expire in
December 2058 with respect to Yulong Bricks and Yulong Concrete, and in March 2065 with respect to Yulong Renewable, until the
Company can complete such registration.
Amortization expense for the years ended
June 30, 2016 and 2015 amounted to $103,416 and $55,186, respectively.
The estimated amortization expenses for
each of the five succeeding years is as follows:
Year ending June 30,
|
|
Estimated
amortization expense
|
|
|
|
|
|
2017
|
|
|
52,661
|
|
2018
|
|
|
52,661
|
|
2019
|
|
|
52,661
|
|
2020
|
|
|
52,661
|
|
2021
|
|
|
52,661
|
|
Thereafter
|
|
|
1,900,486
|
|
Total
|
|
$
|
2,163,791
|
|
Note 10 – Short-term loans
Short-term loans represented amounts due
to various banks, normally due within one year. The principal of the loans are due at maturity but can be renewed at the bank’s
option. Interest is due monthly.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short term loans due to banks consisted
of the following as of the years indicated:
Due to banks
:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Bank, which was originally due in April 2015, with loan amount $602,017 (RMB 4,000,000) and annual interest of 12%. The Company repaid $270,908 (RMB 1,800,000) in April 2015 and obtained the Bank’s approval to extend the remaining $331,109 (RMB 2,200,000) until April 2016. Interest rate is 11.5% per annum. The loan is guaranteed by Yulong Bricks, the executive director of Yulong Bricks, a third party, the Company founder and his relatives. The Company is settling with the bank on loan extension subsequently.
|
|
$
|
331,109
|
|
|
$
|
360,140
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Rural Credit Cooperative Union, originally matured in June 2014 and obtained the bank’s approval to extend the balance until June 2015. Interest rate of 12.1% per annum. The Company repaid the loan in July 2015. The loan was guaranteed by Yulong Bricks, Yulong Renewable, the founder and a company that he owns.
|
|
|
-
|
|
|
|
2,373,650
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Bank, original loan amount $752,521 (RMB 5,000,000) matured in January 2015. The Company repaid $75,252 (RMB 500,000) in January 2015 and extended the remaining $677,269 (RMB 4,500,000), which matured in July 2015, with interest rate of 10.8% per annum. The Company repaid the loan in August 2015 with a new loan. The loan was guaranteed by Yulong Bricks, the executive director of Yulong Bricks, a third party, the Company founder and his relatives.
|
|
|
-
|
|
|
|
736,650
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Rural Credit Cooperative Union, matured in May 2015. Interest rate of 12.1% per annum. The Company repaid $59,600 in May 2015 and obtained approval from the Union to extend the remaining balance through May 2016 . The company repaid the loan in August 2016 with a new loan. The loan was guaranteed by Yulong bricks, Yulong Concrete and the founder.
|
|
|
-
|
|
|
|
736,650
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Bank, matured in August 2015. Interest rate of 10.8% per annum. Guaranteed by Yulong Concrete, Yulong Transport, Yulong Renewable, the executive director of Yulong Bricks, the founder and his relatives. The loan was paid in full as of September 2015 .
|
|
|
-
|
|
|
|
818,500
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Rural Credit Cooperative Union, matures in December 2015. Interest rate of 12.6% per annum. Guaranteed by Yulong Transport, a third party, the founder and the executive director of Yulong Bricks. The loan was repaid in full in April 2016.
|
|
|
-
|
|
|
|
1,637,000
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Bank, matures in March 2016. Interest rate is 10.2% per annum. Guaranteed by Yulong Concrete, Yulong Renewable, the executive director of Yulong Bricks, the founder and his relative. The loan was repaid as is March 2016.
|
|
|
-
|
|
|
|
654,800
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Rural Credit Cooperative Union, matures in July 2016. Interest rate is 12.1% per annum. The loan is guaranteed by Yulong Bricks, Yulong Renewable, the founder and a company that he owns. The company repaid the loan by obtaining a new loan in January 2017.
|
|
|
2,182,312
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Bank, orginal loan amount $677,269 (RMB 4,500,000), at an interest rate 8.73% per annum, matures in August 2016. The loan is guaranteed by Yulong Bricks, the executive director of Yulong bricks, his relative and a third party. The Company is settling with the bank on loan extension subsequently.
|
|
|
677,269
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan rural credit cooperative union, original loan amount $677,269 (RMB 4,500,000) at an interest rate 9%, matures in August 2017. The loan is guaranteed by Yulong Concrete, Yulong Bricks and the company’s founder.
|
|
|
677,269
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from China Construction Bank, original loan amount $602,017 (RMB4,000,000), matures in June 2016. Interest rate is 6.1% and 6.4% per annum as of 30 June 2015 and 30 June 2016, respectively. Guaranteed by Yulong Concrete and a third party. The Company is settling with the bank on loan extension subsequently.
|
|
|
602,017
|
|
|
|
654,800
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Bank, original loan amount $602,017 (RMB4,000,000), matures in September 2016. Interest rate is 8.3% per annum. Guaranteed by Yulong Concrete, Yulong Industry and Yulong Renewable. The Company is settling with the bank on loan extension subsequently.
|
|
|
602,017
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Pingdingshan Bank, original loan amount $602,017 (RMB4,000,000), matures in March 2017. Interest rate is 8.7% per annum. Guaranteed by Yulong Renewable, Yulong Industry and Yulong Concrete. The Company is settling with the bank on loan extension subsequently.
|
|
|
602,017
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total short-term loans - bank
|
|
$
|
5,674,011
|
|
|
$
|
7,972,190
|
|
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on debts for the years
ended June 30, 2016 and 2015 amounted to $783,190 and $1,000,326, respectively. No interest expense has been capitalized into construction-in-progress
due to all borrowings were for working capital purposes.
Note 11 – Related party transactions
Other payables - related parties
Other payables – related parties
are nontrade payables arising from transactions between the Company and certain related parties, such as loans from such related
parties. The loans are unsecured and non-interest bearing. Current payables are due on demand.
