Quarterly Report (10-q)

Date : 02/13/2018 @ 1:05PM
Source : Edgar (US Regulatory)
Stock : China Advanced Construction Materials Grp., Inc. (CADC)
Quote : 2.4  -0.1 (-4.00%) @ 8:00PM
China Advanced Construction Materials Grp., Inc. share price Chart

Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: December 31, 2017

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

For the transition period from ____________ to _____________

Commission File Number: 001-34515

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada 20-8468508
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

9 North West Fourth Ring Road Yingu Mansion Suite 1708
Haidian District Beijing, People’s Republic of China 100190
(Address of principal executive offices, Zip Code)

+86 10 82525361
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [_]

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

Large Accelerated Filer [_] Accelerated Filer [_]
Non-Accelerated Filer [_] Smaller reporting company [X]
(Do not check if a smaller reporting company) Emerging growth company [_]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]

The number of shares outstanding of each of the issuer’s classes of common equity, as of February 12, 2018 is as follows:

Class of Securities Shares Outstanding
Common Stock, $0.001 par value 2,387,658


TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
  PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 30
ITEM 4. CONTROLS AND PROCEDURES 30
     
PART II  
OTHER INFORMATION  
     
ITEM 6. EXHIBITS 31


PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

    December 31,     June 30,  
    2017     2017  
             
ASSETS            
CURRENT ASSETS:            
   Cash and cash equivalents $  1,137,395   $  224,679  
   Restricted cash   -     4,208,765  
   Accounts receivable, net   46,920,488     47,543,077  
   Inventories   752,268     626,738  
   Other receivables, net   1,127,853     240,123  
   Prepayments and advances, net   8,125,800     16,894,781  
   Prepayments - related party   5,457,469     6,996,400  
      Total current assets   63,521,273     76,734,563  
             
PROPERTY PLANT AND EQUIPMENT, net   3,226,068     3,644,203  
             
             
Total assets $  66,747,341   $  80,378,766  
             
LIABILITIES AND SHAREHOLDERS' EQUITY             
             
CURRENT LIABILITIES:            
   Short term loans, banks and bank guarantees $  27,095,148   $  17,700,720  
   Notes payable   -     14,013,070  
   Accounts payable   22,055,353     29,081,789  
   Customer deposits   1,136,303     614,558  
   Other payables   420,979     4,098,772  
   Other payables - shareholders   2,635,292     2,261,766  
   Accrued liabilities   1,508,675     1,352,750  
   Taxes payable   113,441     103,419  
Total current liabilities   54,965,191     69,226,844  
             
COMMITMENTS AND CONTINGENCIES            
             
SHAREHOLDERS' EQUITY:            
             
   Preferred stock $0.001 par value, 1,000,000 shares authorized, no shares issued or outstanding   -     -  
   Common stock, $0.001 par value, 74,000,000 shares authorized, 2,387,658 shares issued and
   outstanding as of December 31, 2017 and June 30, 2017
  2,388     2,388  
   Additional paid-in-capital   38,662,377     38,662,377  
   Accumulated deficit   (41,054,643 )   (40,975,658 )
   Statutory reserves   6,248,092     6,248,092  
   Accumulated other comprehensive income   7,923,936     7,214,723  
Total shareholders' equity   11,782,150     11,151,922  
Total liabilities and shareholders' equity $  66,747,341   $  80,378,766  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1



CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)

    For the three months ended     For the six months ended  
    December 31,     December 31,  
    2017     2016     2017     2016  
                         
REVENUE $  10,255,073   $  14,732,354   $  24,023,532   $  22,189,216  
                         
COST OF REVENUE   8,354,051     15,648,509     20,676,106     24,057,783  
                         
GROSS PROFIT (LOSS)   1,901,022     (916,155 )   3,347,426     (1,868,567 )
                         
RECOVERY OF (PROVISION FOR) DOUBTFUL ACCOUNTS   856,573     (2,276,981 )   696,833     (4,362,318 )
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES   (1,362,471 )   (1,214,549 )   (2,774,616 )   (3,077,477 )
RESEARCH AND DEVELOPMENT EXPENSES   (696,276 )   (610,278 )   (786,934 )   (689,443 )
                         
INCOME (LOSS) FROM OPERATIONS   698,848     (5,017,963 )   482,709     (9,997,805 )
                         
OTHER INCOME (EXPENSE), NET                        
 Other (expense) income, net   1,979     149,920     (22 )   236,121  
 Interest income   1,883     3,433     4,326     11,834  
 Interest expense   (235,538 )   (190,112 )   (563,592 )   (387,329 )
 Finance expense   (565 )   (97,416 )   (2,404 )   (335,731 )
TOTAL OTHER EXPENSE, NET   (232,241 )   (134,175 )   (561,692 )   (475,105 )
                         
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES   466,607     (5,152,138 )   (78,983 )   (10,472,910 )
                         
PROVISION FOR INCOME TAXES   -     -     -     -  
                         
NET INCOME (LOSS) $  466,607   $  (5,152,138 ) $  (78,983 ) $  (10,472,910 )
                         
COMPREHENSIVE INCOME (LOSS)                        
 Net Income (loss) $  466,607   $  (5,152,138 ) $  (78,983 ) $  (10,472,910 )
 Other comprehensive income (loss) - foreign currency translation income (loss)   450,787     (625,922 )   709,213     (712,184 )
                         
COMPREHENSIVE INCOME (LOSS) $  917,394   $  (5,778,060 ) $  630,230   $  (11,185,094 )
                         
EARNINGS (LOSS) PER COMMON SHARE                        
 Weighted average number of shares:                        
     Basic   2,280,799     2,387,658     2,280,799     2,330,322  
     Diluted   2,330,799     2,387,658     2,280,799     2,330,322  
                         
 Earnings (loss) per share:                        
     Basic $  0.20   $  (2.16 ) $  (0.03 ) $  (4.49 )
     Diluted $  0.20   $  (2.16 ) $  (0.03 ) $  (4.49 )

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2



CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

    For the six months ended  
    December 31,  
    2017     2016  
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
 Net loss $  (78,983 ) $  (10,472,910 )
 Adjustments to reconcile net loss to net cash provided by operating activities:            
         Depreciation and amortization   606,165     598,972  
         Gain on disposal of equipment   (2,259 )   -  
         Stock-based compensation expense   -     289,000  
         (Recovery of) provision for doubtful accounts   (696,833 )   4,362,318  
     Changes in operating assets and liabilities            
         Accounts receivable   622,561     (10,706,622 )
         Inventories   (97,272 )   374,813  
         Other receivables   295,626     7,499,561  
         Prepayments and advances   8,773,808     (8,356,631 )
         Prepayments - related party   1,795,377     6,013,070  
         Accounts payable   (6,085,552 )   9,606,205  
         Customer deposits   486,038     (2,784,215 )
         Other payables   (3,799,328 )   2,872,998  
         Other payables - shareholders   372,268     312,072  
         Accrued liabilities   139,351     (562,213 )
         Taxes payable   5,574     98,266  
 Net cash provided by (used in) operating activities   2,336,541     (855,316 )
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
 Purchases of property, plant and equipment   (44,503 )   (51,552 )
         Net cash used in investing activities   (44,503 )   (51,552 )
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
 Proceeds from short term loans, banks and bank guarantees   24,593,633     15,560,685  
 Repayments of short term loans, banks and bank guarantees   (16,114,628 )   (9,632,805 )
 Proceeds from notes payable   -     16,598,064  
 Repayments of notes payable   (14,307,380 )   (17,783,640 )
 Payable to shareholders   -     146,611  
 Change in restricted cash   4,297,159     (1,443,051 )
         Net cash (used in) provided by financing activities   (1,531,216 )   3,445,864  
             
EFFECTS OF EXCHANGE RATE CHANGE IN CASH AND CASH EQUIVALENTS   151,894     (116,282 )
             
NET CHANGE IN CASH AND CASH EQUIVALENTS   912,716     2,422,714  
             
CASH AND CASH EQUIVALENTS, beginning of period   224,679     1,006,970  
             
CASH AND CASH EQUIVALENTS, end of period $  1,137,395   $  3,429,684  
             
SUPPLEMENTAL CASH FLOW INFORMATION:            
     Cash paid for interest expense $  563,592   $  374,326  
     Cash paid for income tax $  -   $  -  
             
OTHER NON-CASH TRANSACTIONS:            
     Accounts receivable offset with accounts payable upon execution of tri-party agreements $  1,994,213   $  873,793  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Organization and description of business

China Advanced Construction Materials Group, Inc. (“CADC Delaware”) was incorporated in the State of Delaware on February 15, 2007. CADC Delaware, through its 100% owned subsidiaries and its variable interest entities (“VIEs”), is engaged in producing general ready-mix concrete, customized mechanical refining concrete, and other concrete-related products that are mainly sold in the People’s Republic of China (the “PRC”). CADC Delaware has a wholly-owned subsidiary in the British Virgin Islands, Xin Ao Construction Materials, Inc. (“BVI-ACM”), which is a holding company with no operations. BVI-ACM has a wholly-owned foreign subsidiary, Beijing Ao Hang Construction Material Technology Co., Ltd. (“China-ACMH”), and China-ACMH has contractual agreements with Beijing XinAo Concrete Group (“Xin Ao”) and therefore Xin Ao is considered to be a VIE of China- ACM.

