NOTES
TO THE 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
only 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- ACMH.
Xin Ao is engaged in the business of concrete
mixing 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. In February
2017 and prior, 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. The Company’s working capital was approximately $7.0 million as
of June 30, 2018, as compared to $6.2 million as of June 30, 2017. As of June 30, 2018, the Company had cash on-hand of approximately
$1.1 million, with remaining current assets mainly composed of accounts receivable 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 June 30, 2018. 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:
|
●
|
Other
available sources of financing from PRC banks and other financial institutions, given
the Company’s credit history.
|
|
●
|
Financial support and credit guarantee commitments from Mr. Xianfu Han, and Mr. Weili He, the Company’s shareholders and officers.
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE 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, additional legal liabilities, or the inability of the Company’s
bank and shareholders to provide continued financial support.
In addition, the Company is involved in
various lawsuits, claims and disputes related to its operations and the personal guarantees of its executives to affiliated entities.
The Company is actively defending these actions and attempting to mitigate the Company’s exposure to any liability in excess
of the current provision of approximately $4.4 million, (see Note 12 in the accompanying notes to the consolidated financial statements).
The ultimate outcome of these pending actions cannot presently be determined, but currently management is of the opinion that any
potential additional liability would not have a material impact on the Company’s consolidated financial position. Nevertheless,
due to the uncertainties with litigation, the PRC legal system, claims and disputes, it is at least reasonably possible that management’s
view of the outcome could change in the near term.
Furthermore, as of June 30, 2018, the Company’s
VIE, Xin Ao, was subject to several civil lawsuits with potential judgments in the amount of approximately $14.2 million (see Note
12 in the accompanying notes to the consolidated financial statements) and the likelihood of the outcome of these lawsuits cannot
presently be determined. These lawsuits involve the Company principally due to the personal guarantees by Mr. Xianfu Han, and Mr.
Weili He, the Company’s shareholders and officers, because they are also the shareholders of Xin Ao. Because Mr. Han and
Mr. He are the shareholders of Xin Ao, the plaintiffs included Xin Ao in the joint complaints. Xin Ao was not involved in most
of the lawsuits but named as a joint defendant in the lawsuits. As a result, Xin Ao might have exposure to any judgements in the
future under PRC laws. Mr. Han and Mr. He have agreed to indemnify the Company for any amounts Xin Ao may have to pay.
Should the outcome of these lawsuits require Xin Ao to pay because the other co-defendants of the lawsuits and Mr. Han. and Mr.
He were unable to liquidate their personal assets or their ownership interest in their privately held companies timely to pay for
the judgements, the Company’s working capital as of June 30, 2018 would be reduced from approximately $7.0 million to a
net working capital deficiency of approximately $7.2 million.
The management of the Company has considered whether there is a going concern issue due to the Company’s
recurring losses from operations, the estimated claims charges and the possible additional exposure for pending actions against
Company which is presently unknown. Based upon the personal indemnifications of Mr. Han and Mr. He and their agreement to provide
the necessary funds to the Company to continue its operations should the need arise, the management of the Company believes that
it has alleviated the going concern issue.
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) and 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.
Principles
of consolidation
The
consolidated financial statements reflect the activities of the following subsidiaries and VIEs. All material intercompany transactions
have been eliminated.
Subsidiaries and VIEs
|
|
Place incorporated
|
|
Ownership
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
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 ACMH 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 ACMH is the primary beneficiary. Accordingly,
the accounts of Xin Ao are consolidated with those of China ACMH.
The
carrying amount of the VIE’s assets and liabilities are as follows:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Current assets
|
|
$
|
50,219,221
|
|
|
$
|
76,607,089
|
|
Property,
plants and equipment
|
|
|
2,748,409
|
|
|
|
3,644,203
|
|
Total assets
|
|
|
52,967,630
|
|
|
|
80,251,292
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
(43,372,069
|
)
|
|
|
(67,885,085
|
)
|
Intercompany
payables*
|
|
|
(7,705,339
|
)
|
|
|
(7,088,094
|
)
|
Total liabilities
|
|
|
(51,077,408
|
)
|
|
|
(74,973,179
|
)
|
Net assets
|
|
$
|
1,890,222
|
|
|
$
|
5,278,113
|
|
*
Payables to China-ACMH and BVI-ACM have been eliminated in 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 consolidated financial statements include the allowance for doubtful accounts,
deferred income taxes, prepayments and advances, stock-based compensation, contingent liabilities 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, the Chinese Renminbi (“RMB”) as their functional currency. In accordance with
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 consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Asset
and liability accounts at June 30, 2018 and 2017 were translated at RMB 6.62 and RMB 6.78 to USD$1.00, respectively. The average
translation rates applied to the consolidated statements of operations and comprehensive loss and cash flows for the years ended
June 30, 2018 and 2017 were RMB 6.51 and RMB 6.81 to USD$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 the years ended
June 30, 2018 and 2017. The effects of foreign currency translation adjustments are included in shareholders’ equity as
a component of accumulated other comprehensive income (loss).