Other payables - related parties consisted of the following:
Name of related parties
|
|
Relationship
|
|
Nature of
transactions
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Yulong Zhu
|
|
Founder
|
|
Loan for operating cash flows
|
|
$
|
1,488,794
|
|
|
$
|
2,342,541
|
(1)
|
Henan Yuliang Hotel Co., Ltd.
|
|
Owned by founder
|
|
Loan for operating cash flows
|
|
|
15,050
|
|
|
|
21,281
|
|
Lei Zhu
|
|
Relative of founder
|
|
Loan for operating cash flow
|
|
|
461,393
|
|
|
|
220,282
|
(2)
|
Total other payables
|
|
|
|
|
|
$
|
1,965,237
|
|
|
$
|
2,584,104
|
|
(1)
|
Converted approximately $1.5 million into the Company’s ordinary shares concurrently with the closing of the Company’s initial public offering of its ordinary shares on July 1, 2015 (the “IPO”), at the IPO price per share of $6.25 (the “IPO Price”).
|
|
|
(2)
|
Fully converted into shares of the Company’s ordinary shares concurrently with the closing of the IPO at the IPO Price.
|
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Capital lease obligations
Capital lease obligations consisted of the following:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Lease obligations for ten waste hauling trucks expired May 2015, lease payment at $24,208 (RMB160,847) per month with interest at 18.2% per annum. The lease obligation was previously extended to December 2015 and was entirely paid off in August 2015.
|
|
$
|
-
|
|
|
$
|
334,323
|
|
Lease obligations for ten waste hauling trucks expired June 2015, lease payment at $29,450 (RMB195,676) and $15,152 (RMB100,676) per month from July 2013 to June 2014 and from July 2014 to June 2015, respectively, with interest at 16.8% per annum. In June 2015, lessor verbally agreed to extend due date for the unpaid balance to June 2016. The Company is arranging a repayment plan with the lessor.
|
|
|
122,366
|
|
|
|
290,552
|
|
Lease obligations for a loader expired in November 2015, lease payment at $2,423 (RMB16,101) per month with interest at 8.5% per annum. The lease obligation was paid off.
|
|
|
-
|
|
|
|
28,073
|
|
Lease obligations for an excavator expired in May 2016, lease payment at
$4,886 (RMB32,462) per month with interest at 8.8% per annum. The Company is arranging a repayment plan with the lessor.
|
|
|
28,535
|
|
|
|
82,442
|
|
Lease obligations for thirty waste hauling trucks expiring in July 2016, lease payment at $81,882 (RMB544,050) per month with interest at 15.6% per annum. The Company is arranging a repayment plan with the lessor subsequently.
|
|
|
1,449,258
|
|
|
|
1,673,890
|
|
Lease obligation for a loader expired in April 2016, lease payment at $2,423 (RMB16,101) per month with interest at 8.3% per annum. In May 2016, the lessor verbally agreed to extend the due date for the unpaid balance to October 2016. The Company is arranging a repayment plan with the lessor subsequently.
|
|
|
38,733
|
|
|
|
43,107
|
|
Lease obligation for a loader expired in April 2016, lease payment at $2,416 (RMB16,053) per month with interest at 8.3% per annum. In May 2016, the lessor verbally agreed to extend the due date for the unpaid balance to October 2016. The Company is arranging a repayment plan with the lessor subsequently.
|
|
|
38,619
|
|
|
|
42,979
|
|
Lease obligation for an excavator expiring in October 2016, lease payment at
$7,054 (RMB46,870) per month with interest at 8.7% per annum. The Company is arranging a repayment plan with the lessor
subsequently.
|
|
|
137,504
|
|
|
|
156,228
|
|
Lease obligation for an excavator expiring in October 2016, lease payment at
$4,886 (RMB32,462) per month with interest at 8.7% per annum. The Company is arranging a repayment plan with the lessor
subsequently.
|
|
|
95,236
|
|
|
|
108,204
|
|
Lease obligation for a land use right which the Company expects to pay in full in late 2017.
|
|
|
1,927,500
|
|
|
|
2,109,864
|
|
Lease obligation for an excavator commenced on August 1, 2015 expiring on
July 1, 2017, total obligation is approximately $107,159 (RMB712,000), lease payment at $4,886 (RMB32,462) per month with
interest at 9.6%. The Company is arranging a repayment plan with the lessor subsequently.
|
|
|
98,587
|
|
|
|
-
|
|
Lease obligation for an excavator commenced on August 1, 2015 expiring on
July 1, 2017, total obligation is approximately $107,159 (RMB712,000), lease payment at $4,886 (RMB32,462) per month with
interest at 9.6%. The Company is arranging a repayment plan with the lessor subsequently.
|
|
|
98,587
|
|
|
|
-
|
|
Lease obligation for a loader commenced on August 1, 2015 expiring on
January 1, 2017, total obligation is approximately $40,455 (RMB 268,800), lease payment at $2,402 (RMB15,958) per month with
interest at 9.5%. The Company is arranging a repayment plan with the lessor subsequently.
|
|
|
34,672
|
|
|
|
-
|
|
Lease obligation for a loader commenced on August 1, 2015 expiring on July 1, 2017, total obligation is approximately $39,733 (RMB 264,000), lease payment at $2,359 (RMB15,673) per month with interest at 9.5%. The Company is arranging a repayment plan with the lessor subsequently.
|
|
|
34,052
|
|
|
|
-
|
|
Subtotal
|
|
|
4,103,649
|
|
|
|
4,869,662
|
|
Less: deferred interest
|
|
|
(12,506
|
)
|
|
|
(115,627
|
)
|
Capital lease obligations, net
|
|
|
4,091,143
|
|
|
|
4,754,035
|
|
Less: capital lease obligations - current
|
|
|
(4,062,291
|
)
|
|
|
(4,615,083
|
)
|
Capital lease obligations – non-current
|
|
$
|
28,852
|
|
|
$
|
138,952
|
|
As of June 30, 2016 and 2015, the Company
has accrued interest of $66,388 and $179,264, respectively, in connection with the capital lease obligations, and were classified
in the Company’s consolidated balance sheets under the caption “Other payables and accrued liabilities”. Interest
expenses on capital lease obligations for the years ended June 30, 2016 and 2015 amounted to $123,478 and $296,776, respectively.