Xin Ao is engaged in the business of consulting, concrete mixing and equipment rental services. Xin Ao had five wholly owned subsidiaries in the PRC: (1) Beijing Heng Yuan Zheng Ke Technical Consulting Co., Ltd, (2) Beijing Hong Sheng An Construction Materials Co., Ltd, (3) Beijing Heng Tai Hong Sheng Construction Materials Co., Ltd, (4) Da Tong Ao Hang Wei Ye Machinery, Equipment Rental Co., Ltd, and (5) Luan Xian Heng Xin Technology Co., Ltd. Since their establishment, none of these five entities had any operations and the Company did not plan to pursue operations for these entities. As of June 30, 2017, all five subsidiaries were dissolved.

On August 1, 2013, CADC Delaware consummated a reincorporation merger with its newly formed wholly-owned subsidiary, China Advanced Construction Materials Group, Inc. (“China ACM”), a Nevada corporation, with CADC Delaware merging into China ACM and China ACM being the surviving company, for the purpose of changing CADC Delaware’s state of incorporation from Delaware to Nevada.

China ACM, BVI-ACM, China-ACMH and Xin Ao are collectively referred to as the “Company.”

Note 2 – Summary of significant accounting policies

Liquidity

In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations.

The Company engages in the production of advanced construction materials for large-scale infrastructure, commercial and residential developments. The Company’s business is capital intensive and the Company is highly leveraged. Debt financing in the form of short term bank loans, loans from related parties and bank acceptance notes have been utilized to finance the working capital requirements and the capital expenditures of the Company. Due to recurring losses, the Company’s working capital was approximately $8.6 million as of December 31, 2017, as compared to $7.5 million as of June 30, 2017. As of December 31, 2017, the Company had cash on-hand of approximately $1.1 million, with remaining current assets mainly composed of accounts receivables and prepayments and advances.

Although the Company believes that it can realize its current assets in the normal course of business, the Company’s ability to repay its current obligations will depend on the future realization of its current assets. Management has considered its historical experience, the economic environment, trends in the construction industry, the expected collectability of its accounts receivable and other receivables and the realization of the prepayments on inventory, and provided for an allowance for doubtful accounts as of December 31, 2017. The Company expects to realize the balance of its current assets net of the allowance for doubtful accounts within the normal operating cycle of a twelve month period. If the Company is unable to realize its current assets within the normal operating cycle of a twelve month period, the Company may have to consider supplementing its available sources of funds through the following:

 

Financial support and credit guarantee commitments from the Company’s majority shareholders (See Note 7 - Related party transactions).

     
 

Other available sources of financing from PRC banks and other financial institutions, given the Company’s credit history.

4


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Based on the above considerations, the Company’s management is of the opinion that it has sufficient funds to meet the Company’s working capital requirements and debt obligations as they become due. However, there is no assurance that management will be successful in their plans. There are a number of factors that could potentially arise that could undermine the Company’s plans, such as changes in the demand for the Company’s products, economic conditions, competitive pricing in the concrete-mix industry, the Company’s operating results continuing to deteriorate, or the inability of the Company’s bank and shareholders to provide continued financial support.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements include the accounts of all the directly and indirectly owned subsidiaries and VIEs listed below. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary to give a fair presentation have been included. Interim results are not necessarily indicative of results of a full year. The information in this Form 10-Q should be read in conjunction with information included in the annual report for the fiscal year ended June 30, 2017 on Form 10-K filed with the SEC on September 28, 2017.

Principles of consolidation

The unaudited condensed consolidated financial statements reflect the activities of the following subsidiaries and VIEs. All material intercompany transactions have been eliminated.

        Ownership
Subsidiaries and VIEs   Place incorporated   percentage
BVI-ACM   British Virgin Island   100%
China-ACMH   Beijing, China   100%
Xin Ao   Beijing, China   VIE
Heng Yuan Zheng Ke 3   Beijing, China   VIE
Hong Sheng An 2   Beijing, China   VIE
Heng Tai 4   Beijing, China   VIE
Da Tong 1   Datong, China   VIE
Heng Xin 2   Luanxian, China   VIE

1 Dissolved in August 2016
2 Dissolved in December 2016
3 Dissolved in January 2017
4 Dissolved in February 2017

VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIEs. The primary beneficiary is required to consolidate the VIEs for financial reporting purposes.

Management makes ongoing assessments of whether China ACM is the primary beneficiary of Xin Ao. Based upon a series of contractual arrangements, the Company determined that Xin Ao is a VIE subject to consolidation and that China ACM is the primary beneficiary. Accordingly, the accounts of Xin Ao are consolidated with those of China ACM.

5


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The carrying amount of the VIE’s assets and liabilities are as follows:

    December 31,     June 30,  
    2017     2017  
   Current assets $  63,393,372   $  76,607,089  
   Property, plants and equipment   3,192,948     3,644,203  
Total assets   66,586,320     80,251,292  
             
   Liabilities   (51,946,295 )   (66,612,148 )
             
   Intercompany payables*   (7,210,196 )   (7,088,094 )
             
Total liabilities   (59,156,491 )   (73,700,242 )
             
Net assets $  7,429,829   $  6,551,050  

* Payables to China-ACMH and BVI-ACM have been 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company’s unaudited condensed consolidated financial statements include allowance for doubtful accounts, deferred income taxes, prepayments and advances, stock-based compensation, and fair value and useful lives of property, plant and equipment. Actual results could be materially different from those estimates.

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of China ACM and BVI-ACM is the U.S. dollar. China-ACMH and Xin Ao use their local currency Chinese Renminbi (“RMB”) as their functional currency. In accordance with the U.S. GAAP guidance on Foreign Currency Translation, the Company’s results of operations and cash flows are translated at the average exchange rates during the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at historical exchange rates. As a result, amounts related to assets and liabilities reported on the unaudited condensed consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the unaudited condensed consolidated balance sheets.

Asset and liability accounts at December 31, 2017 and June 30, 2017 were translated at RMB 6.51 and RMB 6.78 to $1.00, respectively. The average translation rates applied to the consolidated statements of operations and comprehensive loss for the three months ended December 31, 2017 and 2016 were RMB 6.76 and RMB 6.79 to $1.00, respectively. The average translation rates applied to the unaudited condensed consolidated statements of operations and comprehensive loss and cash flows for the six months ended December 31, 2017 and 2016 were RMB 6.64 and RMB 6.75 to $1.00, respectively.

Translation gains (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. There were no foreign currency transaction gains or losses for each of the three and six months ended December 31, 2017 and 2016. The effects of foreign currency translation adjustments are included in shareholders’ equity as a component of accumulated other comprehensive income.

Revenue recognition

Revenue is realized or realizable and earned when four criteria are met:

6


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Persuasive evidence of an arrangement exists (the Company considers its sales contracts to be pervasive evidence of an arrangement);

     
  Delivery has occurred;
     
  The seller’s price to the buyer is fixed or determinable; and
     
  Collectability of payment is reasonably assured.

The Company sells its concrete products primarily to major local construction companies. Sales agreements are signed with each customer. The agreements list all terms and conditions with the exception of delivery date and quantity, which are evidenced separately in purchase orders. The purchase price of products is fixed in the agreement and customers are not permitted to renegotiate after the contracts have been signed. The agreements include a cancellation clause if the Company or customers breach the contract terms specified in the agreement.

The Company recognizes revenue when title and ownership of the goods are transferred upon shipment to the customer by the Company and collectability of payment is reasonably assured.

The Company includes the shipping and handling fee in both revenue and cost of revenue.

Financial instruments

US GAAP, regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The three levels of inputs are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3 inputs to the valuation methodology are unobservable.

Financial instruments included in current assets and current liabilities are reported in the unaudited condensed consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

Cash and cash equivalents

The Company considers all highly liquid investments with the original maturity of three months or less at the date of purchase to be cash equivalents. The Company currently maintains substantially all of its day-to-day operating cash balances with major financial institutions within the PRC and the United States. As of December 31, 2017 and June 30, 2017, the Company had deposits in excess of federally insured limits totaling approximately $1.1 million and $0.2 million, respectively, outside the United States.

Restricted cash

Restricted cash consisted of collateral representing cash deposits for bank guarantees and notes payable.