Revenue
recognition
Revenue
is realized or realizable and earned when the following four criteria are met:
|
●
|
Persuasive
evidence of an arrangement exists (the Company considers its sales contracts to be pervasive
evidence of an arrangement);
|
|
●
|
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.
On
July 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers
(ASC 606) using the modified retrospective method for contracts that were not completed as of July 1, 2018. The core principle
underlying revenue recognition is that the Company will recognize revenue to represent the transfer of goods and services to customers
in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the
Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time
or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are
primarily recognized at a point in time.
The
ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that
the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine
the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will
not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue
when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared
to the prior guidance should not result in significant changes in the way the Company records its revenue. Upon adoption,
the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards
and using the five-step model under the new guidance and confirmed that there were no material differences in the pattern of revenue
recognition.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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 June 30, 2018 and 2017, the Company had deposits in excess of federally
insured limits totaling approximately $0.3 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.
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 an allowance
for doubtful accounts provision of 15% for accounts receivable balances that are past due more than 180 days but less than one
year, an allowance for doubtful accounts provision of 40% of for accounts receivable past due from one to two years, an allowance
for doubtful accounts provision of 75% for accounts receivable past due beyond two years, an allowance for doubtful accounts provision
of 100% 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 its valuation allowance
policy and will update it if necessary.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2018 and 2017, the Company determined that no allowance was 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 refundable, VAT tax and other deposits. Management regularly
reviews the aging of receivables and changes in payment trends and records an allowance when management believes collection of
amounts due are at risk. Accounts considered uncollectible are written off against the allowance after exhaustive efforts at collection
are made. The Company provides an allowance for doubtful accounts of 5% for other receivables balances that are aged within one
year, an allowance for doubtful accounts of 50% for other receivables aged from one to two years, and an allowance for doubtful
accounts of 100% 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 provides
a provision of 5% of the allowance for doubtful accounts for prepayments and advances that are aged from six months to one year
and 10% of the allowance for doubtful accounts for prepayments and advances aged beyond one year.
The
Company provided an allowance of approximately $0.3 million and $0 for the year ended June 30, 2018 and 2017, respectively. The
Company wrote off approximately $0 and $0.2 million on unrealizable prepayments for the year ended June 30, 2018 and 2017, respectively.
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 remaining lease terms, as appropriate.
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
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Accounting
for long-lived assets
The
Company classifies its long-lived assets into: (i) transportation equipment; (ii) plants and machinery; (iii) office 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 years ended June 30, 2018 and 2017.
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
asset and liability method of accounting for income taxes. Under the asset 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 has
a greater than 50% 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 2018 and prior years are subject
to examination by any applicable tax authorities.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE 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 (loss) per share in accordance with U.S. GAAP, which requires presentation of basic and diluted earnings
(loss) per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings
(loss) per share 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.
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. When the Company has a loss, no potential dilutive items are included since
they would be antidilutive.
Stock
dividends or stock splits are 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 as of the beginning of each period presented.
Comprehensive
income (loss)
Comprehensive
income (loss) consists of net income (loss) and foreign currency translation adjustments.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 requires
an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services
to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits
the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB
issued ASU No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date
for ASU 2014-09 by one year. For public entities, the guidance in ASU 2014-09 will be effective for annual reporting periods beginning
after December 15, 2018 (including interim reporting periods within those periods), which means it will be effective for the Company’s
fiscal year beginning July 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations
(Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus
agent considerations in the new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying
Performance Obligations and Licensing” (“ASU 2016-10”), which reduces the complexity when applying the guidance
for identifying performance obligations and improves the operability and understandability of the license implementation guidance.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update will require the recognition of a right-of-use
asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with
terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line
basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the
lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive
income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the
interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual
and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized
and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently
evaluating the impact of the adoption of ASU 2016-02 on its unaudited condensed consolidated financial statements and related
disclosures.