Future annual capital lease payments approximately consist of
the following:
Twelve months ending June 30,
|
|
Amount
|
|
2017
|
|
$
|
4,062,291
|
|
2018
|
|
|
28,852
|
|
Total
|
|
$
|
4,091,143
|
|
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Taxes
Income taxes
Cayman Islands
Yulong Eco-Materials is incorporated in
the Cayman Islands and conducts all of its business through its PRC subsidiary and VIEs. Under the current laws of the Cayman Islands,
the Company is not subject to tax on income or capital gains. In addition, upon payments of dividends by these entities to their
shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Yulong BVI is incorporated in the British Virgin Islands and
conducts all of its businesses through its PRC subsidiary and VIEs. Under the current laws of the British Virgin Islands, Yulong
BVI is not subject to tax on income or capital gains. In addition, upon payments of dividends by these entities to their shareholders,
no British Virgin Islands withholding tax will be imposed.
Hong Kong
Yulong HK is incorporated in the Hong Kong
and conducts all of its businesses through its PRC subsidiary and VIEs. Companies registered in Hong Kong are subject to Hong Kong
Profits Tax on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant
Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. Under Hong Kong tax law, Yulong HK is exempted from income tax
on its foreign derived income and there are no withholding taxes in Hong Kong on remittance of dividends.
The net operating losses carried forward
incurred by Yulong Hong Kong were approximately US$1,110,033 and US$0 as of June 30, 2016 and 2015, respectively, which can be
carried forward indefinitely under the pertinent Hong Kong profit tax laws. A full valuation allowance, $183,155, has been recorded
because it is considered more likely than not that the deferred tax assets will not be realized through sufficient future earnings
of the entity to which the operating losses relate.
PRC
Yulong WFOE and the VIEs are governed by
the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable
tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof.
Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises are subject to income tax at
a rate of 25% after appropriate tax adjustments.
Yulong Bricks utilizes recycled raw materials
to produce bricks and is qualified for preferential income tax granted by the State Administration of Taxation: only 90% of revenue
attributable to utilization of recycled materials counts for taxable revenue.
Under the EIT Laws, dividends paid by PRC
enterprises out of profits earned post-2007 to non-PRC tax resident investors are subject to PRC withholding tax of 10%. A lower
withholding tax rate may be applied based on applicable tax treaty with certain countries.
The EIT Laws also provide that enterprises
established under the laws of foreign countries or regions and whose “place of effective management” is located within
the PRC are considered PRC tax resident enterprises and subject to PRC income tax at the rate of 25% on worldwide income. The definition
of “place of effective management” refers to an establishment that exercises, in substance, overall management and
control over the production and business, personnel, accounting, properties, and other aspects of an enterprise. No detailed interpretation
or guidance has been issued to define “place of effective management”. Furthermore, the administrative practice associated
with interpreting and applying the concept of “place of effective management” is unclear. If the Company is deemed
as a PRC tax resident, it would be subject to PRC tax under the EIT Law. The Company has analyzed the applicability of this law,
and for each of the periods presented, the Company has not accrued for PRC tax on such basis. The Company will continue to monitor
changes in the interpretation and/or guidance of this law.
The net operating losses carried forward
incurred by the Company's PRC subsidiaries and VIEs were approximately US$427,556 and US$194,076 at June 30, 2016 and 2015, respectively,
which loss carry forwards gradually expire over time, the last of which expires in 2021. The related deferred tax assets were calculated
based on the respective net operating losses incurred by each of the PRC subsidiaries and VIEs and the respective corresponding
enacted tax rate that will be in effect in the period in which the losses are expected to be utilized. The Company recorded approximately
US$14,634,601 and US$48,519 net valuation allowance for the years ended June 30, 2016 and 2015, respectively, because it is considered
more likely than not that this portion of the deferred tax assets will not be realized through sufficient future earnings of the
entities to which the operating losses relate.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provision (benefit) for income taxes is
comprised of the following:
|
|
For the years ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
|
|
Domestic
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
3,265,059
|
|
|
|
3,226,780
|
|
Deferred
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
92,180
|
|
|
|
(328,761
|
)
|
Total provision for income taxes
|
|
$
|
3,357,239
|
|
|
$
|
2,898,019
|
|
The following table reconciles the statutory
rates in China to the Company’s effective tax rate for the years ended June 30, 2016 and 2015:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Computed tax expense (benefit) with statutory tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Changes in valuation allowance
|
|
|
(29.6
|
%)
|
|
|
(2.9
|
)%
|
Foreign tax differential
|
|
|
0.4
|
%
|
|
|
-
|
|
Tax effect of non-deductible items
|
|
|
(1.0
|
%)
|
|
|
2.9
|
%
|
PY Adjustment/True-up
|
|
|
(0.2
|
%)
|
|
|
-
|
|
Effective income tax rates
|
|
|
(5.4
|
%)
|
|
|
25.0
|
%
|
Deferred taxes
Significant components of deferred tax
assets and liabilities were as follows:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
Startup cost
|
|
|
201,217
|
|
|
|
218,861
|
|
Plant and equipment
|
|
|
140,283
|
|
|
|
351,583
|
|
Intangible assets
|
|
|
(49,556
|
)
|
|
|
(50,297
|
)
|
Staff Education
|
|
|
1,493
|
|
|
|
-
|
|
Provision for doubtful accounts
|
|
|
1,184,219
|
|
|
|
-
|
|
Impairment provision for long-lived assets, intangible assets, and reserve for prepayment, non-current
|
|
|
13,444,794
|
|
|
|
-
|
|
Net operating loss carryforward in China
|
|
|
284,276
|
|
|
|
48,519
|
|
Total non-current deferred tax assets
|
|
|
15,206,726
|
|
|
|
568,666
|
|
Valuation allowance
|
|
|
(14,817,756
|
)
|
|
|
(48,519
|
)
|
Total non-current deferred tax assets, net
|
|
|
388,970
|
|
|
|
520,147
|
|
Total deferred tax assets
|
|
$
|
388,970
|
|
|
$
|
520,147
|
|
Uncertain tax positions
Aggregate undistributed earnings of Yulong
WFOE and the VIEs that are available for distribution to the Company are approximately ($32.0) and $23.1 million as of June 30,
2016 and 2015, respectively. Such undistributed earnings are considered to be indefinitely reinvested, because the Company does
not have any present plan to pay any cash dividends on its ordinary shares in the foreseeable future and intends to retain most
of its available funds and any future earnings for use in the operation and expansion of its business. Accordingly, no deferred
tax liability has been accrued for the Chinese dividend withholding taxes that would be payable upon the distribution of those
amounts to the Company as of June 30, 2016 and 2015.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, a deferred tax liability should
be recorded for taxable temporary differences attributable to the excess of financial reporting amounts over tax basis amount in
the PRC subsidiary. However, recognition is not required in situations where the tax law provides a means by which the reported
amount of that investment can be recovered tax-free and the enterprise expects that it will ultimately use that means. The Company
has not recorded any such deferred tax liability attributable to the undistributed earnings of its financial interest in the VIEs
because it believes such excess earnings can be distributed in a manner that would not be subject to income tax.