7


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accounts receivable

The Company extends unsecured credit to its customers in the normal course of business. Accounts are considered past due after 30 days. In establishing the required allowance for doubtful accounts, management considers historical experience, the economic environment, trends in the construction industry and the expected collectability of the overdue receivables. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovering is considered remote. The Company provides a provision of 15% of the allowance for doubtful accounts for accounts receivable balances that are past due more than 180 days but less than one year, 40% of the allowance for doubtful accounts for accounts receivable past due from one to two years, 75% of the allowance for doubtful accounts for accounts receivable past due beyond two years, 100% of the allowance for doubtful accounts for accounts receivable past due beyond three years, plus additional amounts as necessary when the Company’s collection department determines the collection of the full amount is remote and the Company’s management approves 100% of the allowance for doubtful accounts. The Company’s management has continued to evaluate the reasonableness of the valuation allowance policy and will update it if necessary.

Inventories

Inventories consist of raw materials 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. As of December 31, 2017 and June 30, 2017, the Company determined that no reserves for obsolescence were necessary.

Other receivables

Other receivables primarily include prepayments to be refunded by our suppliers if the supplies do not meet the Company’s specification needs, advances to employees, amounts due from unrelated entities, VAT tax refunds and other deposits. Management regularly reviews the aging of receivables and changes in payment trends and records allowances when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off against allowances after exhaustive efforts at collection are made. The Company provides a provision of 5% of the allowance for doubtful accounts for other receivables balances that are aged within one year, 50% of the allowance for doubtful accounts for other receivables aged from one to two years, and 100% of the allowance for doubtful accounts for other receivables aged beyond two years.

Prepayments and advances

Prepayments are funds deposited or advanced to outside vendors for future inventory purchases. As is standard practice in the PRC, many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis. This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require any outstanding prepayments to be returned to the Company when such contracts end.

The Company recovered approximately $0.3 million and provided allowance of approximately $0.1 million on unrealizable prepayments for the three months ended December 31, 2017 and 2016, respectively. The Company provided allowance of approximately $0.5 million and $0.2 million on unrealizable prepayments for the six months ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and June 30, 2017, the Company provided approximately $0.5 million and $0, respectively, bad debt allowance for prepayments and advances.

Property, plant and equipment

Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred while additions, renewals and improvements are capitalized. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method with a 5% residual value. Leasehold improvements are amortized over the lesser of estimated useful lives or lease terms, as appropriate.

8


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The estimated useful lives of assets are as follows:

  Useful life
Transportation equipment 7-10 years
Plants and machinery 10 years
Office equipment 5 years
Buildings and improvements 3-20 years

Accounting for long-lived assets

The Company classifies its long-lived assets into: (i) machinery and equipment; (ii) transportation equipment; (iii) office and equipment; and (iv) buildings and improvements.

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

If the value of an asset is determined to be impaired, the impairment to be recognized is measured in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition costs.

There were no impairment charges for the three and six months ended December 31, 2017 and 2016.

Competitive pricing pressures and changes in interest rates could materially and adversely affect the Company’s estimates of future net cash flows to be generated by the long-lived assets, and thus could result in future impairment losses.

Stock-based compensation

The Company records stock-based compensation expense at fair value on the grant date and recognizes the expense over the employee's requisite service period. The Company’s expected volatility assumption is based on the historical volatility of Company’s stock. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on the Company’s current and expected dividend policy.

Income taxes

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes,” which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.

ASC 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation of a tax position as 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. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. United States federal, state and local income tax returns prior to 2015 are not subject to examination by any applicable tax authorities. PRC tax returns filed in 2017 and prior years are subject to examination by any applicable tax authorities.

9


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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. The standard VAT rate for the Company’s industry is 3% of gross sales, and revenues are presented net of VAT.

Research and development

Research and development costs are expensed as incurred. The cost of materials and equipment that are acquired or constructed for research and development activities, and have alternative future uses, either in research and development, marketing, or sales, are classified as property and equipment, and depreciated over their estimated useful lives.

Earnings (loss) per share

The Company reports earnings (losses) per share in accordance with the U.S. GAAP, which requires presentation of basic and diluted earnings (losses) per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings (losses) per share excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants, options, restricted stock based grants and convertible preferred stock, to issue common stock were exercised and converted into common stock. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted earnings per share.

Stock dividends or stock splits are to be accounted for retroactively if the stock dividends or stock splits occur during the period, or retroactively if the stock dividends or stock splits occur after the end of the period but before the release of the financial statements, by considering it outstanding of the entirety of each period presented.

Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Comprehensive income (loss)

Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments.

Recent Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update (ASU) No., 2016-09, Compensation-Stock Options (Topic 718): Improvements to Employee Share-Based Payment Accounting. The areas for simplification in this amendment include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The adoption of this ASU has not had a material effect on the Company’s unaudited condensed consolidated financial statements.

10


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. Management does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests held through related parties that are under common control. The amendments in this ASU require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. Management does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash". The amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management believes that the adoption of this ASU on the Company’s statement of cash flows will increase cash and cash equivalents by the amount of the restricted cash on the Company’s unaudited condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, this ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The adoption of this ASU would not have a material effect on the Company’s unaudited condensed consolidated financial statements.

11


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The amendments in Part I of the Update change the reclassification analysis of certain equity-lined financial instruments (or embedded features) with down round features. The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.

In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). This Accounting Standards Update adds SEC paragraphs pursuant to an SEC Staff Announcement made at the July 20, 2017 Emerging Issues Task Force meeting. The Company does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.

In November 2017, the FASB issued ASU 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). This Accounting Standards Update supersedes various SEC paragraphs and amends an SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 116 and SEC Release No.33-10403. The Company does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed consolidated financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying unaudited condensed consolidated financial statements.

Note 3 – Accounts receivable, net

Accounts receivable, net consisted of the following:

    December 31, 2017     June 30, 2017  
Accounts receivable $  63,355,822   $  63,370,426  
Less: Allowance for doubtful accounts   (16,435,334 )   (15,827,349 )
Total accounts receivable, net $  46,920,488   $  47,543,077  

12


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Movement of allowance for doubtful accounts is as follows:

    Six months ended     Year ended  
    December 31, 2017     June 30, 2017  
             
Beginning balance $  15,827,349   $  11,524,131  
(Recovery of) provision for doubtful accounts   (54,203 )   3,987,890  
Less: write-off   -     -  
Exchange rate effect   662,188     315,328  
Ending balance $  16,435,334   $  15,827,349  

During the six months ended December 31, 2017 and 2016, the Company offset approximately $2.0 million and $0.9 million of accounts receivable and accounts payable pursuant to certain three-party settlement agreements, respectively.

Note 4 – Other receivables, net

Other receivables

Other receivables consisted of the following:

    December 31, 2017     June 30, 2017  
Other receivables $  1,440,619   $  1,653,351  
Other receivable from sale of Asset Group   -     18,867  
Less: Allowance for doubtful accounts   (312,766 )   (1,432,095 )
Total other receivables, net $  1,127,853   $  240,123  

$0.92 million of other receivable was from Beijing Jinshengding Mineral Products Co., Ltd., a supplier to the Company. The Company collected the loan advance in January 2018.

Movement of allowance for doubtful accounts is as follows:

    Six months ended     Year ended  
    December 31, 2017     June 30, 2017  
             
Beginning balance $  1,432,095   $  2,334,672  
Recovery of doubtful accounts   (1,155,679 )   (852,275 )
Less: write-off   -     -  
Exchange rate effect   36,350     (50,302 )
Ending balance $  312,766   $  1,432,095  

Note 5 – Property, plant and equipment, net

Property, plants and equipment consist of the following:

    December 31, 2017     June 30, 2017  
Machinery and equipment $  929,279   $  896,326  
Transportation equipment   4,427,703     4,249,609  
Office equipment   1,217,830     1,168,846  
Buildings and improvements   321,570     308,636  
Construction in progress   33,120     -  
Total   6,929,502     6,623,417  
Less: Accumulated depreciation and amortization   (3,703,434 )   (2,979,214 )
Plants and equipment, net $  3,226,068     3,644,203  

13


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Depreciation and amortization expense amounted to approximately $0.3 million for each of the three months ended December 31, 2017 and 2016. Depreciation and amortization expense amounted to approximately $0.6 million for each of the six months ended December 31, 2017 and 2016.

Note 6 – Credit Facilities

Short term loans - banks:

Outstanding balances on short-term bank loans consisted of the following:

  December 31, 2017     June 30, 2017  
             
Loans from China Construction Bank, with an interest rate of 4.35% per annum, due March 2018, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Xianfu Han, Ms. Chunying Wang, Mr. Weili He and Ms. Junkun Chen.   2,305,316     17,700,720  
             
Loans from China Construction Bank, each with an interest rate of 5.66% per annum, due between January 2018 and August 2018, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Xianfu Han, Ms. Chunying Wang, Mr. Weili He, and Ms. Junkun Chen.   19,257,073     -  
             
Loans from China Construction Bank, each with an interest rate of 5.66% per annum, due between September 2018 and October 2018, guaranteed by Beijing Jinshengding Mineral Products Co., Ltd , Mr. Xianfu Han, Ms. Chunying Wang, Mr. Weili He, and Ms. Junkun Chen.  