In
May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”),
which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar
taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue
from Contracts with Customers” (“ASU 2016-20”), which makes minor corrections or minor improvements to the Codification
that are not expected to have a significant effect on current accounting practice or create a significant administrative cost
to most entities. The amendments are intended to address implementation and provide additional practical expedients to reduce
the cost and complexity of applying the new revenue standard. These amendments have the same effective date as the new revenue
standard. On July 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts
with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of July 1, 2018. Upon
adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous
standards and using the five-step model under the new guidance and confirmed that there were no material differences in the pattern
of revenue recognition.
In
January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The
amendments in this ASU is to clarify the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition
of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments
are effective for public business entities for fiscal years beginning after December 15, 2017, 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, 2018, and interim periods within fiscal years beginning after December 15, 2019. Management plans to adopt this ASU early
after the quarter ending September 2018. The Company does not believe the adoption of this ASU would have a material effect on
the Company’s consolidated financial statements.
In
March 2017, the FASB issued Accounting Standards Update (ASU) No., 2017-09, 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, 2017, 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. Management adopted this ASU during the quarter ending September 2017. The adoption of this
ASU has not had a material effect on the Company’s consolidated financial statements.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE 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. Management plans to adopt this ASU during the quarter ending
September 2018. The adoption of this ASU will not have a material effect on the Company’s 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. Management plans to adopt this ASU during the quarter ending September 2019. The Company does
not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
In
August 2017, the FASB issued ASU No. 2017-15, 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 plans to adopt
this ASU during the quarter ending September 2018. Management does not believe the adoption of this ASU would have a material
effect on the Company’s consolidated financial statements.
In
October 2017, the FASB issued ASU No. 2017-17, 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, 2017, 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, 2017, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted,
including adoption in an interim period. Management plans to adopt this ASU during the quarter ending September 2018. Management
does not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
In
November 2017, the FASB issued ASU No. 2017-18, “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 plans to adopt this ASU during the quarter ending September 2018. 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 consolidated financial statements.
In
February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required
to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive
income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this
Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public
business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities
for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update
should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change
in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption
of this ASU would have a material effect on the Company’s consolidated financial statements.
In
March 2018, the FASB issued ASU 2018-05 - Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118 (“ASU 2018-05”), which amends the FASB Accounting Standards Codification and XBRL Taxonomy based
on the Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017 and Staff Accounting Bulletin
No. 118 (“SAB 118”) that was released by the Securities and Exchange Commission. The Act changes numerous provisions
that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits and may additionally have international
tax consequences for many companies that operate internationally. The Company does not believe the adoption of this ASU would
have a material effect on the Company’s consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07 – Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting, which to include share-based payment transactions for acquiring goods and services from non-employees,
which nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity
instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other
conditions necessary to earn the right to benefit from the instruments have been satisfied. The definition of the term grant date
is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions
of a share based payment award. The amendments are effective for public business entities for fiscal years beginning after December
15, 2018, 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, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted, including adoption in an interim period. Management plans to adopt this ASU during the quarter ending
September 2019. Management does not believe the adoption of this ASU would have a material effect on the Company’s 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 consolidated financial statements.