There were no unrecognized tax benefits
as of June 30, 2016 and 2015. Management does not anticipate any potential future adjustments in the next twelve months which would
result in a material change to its tax positions. For the years ended June 30, 2016 and 2015, the Company did not incur any interest
and penalties.
Value added tax
Enterprises or individuals who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC
laws. The value added tax (“VAT”) standard rates range from 13% to 17% of the gross sales price. A credit is available
whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on sales of the finished product.
Yulong Bricks’ products qualify for
“specified building materials” under the PRC law of [2008] No. 156 and is therefore eligible for VAT tax exemption.
Yulong Concrete’s products are mainly produced with cement and are eligible for a VAT at the rate of 6% of the gross sale
prices under the PRC law of [2009] No. 9. Yulong Concrete’s VAT rate decreased to 3% starting in November 2014.
Taxes payable
Taxes payable consisted of the following:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Income taxes payable
|
|
$
|
1,126,157
|
|
|
$
|
983,767
|
|
VAT taxes payable
|
|
|
223,307
|
|
|
|
102,077
|
|
Other taxes payable
|
|
|
148,619
|
|
|
|
12,249
|
|
Total
|
|
$
|
1,498,083
|
|
|
$
|
1,098,093
|
|
Note 14 – Equity
Restricted net assets
The Company’s ability to pay dividends
is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations
permit payments of dividends by Yulong WFOE and the VIEs only out of their retained earnings, if any, as determined in accordance
with PRC accounting standards and regulations. The results of operations reflected in the consolidated financial statements prepared
in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Yulong WFOE and the VIEs.
Each of Yulong WFOE and the VIEs is required
to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve
funds reach 50% of its registered capital. In addition, Yulong WFOE may allocate a portion of its after-tax profits based on PRC
accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. Each of the VIEs may allocate
a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory
reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned
company out of China is subject to examination by the banks designated by SAFE.
As of June 30, 2016 and 2015, Yulong WFOE
and the VIEs collectively appropriated $3,922,228 and $3,922,228 of retained earnings for their statutory reserves, respectively.
As a result of the foregoing restrictions,
Yulong WFOE and the VIEs are restricted in their ability to transfer their net assets to the Company.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign exchange and other regulation in
the PRC may further restrict Yulong WFOE and the VIEs from transferring funds to the Company in the form of dividends, loans and
advances. As of June 30, 2016 and 2015, amounts restricted are the net assets of Yulong WFOE and the VIEs, which amounted to $3,453,575
and $47,875,838, respectively.
Initial Public Offering
On July 1, 2015, the Company completed
the IPO of 2,250,000 shares of its ordinary shares for gross proceeds of $14,062,500 and, less costs of $2,552,343, for net proceeds
of $11,510,157.
In connection with the closing of the IPO,
the Company:
|
●
|
granted a 45-days option to its underwriters to purchase up to 337,500 shares of ordinary shares, to cover over-allotments, which expired on August 15, 2015 without being exercised;
|
|
●
|
granted warrants to purchase up to 112,500 shares of ordinary shares in the aggregate, or 5% of the ordinary shares sold in the IPO, to the representative of its underwriters and an independent financial adviser for the IPO (the “warrants”);
|
|
●
|
granted 26,400 shares of ordinary shares in the aggregate to its CFO (20,000 shares vested concurrently with the closing of IPO) and two non-executive board members (3,200 shares each vesting quarterly from the closing of IPO) at $6.25 per share and valued at $165,000 in total; and
|
|
●
|
converted $9,959,613 in indebtedness to five shareholders, including its founder, into 1,593,538 shares of ordinary shares.
|
Stock-based compensation expenses amounted
to $165,000 and $0 for the fiscal year ended June 30, 2016 and 2015.
Conversion in related party indebtedness
On February 27, 2015, five shareholders
of the Yulong operating companies, including the Company’s founder, agreed to convert the RMB equivalent of $9,892,692,
including dividends payable and due to related parties, due to them in the aggregate from the Yulong operating companies into
the Company’s ordinary shares concurrently with the closing of the IPO at the IPO Price.