5,532,759

   

  -

 
  $  27,095,148   $  17,700,720  

Beijing Jinshengding Mineral Products Co., LTD is a supplier to the Company. Mr. Xianfu Han is the Company’s Chief Executive Officer. Chunying Wang is the spouse of Mr. Xianfu Han. Mr. Weili He is the Company’s Interim Chief Financial Officer. Ms. Junkun Chen is the spouse of Mr. Weili He. Also see Note 7 – Related party transactions.

The Company has an approximately $32.3 million (RMB210, 000,000) credit facility from China Construction Bank (the “CCB Credit Facility”), which was extended in August 2017 through August 2018. The Company’s availability under the CCB Credit Facility was $5.2 million as of December 31, 2017.

In January 2018, one short-term bank loan totaling $3,611,662 (RMB 23,500,000) was due and the Company renewed the loan with a new short-term bank loan totaling $3,596,293 (RMB 23,400,000), which matures on July 16, 2018. Interest expense was approximately $0.2 million for each of the three months ended December 31, 2017 and 2016. Interest expense was approximately $0.6 million and $0.4 million for the six months ended December 31, 2017 and 2016, respectively.

14


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Notes payable:

Bank notes are issued under the CCB Credit Facility for inventory purchases. The notes payable are guaranteed by Beijing Jinshengding Mineral Products Co., LTD., Xianfu Han and his spouse, Chunying Wang, and Weili He and his spouse, Junkun Chen, and amounted to approximately $0 and $14.0 million as of December 31 and June 30, 2017, respectively. The notes are generally charged with a transaction fee of 0.1% of the notes amount. The restricted cash for the notes was approximately $0 and $4.2 million as of December 31, 2017 and June 30, 2017, respectively.

Note 7 – Related party transactions

Prepayments - related party

Mr. Xianfu Han, and Mr. Weili He, the Company’s shareholders and officers, are holding positions as president and director of Ningbo Lianlv Investment Ltd., respectively. This company owns 99% of the shares of Beijing Lianlv Technical Group Ltd. (“Beijing Lianlv”), the Company’s supplier. As of December 31 and June 30, 2017, the Company prepaid $5,457,469 and $6,996,400 to Beijing Lianlv for inventory purchases, respectively.

Other payables – shareholders

Two shareholders have advanced funds to BVI-ACM for working capital purposes. The advances are non-interest bearing, unsecured, and are payable in cash on demand. These two shareholders are also officers of the Company. They and their spouses have also guaranteed certain short-term loans payable and notes payable of the Company (see Note 6). The other payables-shareholders balance also includes the Company’s salary payables to the two shareholders.

Other payables - shareholders consisted of the following:

    December 31, 2017     June 30, 2017  
Xianfu Han $  1,250,535   $  1,070,535  
Weili He   1,384,757     1,191,231  
  $  2,635,292   $  2,261,766  

As of December 31, 2017, the balance of other payables-shareholders includes $2,160,000 salary payable-shareholders and $437,736 loans payable-shareholders. As of June 30, 2017, the balance of other payables-shareholders incudes $1,800,000 salary payable-shareholders and $461,766 loans payable-shareholders.

Note 8 – Income taxes

(a) Corporate income tax

China ACM is organized in the United States. China ACM had no taxable income for United States income tax purposes for the six months ended December 31, 2017 and 2016, respectively. China ACM’s net operating income for the six months ended December 31, 2017, amounted to approximately $0.2 million. As of December 31, 2017, China ACM’s net operating loss carry forward for United States income taxes was approximately $0.2 million. The net operating loss carry forwards are available to reduce future years’ taxable income through year 2037. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management reviews this valuation allowance periodically and makes changes accordingly.

15


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On December 22, 2017, the “Tax Cuts and Jobs Act” (“The Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21%. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. Accordingly, we have remeasured our deferred tax assets on net operating loss carryforwards in the U.S at the lower enacted cooperated tax rate of 21%. However, this remeasurment has no effect on the Company’s income tax expenses as the Company has provided a 100% valuation allowance on its deferred tax assets previously.

Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The change in rate has caused us to remeasure all U.S. deferred income tax assets and liabilities for temporary differences and NOL carryforwards and recorded one time income tax payable to be paid in 8 years. However, this one-time transition tax has no effect on the Company’s income tax expenses as the Company has no undistributed foreign earnings prior to December 31, 2017 which the Company has cumulative foreign losses as of December 31, 2017.

BVI-ACM is incorporated in the British Virgin Islands (“BVI”), where its income tax rate is 0% under current BVI law.

China-ACMH and VIE-Chinese operations

China-ACMH and Xin Ao are governed by the income tax laws of the PRC. Income tax provisions with respect to operations in the PRC are 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 Chinese Enterprise Income Tax (“EIT”) law, the statutory corporate income tax rate applicable to most companies is 25%. In 2009, Xin Ao applied and received an Enterprise High-Tech Certificate. The High-Tech Certificate was required to be renewed every 3 years. The certificate was awarded based on Xin Ao’s involvement in producing high-tech products, its research and development, as well as its technical services. As granted by the State Administration of Taxation of the PRC, Xin Ao is entitled to a reduction in its income tax rate from 25% to 15% until 2018.

The EIT Law imposes a 10% withholding income tax, subject to reduction based on tax treaties where applicable, for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. Such dividends were exempted from PRC tax under the previous income tax law and regulations. The Company intends to permanently reinvest undistributed earnings of its Chinese operations located in the PRC. As a result, there is no deferred tax expense related to withholding tax on the future repatriation of these earnings.

Income (loss) before provision for income taxes consisted of:

    Three months ended December 31,  
    2017     2016  
             
USA and BVI $  (377,946 ) $  (194,777 )
PRC   844,553     (4,957,361 )
  $  466,607   $  (5,152,138 )

    Six months ended December 31,  
    2017     2016  
             
USA and BVI $  (687,029 ) $  (838,301 )
PRC   608,046     (9,634,609 )
  $  (78,983 ) $  (10,472,910 )

16


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Significant components of deferred tax assets were as follows:

    December 31, 2017     June 30, 2017  
Deferred tax assets            
   Allowance for doubtful accounts $  5,513,989   $  5,618,514  
   Impairment loss of long-lived assets   393,673     393,673  
   Net operating loss carryforward in China   172,398     159,080  
   Net operating loss carryforward in the U.S.   50,332     238,650  
   Valuation allowance   (6,130,392 )   (6,409,917 )
Total deferred tax assets $  -   $  -  

As of December 31, 2017 and June 30, 2017, the Company believes it is more likely than not that its PRC operations will be unable to fully utilize its deferred tax assets related to its allowance for doubtful accounts, impairment loss of long-lived assets and the net operating loss carryforward in the PRC. If the Company continues to incur losses in its PRC operations, it is more likely than not that it will not have sufficient income to utilize its deferred tax assets. As of December 31, 2017, the Company has a net operating loss carry forward in the PRC that expires in 2021. As a result, the Company provided a 100% allowance on all deferred tax assets of approximately $6.1 million and $6.2 million related to its operations in the PRC as of December 31, 2017 and June 30, 2017, respectively.

The Company has incurred losses from its United States operations during all periods presented. Accordingly, management provided approximately $50,000 and $0.2 million of valuation allowance against the deferred tax assets related to the Company’s United States operations as of December 31, 2017 and June 30, 2017, respectively, because the deferred tax benefits of the net operating loss carry forward in the United States might not be utilized.

As of December 31 and June 30, 2017, the Company had $113,441 and $103,419 of other business tax payables, respectively.

(b) Uncertain tax positions

There were no uncertain tax positions as of December 31, 2017 and June 30, 2017. Management does not anticipate any potential future adjustments which would result in a material change to its tax positions. For the three and six months ended December 31, 2017 and 2016, the Company did not incur any tax related interest or penalties.

Note 9 – Shareholders’ equity

Restricted Stock Grants

Restricted stock grants are measured based on the market price on the grant date. The Company has granted restricted shares of common stock to the members of the board of directors (the “Board”), senior management and consultants.

Effective August 20, 2016, the Board granted an aggregate of 106,859 shares of restricted common stock, which were issued with a fair value of $308,823 to a consultant under the 2009 Plan. These shares shall vest in two tranches upon achieving certain performance-based milestones. On January 15, 2018, 50,000 shares have been vested on the first tranche and 56,859 shares have been forfeited and cancelled on the second tranche.

Effective August 20, 2016, the Board granted an aggregate of 100,000 shares of restricted common stock, which were issued with a fair value of $289,000 to two employees under the 2009 Plan. These shares vested immediately upon grant.

For the three months ended December 31, 2017 and 2016, the Company did not recognize any compensation expense related to restricted stock grants. For the six months ended December 31, 2017 and 2016, the Company recognized $0 and approximately $0.3 million, respectively, of compensation expense related to restricted stock grants.