Dividends payable consisted of the following:
Name of shareholders
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Yulong Zhu
|
|
$
|
-
|
|
|
$
|
3,462,665
|
|
Hu Zhu
|
|
|
-
|
|
|
|
2,212,315
|
|
Guangjian Zhu
|
|
|
-
|
|
|
|
1,773,900
|
|
Yingtao Miao
|
|
|
-
|
|
|
|
545,245
|
|
Total dividends payable
|
|
$
|
-
|
|
|
$
|
7,994,125
|
|
The dividend payable was settled in a
form of ordinary shares upon the IPO on July 1, 2015. The equivalent number of ordinary shares converted is 1,279,060 at the stock
price on the IPO date, $6.25 per share at $7,994,125 in total.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
The Company follows the provisions of the
accounting standard relating to instruments that are indexed to an entity’s own securities. 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
ordinary shares and (b) classified in stockholders’ equity in the statement of financial position would not be considered
a derivative financial instrument. The Company determined its warrants would be recorded as derivative instruments on the issuance
dates because the strike price of the warrants is denominated in US dollars, a currency other than the Company’s functional
currency RMB. Therefore the warrants are not considered indexed to the Company’s ordinary shares, and as such, all changes
in the fair value of these warrants are recognized currently in earnings from the issuances date until such time as the warrants
are exercised or expire.
The value of the warrant liabilities was
$65,605 at June 30, 2016 and $475,380 at the issuance date on July 1, 2015. The decrease resulted in a $409,775 gain on change
in fair value of warrants for the fiscal year ended June 30, 2016.
Because the warrants are not traded on
an active securities market, the Company estimates their fair value using the Binomial Option Pricing Model on June 30, 2016 and
on July 1, 2015 as follows:
|
|
June 30,
2016
|
|
|
July 1,
2015
|
|
Number of shares exercisable
|
|
|
112,500
|
|
|
|
112,500
|
|
Exercise price
|
|
$
|
6.25
|
|
|
$
|
6.25
|
|
Stock price
|
|
$
|
1.71
|
|
|
$
|
6.00
|
|
Expected term (years)
|
|
|
4.00
|
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
0.89
|
%
|
|
|
1.63
|
%
|
Expected volatility
|
|
|
84.83
|
%
|
|
|
92
|
%
|
Due to the short trading history of the
Company’s ordinary shares, the expected volatility is based primarily on other similar public companies’ historical
volatilities, which are traded on United States stock markets. Historical volatility was computed using daily pricing observations
for recent periods that correspond to the term of the warrants. The Company believes this method produces an estimate that
is representative of the Company’s expectations of future volatility over the expected term of the warrants. The Company
currently has no reason to believe future volatility over the expected remaining life of the warrants is likely to differ
materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest
rate is based on U.S. Treasury securities according to the remaining term of the warrants.
A summary of changes in warrant activity
is presented as follows:
|
|
Fiscal year
Ended
June 30,
2016
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average
Remaining
Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning balance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
112,500
|
|
|
$
|
6.25
|
|
|
|
5.00
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, ending balance
|
|
|
112,500
|
|
|
$
|
6.25
|
|
|
|
4.00
|
|
Stock-based compensation – consulting
services
On January 19, 2016, the Company’s
board of directors approved the following issuances of restricted shares of the Company’s ordinary shares:
|
●
|
31,279 shares to a consultant for services pertaining to business growth and strategies for the calendar years ending December 31, 2017 and 2016; and
|
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
●
|
95,967 shares to a consultant for services rendered previously and for the fiscal quarter ended March 31, 2016 pertaining to financial reporting and internal control over financial reporting.
|
The shares were valued at $3.20 per share,
based on the average closing price of the ordinary shares for the three months immediately preceding the board’s approval.
On July 6, 2016, the Company entered into
a consulting agreement for services in conjunction with the pre-audit and consulting services for the periods ended June 30, 2016,
September 30, 2016, December 31, 2016 and March 31, 2017. Total service fee is $150,000 or $37,500 per quarter and will be settled
in a form of stock-based payment equivalent to 58,140 shares of the Company's common stock. The shares were valued at $2.58 per
share based on the average closing price of the ordinary shares on the date the service agreement was entered.
Stock-based compensation expenses for
consulting services amounted to $534,237 and $0 for the fiscal year ended June 30, 2016 and 2015.
Note 15 — (Loss) Earnings per
share
The basic and diluted (loss) earnings per share are as follows:
|
|
For the year ended
June 30,
2016
|
|
|
For the year ended
June 30,
2015
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(53,190,023
|
)
|
|
$
|
8,679,571
|
|
Weighted average shares outstanding - Basic and Diluted
|
|
|
11,926,956
|
|
|
|
8,000,000
|
|
(Loss) Earnings per share - Basic and Diluted
|
|
$
|
(4.46
|
)
|
|
$
|
1.08
|
|
There were no potentially dilutive securities
outstanding for the years ended June 30, 2016 and 2015.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 – Commitments and contingencies
Contingencies
From time to time, the Company may be subject
to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these
legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse
impact on its financial position, results of operations or liquidity. Three of the four Yulong operating companies were subject
to 10 civil lawsuits with judgment amounts of approximately $2,224,585 (RMB 14,780,875) in the aggregate, of which unpaid amounts
of approximately $108,547 (RMB 721,225) has already been included in capital lease obligations regarding lease agreement for purchasing
10 vehicles from Xuchang Tongli, and approximately $292,327 (RMB 1,942,317) already included in other payables as of June 30, 2016.
The remaining balances included $1,821,756 (RMB 12,104,346) related to the guarantee with details disclosed in notes 'Guarantees',
and $1,955 (RMB 12,988) sued by individuals.
As for the events occurred after June 30,
2016, three of the four Yulong operating companies were parties to 26 civil lawsuits with judgment amounts of approximately $1,719,202
(RMB 11,422,947) in the aggregate, of which unpaid amounts of approximately $347,812 (RMB 2,310,979) has already been included
in short term loans, and approximately $127,929 (RMB 850,000) already included in other payables as of June 30, 2016. The remaining
balances included $25,402 (RMB 168,780) related to the illegal occupation of land, $129,841 (RMB 862,708) related to purchase commitment,
and $1,088,218 (RMB 7,230,480) related to wages or private placement complaints filed by individuals.
Illegal occupation of land
On October 18, 2016, Pingdingshan Land
Resources Bureau applied to the court to enforce the execution of Ping Guo Tu Zi Fa Zi (2016) no.65 Administrative Penalty Decision
that the Company shall:
(1) return 7,137.26 square meters of land
which the Company occupied illegally;
(2) dismantle the new buildings and other
facilities on the 7,137.26 square meters of land which the Company occupied illegally, and restore the original appearance of the
land;
(3) pay a fine on the basis that illegal
occupation of 5,951.4 square meters of general cultivated land at a fine of RMB 16.00 per square meter, i.e. $14,331.38 (RMB 95,222.40),
and 1,185.86 square meters of other land fines per square meter RMB 3.00, i.e. $535.43 (RMB 3,557.58), resulting in a total of
$14,866.81 (RMB 98,779.98).
On November 29, 2016, Pingdingshan Environmental
Protection Bureau filed a claim to the district court to enforce the execution of Ping Huan Fa Zi (2015) no.26 Administrative Penalty
Decision that the Company shall:
(1) cease its trial production;
(2) pay a fine of $10,535.30 (RMB 70,000).
Total unpaid amounts related to illegal
occupation of land were approximately $25,402 (RMB 168,780).
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase commitment
On November 10, 2012, the Company entered
into a sales and purchase contract with an unrelated third party, Xian Oriental Fuxing Machinery Co., Ltd ("Xian Oriental
Fuxing") with a contract amount of $419,907 (RMB 2,790,000). As of June 30, 2016, the Company already paid $293,483 (RMB 1,950,000)
to Xian Oriental Fuxing. According to verdict issued on September 24, 2016, the court ruled that the Company lost the case and
was required to pay the remaining amount of $126,424 (RMB 840,000) and litigation costs of $3,418 (RMB 22,708).
Guarantees
As of June 30, 2016, the Company guaranteed
approximately $3.0 million for a bank loan of unrelated third-parties as follows:
Name
|
|
Guaranteed amount
|
|
|
Guarantee expiration date
|
Pingdingshan Yushi Automobile Accessory Sales Co., Ltd
(1)
|
|
$
|
1,204,034
|
|
|
December 29, 2016
|
Pingdingshan Orr Business Co., Ltd
(2)
|
|
|
1,821,756
|
|
|
January 5, 2018
|
Total
|
|
$
|
3,025,790
|
|
|
|
|
(1)
|
The Company did not, however, accrue any liability in
connection with such guarantee because the borrower has been current in its repayment obligations and the Company has not experienced
any loss from providing such guarantees in the past. The Company has evaluated the guarantee and has concluded that the likelihood
of it having to make payments under the guarantee is remote and that the fair value of the stand-ready obligation under such commitment
is not material. The guarantee expired on December 29, 2016 and there was no default on this loan.
|
|
(2)
|
According to the verdict issued on March 16, 2017, the
court ruled that the borrower was required to remit the loan principal in an amount of $1,806,051 (RMB 12 million) and the litigation
cost in an amount of $15,705 (RMB 104,346) in litigation costs. As the loan term being from January 5, 2015 to January 6, 2016,
and the guarantee will expire on January 5, 2018, the Company has accrued a liability in connection with such guarantee.
|
Variable interest entity structure
In the opinion of management, (i) the corporate
structure of the Company is in compliance with existing PRC laws and regulations; (ii) the Contractual Arrangements are valid and
binding, and do not result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of
Yulong WFOE and the VIEs are in compliance with existing PRC laws and regulations in all material respects.
However, there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be
assured that PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion of its management. If
the current corporate structure of the Company or the Contractual Arrangements is found to be in violation of any existing or future
PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply
with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s
current corporate structure or the Contractual Arrangements is remote based on current facts and circumstances.
Note 17 – Segments
The Company follows ASC 280 – Segment
Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources
to segments and evaluating their performance. The Company’s chief operating decision maker evaluates performance and determines
resource allocations based on a number of factors, the primary measure being income from operations of the Yulong operating companies.
The Company’s operations currently
include three business segments encompassing three different divisions. Such reportable divisions are consistent with the way the
Company manages its business, with each division operating under separate management and producing discrete financial information.
The accounting principles applied at the operating division level in determining income from operations is generally the same as
those applied at the consolidated financial statement level.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The operation and products of the three
divisions are as follow:
|
1.
|
Yulong Bricks: production and sales of fly-ash bricks;
|
|
2.
|
Yulong Concrete and Yulong Transport: production and sales of ready-mixed concrete; and
|
|
3.
|
Yulong Renewable: hauling and processing of construction waste, and production and sales of recycled aggregates and recycled bricks.