17


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Following is a summary of the restricted stock grants:

          Weighted Average     Aggregate  
          Grant Date     Intrinsic  
Restricted stock grants   Shares     Fair Value Per Share     Value  
Unvested as of June 30, 2016   -   $  -   $  -  
Granted   206,859   $  2.89   $  597,823  
Vested   (100,000 ) $  2.89   $  (289,000 )
Unvested as of June 30, 2017   106,859   $  2.89   $  308,823  
Granted   -   $  -   $  -  
Vested   -   $  -   $  -  
Unvested as of December 31, 2017   106,859   $  2.89   $  308,823  

Note 10 – Reserves and dividends

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

The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. As of December 31 and June 30, 2017, the remaining reserve to fulfill the 50% registered capital requirement amounted to approximately $0.9 million and $0.8 million, respectively.

Transfers to statutory reserves must be made before the distribution of any dividends to the Company’s shareholders. The surplus reserve fund is non-distributable other than during liquidation. The surplus reserve fund can however be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

The PRC government restricts distributions of registered capital and the additional investment amounts required by foreign invested enterprises. Approval by the PRC government must be obtained before distributions of these amounts can be returned to the shareholders.

Note 11 – Employee post-retirement benefits

The Company offers a defined contribution plan to eligible employees which consists of two parts: (i) the first part, paid by the Company, is 20% of the employee’s compensation from the prior year and (ii) the second part, paid by the employee, is 8% of the employee’s compensation. The Company’s contributions of employment benefits were approximately $0.1 million and $0.2 million for the three months ended December 31, 2017 and 2016, respectively. The Company’s contributions of employment benefits were approximately $0.3 million and $0.4 million for the six months ended December 31, 2017 and 2016, respectively.

Note 12 – Commitments and contingencies

Lease Commitments

The Company has a lease agreement for a concrete service plant with an unrelated party which will expire on September 30, 2022, with annual payments of approximately $432,000. The Company has a lease agreement for roadway access to the west side entry of the concrete service plant with an unrelated party, which will expire on June 30, 2019, with annual payment of approximately $15,000. The Company has a lease agreement for office space from Mr. Weili He, the Company’s Interim Chief Financial Officer, through October 31, 2018, with annual payments of approximately $25,000.

18


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Operating lease expenses are allocated between the cost of revenue and selling, general, and administrative expenses. Total operating lease expenses were approximately $0.1 million for each of the three months ended December 31, 2017 and 2016. Total operating lease expenses were approximately $0.2 million for each of the six months ended December 31, 2017 and 2016. Future annual lease payments under non-cancelable operating leases with a term of one year or more consist of the following:

Twelve months ending December 31,     Amount  
2018   $  468,000  
2019     439,000  
2020     432,000  
2021     432,000  
2022     324,000  
Total   $  2,095,000  

Legal Contingencies

From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s unaudited condensed consolidated financial position, results of operations and cash flows.

Note 13 - Concentrations of risk

Credit Risk

The Company is exposed to credit risk from its cash in bank and fixed deposits, and accounts receivable, other receivables and advances on equipment purchases.

As of December 31 and June 30, 2017, approximately $1.1 million and $4.4 million were deposited with banks located outside the United States, respectively. These balances are not covered by insurance. While management believes that the credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions.

Accounts receivable, other receivables and advances on inventory purchases are subjected to credit evaluations. An allowance has been made for estimated unrecoverable amounts which have been determined by reference to past default experience and the current economic environment.

Customer Concentration Risk

For the three months ended December 31, 2017, the Company had two customers accounting for approximately 24.4% and 15.5% of total revenue, respectively. For the three months ended December 31, 2016, two customers accounted for 32.9% and 11.6% of total revenue. For the six months ended December 31, 2017, the Company had two customers accounting for approximately 16.8% and 11.9% of total revenue, respectively. For the six months ended December 31, 2016, one customer accounted for 22.0% of total revenue. As of December 31, 2017 and June 30, 2017, no customer accounted for more than 10% of the total balance of accounts receivable.

19


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended December 31, 2017, the Company had two vendors accounting for approximately 18.0% and 10.8% of total purchases. For the three months ended December 31, 2016, the Company had one vendor representing approximately 14.4% of total purchases. For the six months ended December 31, 2017, no vendor accounted for more than 10% of total purchases. For the six months ended December 31, 2016, the Company had one vendor representing approximately 15.8% of total purchases. As of December 31, 2017 and June 30, 2017, no vendor accounted for more than 10% of the total balance of accounts payable.

20


CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 14 – Subsequent events

Restricted Stock Grants

Effective January 19, 2018, the Board granted an aggregate of 56,859 shares of restricted common stock, which were issued with a fair value of $244,494 to one employee under the 2009 Plan. These shares vested immediately upon grant.

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

Overview

We are a holding company whose primary business operations are conducted through our wholly-owned subsidiaries Xin Ao Construction Materials, Inc. (“BVI-ACM”),Beijing Ao Hang Construction Material Technology Co., Ltd. (“China-ACMH”), and our variable interest entity, Beijing XinAo Concrete Group (“Xin Ao”) and its subsidiaries. We engage in the production and supply of advanced construction materials for large-scale commercial, residential, and infrastructure developments, and are primarily focused on producing and supplying a wide range of advanced ready-mix concrete materials for highly technical, large-scale, and environmentally-friendly construction projects that are mainly sold in the People’s Republic of China (“PRC”).

During the six months ended December 31, 2017, we supplied materials and provided services to our projects through one ready-mixed concrete plant in Beijing.

Our management believes that we have the ability to capture a greater share of the Beijing market via expanding relationships and networking, signing new contracts, and continually developing market-leading innovative and eco-friendly ready-mix concrete products.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect our financial performance:

  -

Large-Scale Contractor Relationships. We have contracts with major construction contractors that are constructing key infrastructure, commercial and residential projects. Our sales efforts focus on large-scale projects and large customers which place large recurring orders and present less credit risk to us. For the six months ended December 31, 2017, two customers accounted for approximately 24.4% and 15.5% of our sales. Should we lose any large-scale customers in the future and are unable to obtain additional customers, our revenues will suffer. 

     
-

Experienced Management. Management’s technical knowledge and business relationships give us the ability to secure major infrastructure projects, which provides us with leverage to acquire less sophisticated operators, increase production volumes, and implement quality standards and environmentally sensitive policies. If there were to be any significant turnover in our senior management, it could deplete the institutional knowledge held by our existing senior management team.

   

  -

Innovation Efforts. We strive to produce the most technically and scientifically advanced products for our customers and maintain close relationships with Tsinghua University, Xi’an University of Architecture and Technology and Beijing Dongfang Jianyu Institute of Concrete Science & Technology. We entered technical service contracts with these research institutes to further improve our production and products. If our research and development efforts are not sufficient to adapt to the change in technology in the industry, our products may not compete effectively.

   

  -

Competition. Our competition includes a number of state-owned and large private PRC-based manufacturers and distributors that produce and sell products similar to ours. We compete primarily on the basis of quality, technological innovation and price. Essentially, all of the contracts on which we bid are awarded through a competitive bidding process, with award contracts often being made awarded to the lowest bidder, though other factors such as shorter schedules or prior experience with the customer are often just as important. Within our markets, we compete with many national, regional and local state- owned and private construction entities some of which have achieved greater market penetration or have greater financial and other resources than us. In addition, there are a number of larger national companies in our industry that could potentially establish a presence in our markets and compete with us for contracts. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.

Consolidated Results of Operations

Comparison of the three months ended December 31, 2017 and 2016

The following table sets forth key components of our results of operations for the three months ended December 31, 2017 and 2016, in U.S. dollars:

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    Three months ended  
     December 31,  
                      Percentage  
    2017     2016     Change     Change  
Revenue $  10,255,073   $  14,732,354   $  (4,477,281 )   (30 )%
Cost of revenue   8,354,051     15,648,509     (7,294,458 )   (47 )%
Gross profit (loss)   1,901,022     (916,155 )   2,817,177     (308 )%
Recovery of (provision for) doubtful accounts   856,573     (2,276,981 )   3,133,554     (138 )%
Selling, general and administrative expenses   (1,362,471 )   (1,214,549 )   (147,922 )   12%  
Research and development expenses   (696,276 )   (610,278 )   (85,998 )   14%  
Income (loss) from operations   698,848     (5,017,963 )   5,716,811     (114 )%
Other expense, net   (232,241 )   (134,175 )   (98,066 )   73%  
Income (loss) before provision for income taxes   466,607     (5,152,138 )   5,618,745     (109 )%
Provision for income taxes   -     -     -     -%  
Net income (loss) $  466,607   $  (5,152,138 ) $  5,618,745     (109 )%

Revenue . Our revenue is primarily generated from sales of our advanced ready-mix concrete products. For the three months ended December 31, 2017, we generated revenue of approximately $10.3 million, as compared to approximately $14.7 million during the three months ended December 31, 2016, a decrease of approximately $4.5 million, or 30%. The decrease in revenue was principally due to our customers’ suspension or production limitation policies enforced by certain districts of the local government on November 15, 2017, which prohibits construction jobsites from producing industrial wastes or dusts to aggravate winter haze weather during the winter time. We expect to increase our production back to normal levels on March 15, 2018 after the suspension and production limitation is uplifted from our customers. In addition, the decrease in revenue was offset by an increased selling unit price by 27.7% resulting from the turnaround of the concrete industry. In late 2017, the local government has shut down a number of small and non-qualified concrete manufactures, which led to less competition in the industry and drove up the selling price of the concrete as the supply of concrete was reduced.