|
The following represents results of divisional
operations for the following years ended June 30:
Revenues:
|
|
2016
|
|
|
2015
|
|
Yulong Bricks
|
|
$
|
11,913,095
|
|
|
$
|
15,586,654
|
|
Yulong Concrete and Yulong Transport
|
|
|
23,131,224
|
|
|
|
29,967,622
|
|
Yulong Renewable
|
|
|
7,600,112
|
|
|
|
676,108
|
|
Consolidated revenues
|
|
$
|
42,644,431
|
|
|
$
|
46,230,384
|
|
Gross profit:
|
|
2016
|
|
|
2015
|
|
Yulong Bricks
|
|
$
|
6,268,340
|
|
|
$
|
9,446,895
|
|
Yulong Concrete and Yulong Transport
|
|
|
5,824,949
|
|
|
|
7,084,582
|
|
Yulong Renewable
|
|
|
4,385,629
|
|
|
|
335,922
|
|
Consolidated gross profit
|
|
$
|
16,478,918
|
|
|
$
|
16,867,399
|
|
Income (loss) from operations:
|
|
2016
|
|
|
2015
|
|
Yulong Bricks
|
|
$
|
3,000,133
|
|
|
$
|
9,112,875
|
|
|
|
|
|
|
|
|
|
|
Yulong Concrete and Yulong Transport
|
|
|
3,362,105
|
|
|
|
6,042,286
|
|
|
|
|
|
|
|
|
|
|
Yulong Renewable
|
|
|
(53,608,441
|
)
|
|
|
(1,190,220
|
)
|
Subtotal
|
|
|
(47,246,203
|
)
|
|
|
13,964,941
|
|
|
|
|
|
|
|
|
|
|
Yulong Eco-Materials
|
|
|
(2,254,021
|
)
|
|
|
(1,106,489
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated (loss) income from operations
|
|
$
|
(49,500,224
|
)
|
|
$
|
12,858,452
|
|
Net income (loss):
|
|
2016
|
|
|
2015
|
|
Yulong Bricks
|
|
$
|
1,470,553
|
|
|
$
|
6,872,096
|
|
Yulong Concrete and Yulong Transport
|
|
|
2,041,042
|
|
|
|
4,159,835
|
|
Yulong Renewable
|
|
|
(54,852,671
|
)
|
|
|
(1,245,871
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(51,341,076
|
)
|
|
|
9,786,060
|
|
|
|
|
|
|
|
|
|
|
Yulong Eco-Materials
|
|
|
(1,848,947
|
)
|
|
|
(1,106,489
|
)
|
Consolidated net (loss) income
|
|
$
|
(53,190,023
|
)
|
|
$
|
8,679,571
|
|
Depreciation and amortization:
|
|
2016
|
|
|
2015
|
|
Yulong Bricks
|
|
$
|
522,294
|
|
|
$
|
535,938
|
|
Yulong Concrete and Yulong Transport
|
|
|
188,591
|
|
|
|
374,776
|
|
Yulong Renewable
|
|
|
1,507,000
|
|
|
|
841,937
|
|
Consolidated depreciation and amortization
|
|
$
|
2,217,885
|
|
|
$
|
1,752,651
|
|
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expenses:
|
|
2016
|
|
|
2015
|
|
Yulong Bricks
|
|
$
|
509,151
|
|
|
$
|
513,819
|
|
Yulong Concrete and Yulong Transport
|
|
|
397,948
|
|
|
|
486,507
|
|
Yulong Renewable
|
|
|
121,568
|
|
|
|
296,776
|
|
Interdivision
|
|
|
94
|
|
|
|
-
|
|
Consolidated interest expenses
|
|
$
|
1,028,761
|
|
|
$
|
1,297,102
|
|
Capital expenditures:
|
|
2016
|
|
|
2015
|
|
Yulong Bricks
|
|
$
|
1,155,000
|
|
|
$
|
168,677
|
|
Yulong Concrete and Yulong Transport
|
|
|
5,170
|
|
|
|
40,275
|
|
Yulong Renewable
|
|
|
96,583
|
|
|
|
1,816,214
|
|
Consolidated capital expenditures
|
|
$
|
1,256,753
|
|
|
$
|
2,025,166
|
|
The following represents assets of division
as of June 30, 2016 and 2015:
Total Assets as of:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Yulong Bricks
|
|
$
|
11,131,177
|
|
|
$
|
37,840,558
|
|
Yulong Concrete and Yulong Transport
|
|
|
4,416,866
|
|
|
|
26,391,895
|
|
Yulong Renewable
|
|
|
20,251,768
|
|
|
|
40,638,270
|
|
Interdivision assets
|
|
|
590
|
|
|
|
(27,565,591
|
)
|
Yulong Eco-Materials
|
|
|
642,700
|
|
|
|
293,333
|
|
Total Assets
|
|
$
|
36,443,101
|
|
|
$
|
77,598,465
|
|
Note 18 – Subsequent events
In late March 2016, the central government
of the People's of Republic of China passed Air Pollution Control Act and enforced Air Pollution Control Action Plan. The province
of Henan of People's Republic of China implemented "Province of Henan Blue Sky Action Plan" on various industries such
as construction materials, coal mining. Due to the Air Pollution Control Act and Blue Sky Action Plan, Yulong Renewable is required
to comply with the new environmental regulations. It placed its construction projects on hold and downsized its production since
August 2016.
On February 11, 2017, three of the board
of directors, Ms. Alice Io Wai Wu, Mr. Michael W. Harlan and Mr. Guosheng Liu (together the “Former Directors”) resigned
as directors of the Company. The Company elected Ms. Junfeng Ma, Ms. Yang Li and Mr. Qingsheng Liu to replace the Former Directors.
There is no family relationship among any of the New Directors and any of the Company’s other directors or executive officers.
In addition, the Board has approved the appointment of Ms. Junfeng Ma as Company’s interim chairperson of the Audit Committee.
While Company believe Ms. Ma’s accounting experience qualifies her to be the chairperson of the audit committee, the Company
is actively searching for a candidate who is an expert with U.S. GAAP rules to chair the Audit Committee. Ms. Ma will serve as
the chairperson of the Audit Committee during the Company’s search.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 15, 2017, Yulong Eco-Materials
Limited (the “Company”) received a deficiency letter (the “Letter”) from the NASDAQ Stock Market LLC (the
“Nasdaq”) regarding the Company’s failure to comply with NASDAQ List Rule 5605(c)(2), pursuant to which an audit
committee must have at least three members and be comprised only of independent directors. Due to the resignation of Alice Io Wai
Wu, and Michael W. Harlan on February 11, 2017, the Company failed to meet the aforesaid requirement.
Under Rule 5605(c)(4) and 5810(c)(3)(E),
the Company has been provided a cure period to regain compliance as follow (the “Cure Period”):
|
●
|
until the earlier of the Company’s next annual shareholders’ meeting or February 11, 2018; or
|
|
|
|
|
●
|
if the next annual shareholders’ meeting is held before August 10, 2017, then the Company must evidence compliance no later than August 10, 2017.
|
The Company addressed
this deficiency by providing a notice of annual general meeting of shareholders to be held on June 29, 2017. The Company has announced
the results of its annual general meeting for the fiscal year ended June 30, 2017 on June 30, 2017.