Cost of Revenue . Cost of revenue, which consists of direct labor, rentals, depreciation, other overhead and raw materials, including inbound freight charges, was approximately $8.3 million for the three months ended December 31, 2017, as compared to approximately $15.6 million for the three months ended December 31, 2016, a decrease of approximately $7.3 million, or 47%. The decrease in cost of revenue was primarily associated with the decrease of production volume by 52.8% and was offset by the increase of unit production costs of 10.3%, which was mainly caused by the unit price inflation of our raw materials, such as cement, sand, gravel, breeze and additive during the three months ended December 31, 2017, as compared to the same period in 2016.

Gross Profit (Loss) . Gross profit was approximately $1.9 million for the three months ended December 31, 2017, as compared to approximately $0.9 million in gross loss for the three months ended December 31, 2016, a positive change of approximately $2.8 million, which was primarily a result of large increase in unit selling prices at a higher rate than the increase of unit production cost during the three months ended December 31, 2017, as compared to the same period in 2016 as the reasons as discussed above.

Recovery of (Provision for) Doubtful Accounts . We had recovered doubtful accounts of approximately $0.9 million for the three months ended December 31, 2017, as compared to provision for doubtful accounts charges of approximately $2.3 million during the three months ended December 31, 2016, a change of approximately $3.1 million, or 138%. The change was attributable to the fact that less accounts receivable and prepayments became over 180 days past due and less other receivables became over one year past due during the three months ended December 31, 2017, as compared to the same period in 2016, and we have correspondingly adjusted our allowance for doubtful accounts in accordance with our allowance policy.

At the end of each quarter, we conduct an aging analysis of each customer’s arrears to determine whether the allowance for doubtful accounts is adequate. In establishing the allowance for doubtful accounts, we consider historical experience, the economic environment, trends in the construction industry, expected collectability of amounts receivable that are past due, and the expected collectability of overdue receivables. An estimate of doubtful accounts is recorded when collection of the full amount is no longer probable. Known bad debts are written off against the allowance for doubtful accounts when identified. After reviewing individual balances, we provide a provision of 15% for accounts receivable past due more than 180 days but less than one year, 40% for accounts receivable past due from one to two years, 75% for accounts receivable past due beyond two years, 100% for accounts receivable past due beyond three years, plus additional amounts as necessary.

As of December 31, 2017, our accounts and notes receivable aging are as follows:

    Balance     1-90     91-180     181-360     361-720     over 720     Over 1,080  
          days     days     days     days     days     Days  
Accounts and notes receivable $  63,355,822   $  10,585,638,   $  8,791,279   $  14,914,670   $  24,296,856   $  1,197,478   $  3,569,901  
Allowance for doubtful accounts   (16,435,334 )   -     -     (2,237,201 )   (9,718,742 )   (909,490 )   (3,569,901 )
Accounts and notes receivable, net $  46,920,488   $  10,585,638   $  8,791,279   $  12,677,469   $  14,578,114   $  287,988   $  -  

Selling, General and Administrative Expenses . Selling, general and administrative expenses consist of sales commissions, advertising and marketing costs, office rent and expenses, costs associated with staff and support personnel who manage our business activities, and professional fees paid. We incurred selling, general and administrative expenses of approximately $1.4 million for the three months ended December 31, 2017, as compared to approximately $1.2 million for the three months ended December 31, 2016, an increase of approximately $0.2 million. The increase was primarily due to a $0.1 million increase in consulting expense and $0.2 million increase in salaries, repairs, rent and other various G&A expenses, which was partially offset by a $0.1 million decrease in office, utilities and meals and entertainment expenses as compared to the three months ended December 31, 2016.

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Research and Development (“R&D”) Expenses . Research and development expenses were approximately $0.7 million for the three months ended December 31, 2017, as compared to $0.6 million for the same period in 2016.

Income (Loss) from Operations. We had income from operations of approximately $0.7 million and incurred loss of approximately $5.0 million for the three months ended December 31, 2017 and 2016, respectively. This change of approximately $5.7 million from loss to income was primarily due to a $2.8 million increase in gross profit, a $3.1 million decrease in provision for doubtful accounts expenses, and was offset by a $0.2 million increase in selling, general and administrative expenses and research and development expenses.

Other Expense, Net . Our other expense consists of interest income (expense), finance expense and other non-operating income (expense). We had other expense of approximately $0.2 million and $0.1 million during the three months ended December 31, 2017 and 2016, respectively. We earned interest income of approximately $2,000 and $3,500 for the three months ended December 31, 2017 and 2016, respectively. We incurred interest expense of approximately $0.2 million for each of the three months ended December 31, 2017 and 2016. We incurred finance expense of approximately $600 and $97,000 for the three months ended December 31, 2017 and 2016, respectively.

Provision for Income Taxes. We did not incur provision for income taxes for the three months ended December 31, 2017, because we had net operating losses on deferred tax assets for which we previously provided 100% allowance to be utilized during the period. We did not incur provision for income for the three months ended December 31, 2016 as we did not generate any income for tax provision and provided 100% allowance from net operating losses on deferred tax assets.

On December 22, 2017, the “Tax Cuts and Jobs Act” (“The Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21%. As we have a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. Accordingly, we have remeasure our deferred tax assets on net operating loss carryforward in the U.S at the lower enacted cooperated tax rate of 21%. However, this remeasurment has no effect on our income tax expenses as we have provided a 100% valuation allowance on our deferred tax assets previously.

Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The change in rate has caused us to remeasure all U.S. deferred income tax assets and liabilities for temporary differences and NOL carryforwards and recorded one time income tax payable to be paid in 8 years. However, this one-time transition tax has no effect on our income tax expenses as we have no undistributed foreign earnings prior to December 31, 2017 which we have cumulative foreign losses as of December 31, 2017.

Net Income (Loss). We had net profit of approximately $0.5 million for the three months ended December 31, 2017, as compared to a net loss of approximately $5.1 million for the three months ended December 31, 2016, a positive change in the amount of approximately $5.6 million. Such change was the result of the combination of the changes as discussed above.

Comparison of the six months ended December 31, 2017 and 2016

The following table sets forth key components of our results of operations for the six months ended December 31, 2017 and 2016, in US dollars:

    Six months ended  
    December 31,  
                      Percentage  
    2017     2016     Change     Change  
Revenue $  24,023,532   $  22,189,216    $ 1,834,316     8%  
Cost of revenue   20,676,106     24,057,783     (3,381,677 )   (14 )%
Gross profit (loss)   3,347,426     (1,868,567 )   5,215,993     (279 )%
Recovery of (provision for) doubtful accounts   696,833     (4,362,318 )   5,059,151     (116 )%
Selling, general and administrative expenses   (2,774,616 )   (3,077,477 )   302,861     (10 )%
Research and development expenses   (786,934 )   (689,443 )   (97,491 )   14%  
Income (loss) from operations   482,709     (9,997,805 )   10,480,514     (105 )%
Other expense, net   (561,692 )   (475,105 )   (86,587 )   18%  
Loss before provision for income taxes   (78,983 )   (10,472,910 )   10,393,927     (99 )%
Provision for income taxes   -     -     -     -%  
Net loss $  (78,983 ) $  (10,472,910 ) $  10,393,927     (99 )%

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Revenue . Our revenue is primarily generated from sales of our advanced ready-mix concrete products. For the six months ended December 31, 2017, we generated revenue of approximately $24.0 million, as compared to approximately $22.2 million during the six months ended December 31, 2016, an increase of approximately $1.8 million, or 8%. The increase in revenue was principally due to increased selling unit price by 27.7% resulting from the turnaround of the concrete industry. In late 2017, the local government has shut down a number of small and non-qualified concrete manufactures, which led to less competition in the industry and drove up the selling price of the concrete as the supply of concrete was reduced. The increase in revenue was offset by 16.6% decrease of sales volume due to our customers’ suspension or production limitation policy enforced by certain districts of the local government on November 15, 2017, which prohibits construction jobsites from producing industrial wastes or dusts to aggravate winter haze weather during the winter time. We expect to increase our productions back to normal level on March 15, 2018 after the suspension and production limitation is uplifted from our customers.

Cost of Revenue . Cost of revenue, which consists of direct labor, rentals, depreciation, other overhead and raw materials, including inbound freight charges, was approximately $20.7 million for the six months ended December 31, 2017, as compared to approximately $24.1 million for the six months ended December 31, 2016, an decrease of approximately $3.4 million, or 14%. The decrease in cost of revenue was primarily associated with the decrease in our sales volume and offset by the slight increase of unit production costs of 1.3% for the six months ended December 31, 2017, as compared to the same period in 2016.

Gross Profit (Loss) . Gross profit was approximately $3.3 million for the six months ended December 31, 2017, as compared to approximately $1.9 million of gross loss for the six months ended December 31, 2016, a positive change of approximately $5.2 million, which was primarily due to the increase of our selling price of concrete at a higher rate than the slight increase of unit production cost during the six months ended December 31, 2017 as compared to the same period in 2016 as the reasons as discussed above.

Recovery of (provision for) Doubtful Accounts . We recovered doubtful accounts charge of approximately $0.7 million for the six months ended December 31, 2017 as compared to provision of doubtful accounts charge of approximately $4.4 million during the six months ended December 31, 2016, a change of approximately $5.1 million, or 116%. The change was attributable to the fact that less accounts receivable have become over 720 days past due during the six months ended December 31, 2017 as compared to the same period in 2016 and we have correspondingly decreased our provision for doubtful accounts in accordance with our allowance policy. At the end of each quarter, we conduct an aging analysis of each customer’s arrears to determine whether the allowance for doubtful accounts is adequate. In establishing the allowance for doubtful accounts, we consider the historical experience, the economy, trends in the construction industry, expected collectability of amounts receivable that are past due and the expected collectability of overdue receivables. An estimate of doubtful accounts is recorded when collection of the full amount is no longer probable. Known bad debts are written off against allowance for doubtful accounts when identified. After reviewing individual balances, we provide a provision of 15% for accounts receivable past due more than 180 days but less than one year, 40% for accounts receivable past due from one to two years, 75% for accounts receivable past due beyond two years, 100% for accounts receivable past due beyond three years, plus additional amounts as necessary.

Selling, General and Administrative Expenses . Selling, general and administrative expenses consist of sales commissions, advertising and marketing costs, office rent and expenses, costs associated with staff and support personnel who manage our business activities, and professional fees paid to third parties. We incurred selling, general and administrative expenses of approximately $2.8 million for the six months ended December 31, 2017 as compared to approximately $3.1 million for the six months ended December 31, 2016, a decrease of approximately $0.3 million. The decrease was primarily due to a $0.3 million decrease in stock compensation expense, $0.1 million decrease in meals and entertainment expense, $0.3 million decrease in other various G&A expenses, and was offset by a $0.1 million increase in consulting expense and a $0.3 million increase in salaries, repairs and rent as compared to the six months ended December 31, 2016.

Research and Development Expenses . Research and development expenses were approximately $0.8 million for the six months ended December 31, 2017 as compared to $0.7 million for the same period in 2016. We increased its research and development expenditures during this period as we determined to improve its competitive advantage with respect to its products.

Loss from Operations. We incurred a loss from operations of approximately $79,000 and $10.5 million for the six months ended December 31, 2017 and 2016, respectively. Such decrease of approximately $10.4 million in loss from operations was primarily due to a $5.2 million increase in gross profit and a $0.1 million increase in research and development expenses, and was offset by a $5.1 million decrease in provision of doubtful accounts and a $0.3 million decrease in selling, general and administration expenses.

Other Income (Expense), Net . Our other income (expense) consists of interest income (expense), finance expense and other non-operating income (expense). We had other expense of approximately $0.6 million and $0.5 million during the six months ended December 31, 2017 and 2016, respectively. We earned interest income of approximately $4,000 and $12,000 for the six months ended December 31, 2017 and 2016, respectively. Approximately $0.6 million and $0.4 million of interest expense was recorded for the six months ended December 31, 2017 and 2016, and approximately $2,000 and $0.3 million of finance expense was recorded for the six months ended December 31, 2017 and 2016.

25


Provision for Income Taxes. We did not incur provision for income for the six months ended December 31, 2017 and 2016 as we did not generate any income for tax provision and provided 100% allowance from net operating losses on deferred tax assets.

On December 22, 2017, the “Tax Cuts and Jobs Act” (“The Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21%. As we have a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. Accordingly, we have remeasure our deferred tax assets on net operating loss carryforward in the U.S at the lower enacted cooperated tax rate of 21%. However, this remeasurment has no effect on our income tax expenses as we have provided a 100% valuation allowance on our deferred tax assets previously.

Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The change in rate has caused us to remeasure all U.S. deferred income tax assets and liabilities for temporary differences and NOL carryforwards and recorded one time income tax payable to be paid in 8 years. However, this one-time transition tax has no effect on our income tax expenses as we have no undistributed foreign earnings prior to December 31, 2017 which we have cumulative foreign losses as of December 31, 2017.

Net Loss. We incurred net loss of approximately $79,000 for the six months ended December 31, 2017, as compared to a net loss of approximately $10.5 million for the six months ended December 31, 2016, a positive change in the amount of $10.4 million. Such change was the result of the combination of the changes as discussed above.

Liquidity and Capital Resources

As of December 31, 2017, we had cash and cash equivalents of approximately $1.1 million, which was held by subsidiaries located outside the U.S. We would be required to accrue and pay U.S. taxes if we were to repatriate these funds. Any company which is registered in mainland PRC must apply to the State Foreign Exchange Administration for approval in order to remit foreign currency to any foreign country. We currently do not intend to repatriate to the U.S. the cash and short-term investments held by our foreign subsidiaries. However, if we were to repatriate funds to the U.S., we would assess the feasibility and plan any transfer in accordance with foreign exchange regulations, taking into account tax consequences. As we conduct all of our operations in the PRC, the restriction on the conversion of cash and short-term investments held in RMB to other currencies should not affect our liquidity.

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.

We engage in the production of advanced construction materials for large-scale infrastructure, commercial and residential developments. Our business is capital intensive and we are highly leveraged. Debt financing in the form of short-term bank loans, loans from related parties and bank acceptance notes, have been utilized to finance our working capital requirements and capital expenditures. Working capital was approximately $8.6 million as of December 31, 2017, as compared to $7.5 million as of June 30, 2017. As of December 31, 2017, in addition to cash on-hand, we also have other current assets mainly composed of accounts receivable and prepayments.

Although we believe that we can realize our current assets, our ability to repay our current obligations will depend on the future realization of our current assets. Management has considered historical experience, the economic environment, trends in the construction industry, the expected collectability of accounts receivable and the realization of the prepayments on inventory, and provided for an allowance for doubtful accounts as of December 31, 2017. We expect to realize balances net of allowance within the normal operating cycle of a twelve-month period. If we are unable to realize our current assets within the normal twelve-month operating cycle, we may have to consider supplementing our available sources of funds through the following:

  Financial support and credit guarantee commitments from our shareholders.
     
  Other available sources of financing from PRC banks and other financial institutions, given our credit history.

Based on the above considerations, management is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations as they become due. However, there is no assurance that management will be successful in their plans. There are a number of factors that could potentially arise that could undermine the Company’s plans, such as changes in the demand for our products, economic conditions, competitive pricing in the concrete-mix industry, our operating results not continuing to deteriorate and our bank and shareholders being able to provide continued financial support.

26


The following table provides summary information about our net cash flow for financial statement periods presented in this report:

    For the six months ended  
    December 31,  
    2017     2016  
Net cash provided by (used in) operating activities $  2,336,538   $  (855,316 )
Net cash used in investing activities   (44,503 )   (51,552 )
Net cash (used in) provided by financing activities   (1,531,216 )   3,445,864  
Effect of foreign currency translation on cash and cash equivalents   151,897     (116,282 )
Net change in cash and cash equivalents $  912,716   $  2,422,714  

Principal demands for liquidity are for working capital and general corporate purposes.

Operating Activities. Net cash provided by operating activities totaled approximately $2.3 million for the six months ended December 31, 2017, which was attributable to a net loss of $79,000 and net cash provided by operating activities of $2.4 million, including adjustments for $0.6 million of depreciation and $0.7 million of recovery of doubtful accounts. Net cash from changes in operating assets and liabilities resulted in a net cash inflow, which mainly included cash inflow for reduction of accounts receivable of $0.6 million, excluding non-cash offset of $2.0 million, increase of other receivables of $0.3 million, reduction of prepayments and advances of $8.8 million as we have already secured enough materials for production, reduction of prepayments – related party of $1.8 million, addition of $0.5 million in customer deposits, addition of $0.1 million in accrued liabilities and taxes payable, and addition of $0.4 million other payables-shareholders, and was primarily offset by purchase of inventories of $0.1 million, payments of accounts payable $6.1 million, excluding a non-cash offset of $2.0 million, and payments of other payables of $3.8 million.

Investing Activities . Net cash used in investing activities was approximately $45,000 for the six months ended December 31, 2017, which was primarily attributable to the purchase of equipment.

Financing Activities . Net cash used in financing activities totaled approximately $1.5 million for the six months ended December 31, 2017, which was primarily attributable to $16.1 million for the repayments of bank loans and bank guarantees, $14.3 million for the repayments of notes payable, and was offset by $24.6 million new bank loans and bank guarantees, and releases of $4.3 million of restricted cash.