On March 31, 2017,
Yulong Eco-Materials Limited (the “Company”) received a determination letter (the “Letter”) from the NASDAQ
Stock Market LLC (the “NASDAQ”) notifying the Company of the NASDAQ Staff’s determination (the “Determination”)
to delist the Company’s securities from The NASDAQ Capital Market due to its failure to regain compliance with Listing Rule
5250(c)(1) (the “Rule”) because it had not filed its Annual Report on Form 10-K for the period ended June 30, and Quarterly
Reports on Forms 10-Q for the periods ended September 30, and December 31, 2016, respectively (the “Delinquent Reports”).
Pursuant to the Letter, unless the Company requests an appeal of the Determination by 4:00 Eastern Time on April 7, 2017, trading
of the Company’s common stock will be suspended at the opening of business on April 11, 2017, and a Form 25-NSE will be filed
with the Securities and Exchange Commission (the “SEC”), causing the Company’s securities to be removed from
listing and registration on The NASDAQ Stock Market.
As previously reported, on October 14
and November 22, 2016, the Company received two notification letters (the “Notice”) from NASDAQ advising the Company
that it did not comply with the “Rule” because it had not filed its Annual Report on Form 10-K for the period ended
June 30, and Quarterly Reports on Forms 10-Q for the periods ended September 30, and December 31, 2016, respectively. The Company
was provided an exception until April 12, 2017, to regain compliance with the Rule. On March 24, 2017, the Company advised that
it would be unable to regain compliance with the Rule by April 12, 2017. As of the date of this report, the Company has not regained
compliance with the Rule though it is in the process of preparing its annual report.
On April 6, 2017, Yulong Eco-Materials
Limited received a notification letter from the Listing Qualifications Department of The NASDAQ Stock Market LLC (“NASDAQ”)
indicating that the Company is not in compliance with NASDAQ Listing Rule 5550(a)(2) (the “Rule”) because the closing
bid price of the Company’s common stock on The Nasdaq Capital Market has been below $1.00 per share for 30 consecutive business
days. The Nasdaq notification has no immediate effect on the listing or trading of the Company’s common stock, which will
continue to trade on The Nasdaq Capital Market under the symbol “YECO”.
The Company has 180 calendar days, or until
October 3, 2017, to regain compliance. If, at any time before that date, the closing bid price of the Company’s common stock
is at least $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will notify the Company that it has achieved
compliance with the Rule.
If the Company does not regain compliance
by October 3, 2017, the Company may be eligible for a second compliance period of 180 calendar days. To qualify, the Company will
be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards
for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide NASDAQ written notice
of its intention to cure the deficiency during the second compliance period.
YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If it appears to the NASDAQ staff that
the Company will not be able to cure the deficiency, or if the Company does not cure the deficiency following the additional time,
NASDAQ will notify the Company that its common stock will be subject to delisting. At that time, the Company may appeal the Staff’s
delisting determination to a Hearings Panel. If the Company timely appeals, it would remain listed pending the Hearing Panel’s
decision.
The Company intends to monitor the closing
bid price of its common stock and may consider implementing available options to regain compliance with the Rule. This information
is being provided to comply with NASDAQ Listing Rules requiring public announcement of the Company’s receipt of the notification
letter from NASDAQ.
On May 15, 2017, Yulong Eco-Materials
Limited determines that it qualifies as a “foreign private issuer” as defined under Rule 3b-4 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Accordingly, effective immediately after the filing of this Form 8-K,
the Company will begin reporting under the Exchange Act as a foreign private issuer, including the filing of annual reports on
Form 20-F and current reports on Form 6-K.
On June 12, 2017, Yulong Eco-Materials
Limited - (Nasdaq: YECO) announced that following a hearing before the Nasdaq Hearings Panel (the “
Panel
”) on May 25, 2017, the Panel granted the Company’s request for continued listing on Nasdaq, subject
to the Company’s timely compliance with a number of interim milestones and, ultimately, the Company’s full compliance
with all applicable requirements for continued listing on Nasdaq, including the filing of annual report for fiscal year ended June
30, 2016 and quarterly reports for fiscal periods ended September 30, 2016 and December 31, 2016, by no later than August 31, 2017.
The Company is diligently working to timely
evidence compliance with the terms of the Panel’s decision; however, there can be no assurance that the Company will be able
to do so.
On July 7, 2017, the Company received a
notice from the Nasdaq Hearings Panel (the “Panel”) indicating that it has determined to suspend the Company’s
ordinary shares, from trading on The Nasdaq Stock Market, effective at the open of business on July 11, 2017. As a result of the
notice, the Company's ordinary shares are currently trading on the OTC Pink marketplace under the symbol “YECOF.” For
quotes or additional information on the OTC Pink market, visit http://www.otcmarkets.com.
The Company has a right to appeal the Panel’s
determination. The Company has not yet decided whether to request a review of the decision by the Nasdaq Listing and Hearing Review
Council. The right to request the review expires on July 24, 2017. In the event the Company does not appeal or the appeal is unsuccessful,
Nasdaq will effect the delisting of the Company’s securities by filing a Form 25-NSE (Notification of Removal from Listing
and/or Registration under Section 12(b) of the Securities Exchange Act of 1934) after applicable appeal periods have lapsed.
As previously reported, the Company is
not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial
reports with the Securities and Exchange Commission. Notwithstanding the Panel’s determination, the Company expects to file
its annual report for the fiscal year ended June 30, 2016 and quarterly reports for fiscal periods ended September 30, 2016 and
December 31, 2016 as soon as possible and apply to be quoted on the OTCQB market after these delinquent filings are completed.
On July 21, 2017, the Company submitted
an appeal request requesting the Nasdaq Listing and Hearing Review Council to review the Panel’s determination and stay any
Panel action to suspend the Company’s listing. In addition, the Company intends to submit an updated plan to regain compliance
(“Updated Plan”) with Nasdaq’s Listing Rules. The Company is working diligently on its Updated Plan and plans
to submit it to the Panel by August 4, 2017.