Cash and cash equivalents . As of December 31, 2017, we had cash and cash equivalents of approximately $1.1 million as compared to approximately $0.2 million as of June 30, 2017. We believe that our cash and revenues from ongoing operations, in addition to the close management of our accounts payable and accounts receivable and our ability to obtain loan financing, will be sufficient to meet our liquidity and capital requirements for all of our ongoing operations. However, we may need to raise additional capital if we undertake any plans for expansion.

Loan Facilities . We had a total of approximately $27.1 million and $31.7 million outstanding on loans and credit facilities as of December 31 and June 30, 2017, respectively. See Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this report.

Critical Accounting Policies and Estimates

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

Principles of consolidation

The accompanying unaudited condensed consolidated financial statements include the financial statements of China ACM and its wholly owned subsidiaries, BVI-ACM, China-ACMH, and its variable interest entity Xin Ao (collectively, the “Company”). All significant inter-company transactions and balances have been eliminated in consolidation. In accordance with FASB ASC 810, Consolidation of Variable Interest Entities, variable interest entities, or VIEs, are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. In connection with the adoption of this ASC810, the Company concludes that Xin Ao is a VIE and China ACM is the primary beneficiary. The financial statements of Xin Ao is consolidated with China ACM’s financial statements.

Use of estimates and assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company’s unaudited condensed consolidated financial statements include allowance for doubtful accounts, deferred taxes, and prepayments and advances, stock-based compensation, and fair value and useful lives of property, plant and equipment. Actual results could be materially different from those estimates.

27


Revenue recognition

Revenue is realized or realizable and earned when four criteria are met:

 

Persuasive evidence of an arrangement exists (the Company considers its sales contracts to be pervasive evidence of an arrangement);

  Delivery has occurred;
  The seller’s price to the buyer is fixed or determinable; and
  Collectability of payment is reasonably assured.

The Company sells its concrete products primarily to major local construction companies. Sales agreements are signed with each customer. The agreements list all terms and conditions with the exception of delivery date and quantity, which are evidenced separately in purchase orders. The purchase price of products is fixed in the agreement and customers are not permitted to renegotiate after the contracts have been signed. Each agreement includes a cancellation clause if the Company or the customers breach the contract terms specified in the agreement.

The Company recognizes revenue when title and ownership of the goods are transferred upon shipment to the customer by the Company and collectability of payment is reasonably assured.

The Company includes the shipping and handling fee in both revenue and cost of revenue.

Financial instruments

US GAAP regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The three levels of inputs are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3 inputs to the valuation methodology are unobservable.

Financial instruments included in current assets and current liabilities are reported in the unaudited condensed consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

Accounts receivable

We extend unsecured credit to our customers in the normal course of business, Accounts are considered past due after 30 days. In establishing the required allowance for doubtful accounts, management considers historical experience, the economic environment, trends in the construction industry, and the expected collectability of the overdue receivable. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovering is considered remote. We provide a provision of 15% of the allowance for doubtful accounts for accounts receivable balance that are past due more than 180 days but less than one year, 40% of the allowance for doubtful accounts for accounts receivable past due from one to two years, 75% of the allowance for doubtful accounts for accounts receivable past due beyond two years, 100% of the allowance for doubtful accounts for accounts receivable past due beyond three years, plus additional amount as necessary, which our collection department had determined the collection of the full amount is remote with the approval from our management to provide a 100% provision allowance for doubtful accounts. Our management have continued to evaluate the reasonableness of the valuation allowance policy and update it if necessary.

28


Accounting for long-lived assets

We classify our long-lived assets into: (i) machinery and equipment; (ii) transportation equipment; (iii) office and equipment; and (iv) buildings and improvements.

Long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

If the value of an asset is determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition costs.

There was no impairment charge for the six months ended December 31, 2017, and 2016.

Competitive pricing pressures and changes in interest rates could materially and adversely affect the Company’s estimates of future net cash flows to be generated by long-lived assets, and thus could result in future impairment losses

Income taxes

We account for income taxes in accordance with ASC 740, Income Taxes, which requires us to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forward. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.

ASC 740-10, Accounting for Uncertainty in Income Taxes, defines uncertainty in income taxes and the evaluation of a tax position as 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. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.

United States federal, state and local income tax returns prior to 2015 are not subject to examination by any applicable tax authorities. PRC tax returns filed in 2017 and prior year are subject to examination by any applicable tax authorities.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.

Recently issued accounting pronouncements

Refer to Note 2 of the unaudited condensed consolidated financial statements for a discussion of recent accounting standards and pronouncements.

29


Interest Rate Risk

We are exposed to interest rate risk while we have short-term bank loans outstanding. Although interest rates for our short-term loans are typically fixed for the terms of the loans, the terms are typically twelve months and interest rates are subject to change upon renewal. Interest rates are approximately 4.35% or 5.66% for RMB bank loans with a term of twelve months or less.

Credit Risk

The Company is exposed to credit risk from its cash in bank and fixed deposits, and accounts receivable, other receivables and advances on equipment purchases. The credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions. However, the Company’s cash in bank deposited in the financial institutions in the PRC is not insured. Accounts receivable, other receivables and advances on inventory purchases are subjected to credit evaluations. An allowance has been made for estimated unrecoverable amounts which have been determined by reference to past default experience and the current economic environment.

Foreign Exchange Risk

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. The RMB does not fluctuate with the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. In August 2016, the PRC’s currency dropped by a cumulative 4.4% against the U.S. dollar on hopes of boosting the domestic economy, making PRC exports cheaper and imports into the PRC more expensive by that amount. The effect on trade can be substantial. The RMB started to appreciate in the year 2017 and the trend of appreciation fluctuated during the six months ended December 31, 2017. Compared with the lowest point from RMB versus U.S. dollars in 2016, the RMB has depreciated by 1.7% compared to the exchange rate as of December 31, 2017. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Because substantially all of our earnings and cash assets are denominated in RMB, but our reporting currency is the U.S. dollar, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect our balance sheet and our earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we might issue in the future that will be exchanged into U.S. dollars and earnings from, and the value of, any dollar-denominated investments we make in the future.

Very limited hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Most of the transactions of the Company are settled in RMB and U.S. dollars. In the opinion of the directors, the Company is not exposed to significant foreign currency risk.

Inflation

Inflationary factors, such as increases in the cost of raw materials and overhead costs, could impair our operating results. Inflation has had a material impact on our financial position or results of operations for the six months ended December 31, 2017, a high rate of inflation in the future may have a continued adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures. The term “disclosure controls and procedures,” as defined by regulations of the SEC, means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Securities of Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions to be made regarding required disclosures. Each of our Chief Executive Officer and our Interim Chief Financial Officer has evaluated the design and operating effectiveness of our disclosure controls and procedures as of December 31, 2017. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures were not effective as of December 31, 2017, due to ineffective internal controls over financial reporting that stemmed from the fact that we do not have any full-time accounting personnel who have U.S. GAAP experience.

Despite the material weakness reported above, our management believes that our unaudited condensed consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented because we have retained a consultant who has U.S. GAAP experience to assist us in the preparation of our unaudited condensed consolidated financial statements.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2017, there were no changes in our internal controls over financial reporting identified in connection with the evaluation performed during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

30


PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our financial position, results of operation or liquidity.

Item 1A.  Risk Factors.

This Item is not applicable because we are a smaller reporting company.

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

(a)

Not applicable.

   
(b)

Not applicable.

   
(c)

Not applicable.


Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

ITEM 6. EXHIBITS   

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

31


SIGNATURES

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

Date: February 13, 2018 CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
     
     
  By: /s/ Xianfu Han
    Xianfu Han, Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Weili He
    Weili He, Interim Chief Financial Officer
    (Principal Financial Officer and Principal
    Accounting Officer)

32


EXHIBIT INDEX

Exhibit No. Description of Document Filed Incorporated by Reference To:
    Herewith  
       
2.1 Agreement and Plan of Merger, dated as of August 1, 2013, by and among CADC Delaware and CADC Nevada. Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on August 2, 2013.
3.1 Articles of Incorporation of the Registrant as filed with the Secretary of State of Nevada on July 25, 2013, and made effective on August 1, 2013, as amended to date. Exhibits 3.2 the Registrant’s Current Report on Form 8-K filed on August 2, 2013.
3.2 Bylaws of the registrant. Exhibits 3.2 the Registrant’s Current Report on Form 8-K filed on August 2, 2013.
10.1 Employment Agreement with Weili He dated December 8, 2014 Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K filed on September 25, 2015.
10.2 Employment Agreement with Xianfu Han dated December 8, 2014 Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K filed on September 25, 2015.
10.3 Form of Director Agreement Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K filed on September 23, 2014.
10.9 2009 Equity Incentive Plan, dated as of June 19, 2009, as amended on June 29, 2015 (1) Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 25, 2009.
(2)Appendix B to the Registrant's Definitive Proxy Statement on Schedule 14A filed on May 27, 2015.
31.1 Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. [X]
31.2 Certifications of Interim Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. [X]
32.1 Certifications of Principal Executive Officer and Interim Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. [X]
101.INS XBRL Instance Document    
101.SCH XBRL Taxonomy Extension Schema Document    
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

33


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