Note
3 – Accounts and notes receivable, net
Accounts
and notes receivable, net consisted of the following:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Accounts receivable
|
|
$
|
62,610,943
|
|
|
$
|
63,370,426
|
|
Notes receivable
|
|
|
3,292
|
|
|
|
-
|
|
Less: Allowance
for doubtful accounts
|
|
|
(19,291,772
|
)
|
|
|
(15,827,349
|
)
|
Total accounts
and notes receivable, net
|
|
$
|
43,322,463
|
|
|
$
|
47,543,077
|
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Movement
of allowance for doubtful accounts is as follows:
|
|
Year
ended
June 30,
2018
|
|
|
Year
ended
June 30,
2017
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
15,827,349
|
|
|
$
|
11,524,131
|
|
Provision for doubtful accounts
|
|
|
3,145,087
|
|
|
|
3,987,890
|
|
Add: recovery
|
|
|
-
|
|
|
|
524,789
|
|
Exchange rate
effect
|
|
|
319,336
|
|
|
|
(209,461
|
)
|
Ending balance
|
|
$
|
19,291,772
|
|
|
$
|
15,827,349
|
|
During
the years ended June 30, 2018 and 2017, the Company offset approximately $6.9 million and $1.5 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:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Other receivables
|
|
$
|
279,339
|
|
|
$
|
1,653,351
|
|
Other receivable from sale of Asset
Group
|
|
|
-
|
|
|
|
18,867
|
|
Less: Allowance
for doubtful accounts
|
|
|
(208,097
|
)
|
|
|
(1,432,095
|
)
|
Total other receivables,
net
|
|
$
|
71,242
|
|
|
$
|
240,123
|
|
Movement
of allowance for doubtful accounts is as follows:
|
|
Year
ended
June 30,
2018
|
|
|
Year
ended
June 30,
2017
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,432,095
|
|
|
$
|
2,334,672
|
|
Recovery of doubtful accounts
|
|
|
(1,280,566
|
)
|
|
|
(852,275
|
)
|
Exchange rate
effect
|
|
|
56,568
|
|
|
|
(50,302
|
)
|
Ending balance
|
|
$
|
208,097
|
|
|
$
|
1,432,095
|
|
Note
5 – Property, plant and equipment, net
Property,
plants and equipment consist of the following:
|
|
June
30,
2018
|
|
|
June
30,
2017
|
|
Machinery and equipment
|
|
$
|
917,017
|
|
|
$
|
896,326
|
|
Transportation equipment
|
|
|
4,399,356
|
|
|
|
4,249,609
|
|
Office equipment
|
|
|
1,221,704
|
|
|
|
1,168,846
|
|
Buildings and
improvements
|
|
|
458,718
|
|
|
|
308,636
|
|
Total
|
|
|
6,996,795
|
|
|
|
6,623,417
|
|
Less: Accumulated
depreciation and amortization
|
|
|
(4,248,386
|
)
|
|
|
(2,979,214
|
)
|
Plants and equipment,
net
|
|
$
|
2,748,409
|
|
|
$
|
3,644,203
|
|
Depreciation
expense amounted to approximately $1.2 million for each of the years ended June 30, 2018 and 2017, respectively.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
6 – Credit Facilities
Short
term loans - banks:
Outstanding
balances on short-term bank loans consisted of the following:
|
|
June
30,
2018
|
|
|
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.
|
|
$
|
-
|
|
|
$
|
17,700,720
|
|
Loans
from China Construction Bank, each with an interest rate of 5.66% to 6.09% per annum, due between July 2018 and December 2018,
guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Xianfu Han, Ms. Chunying Wang, Mr. Weili He, and Ms. Junkun
Chen.
|
|
|
26,062,665
|
|
|
|
-
|
|
|
|
$
|
26,062,665
|
|
|
$
|
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.
Interest
expense was approximately $1.4 million and $0.8 million for the years ended June 30, 2018 and 2017, respectively.
The
Company has an approximately $31.7 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 $5.6 million as of June 30, 2018. The Company has completed the application for extension as of the report date and
is waiting for the approval.
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 June 30, 2018 and 2017, respectively. The notes are generally charged with a transaction
fee of 0.1% of the note amount. The Company paid $0 and $0.6 million in transactions fees which have been included in bank charges
for the years ended June 30, 2018 and 2017, respectively. The notes are not extended beyond due to their short term nature. The
restricted cash for the notes was approximately $0 and $4.2 million as of June 30, 2018 and 2017, respectively.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
7 – Related party transactions
Rent
expense - related party
The Company has a lease agreement for
office space from Mr. Weili He, the Company’s Interim Chief Financial Officer, through October 31, 2023, with annual payments
of approximately $25,000.
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 June 30, 2018 and 2017, the Company prepaid $3,027,409 and $6,996,400 to Beijing
Lianlv for inventory purchases, respectively.
Due
to Beijing Lianlv being named as a joint defendant in one of the civil lawsuits of the Company, the Company provided a provision
of 5% of an allowance for doubtful accounts for Beijing Lianlv’s prepayment that are aged from six months to one year and
10% for the balance beyond one year. As of June 30, 2018, the Company made an allowance approximately $0.3 million for prepayments
– related party.
Other
receivable - related party
This balance represents a litigation raised from a related party, whose shareholders are Mr. Han and Mr.
He. The creation of the litigation is due to the fact that Xin Ao signed a capital lease agreement on behalf of Bejing Lianlv.
The balance was subsequently offset and indemnified by Mr. Han and Mr. He in September 2018. As of June 30, 2018, other receivable
from Beijing Lianlv was $1,397,042.
Other
payables – shareholders
Mr. Xiaofu Han and Mr. Weili He have advanced
funds to BVI-ACM for working capital purposes. The advances are non-interest bearing, unsecured, and are payable in cash on demand.
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 payable to the two individuals and payment made to
settle a legal claim.
Other
payables - shareholders consisted of the following:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Xianfu Han
|
|
$
|
91,336
|
|
|
$
|
1,402,423
|
|
Weili He
|
|
|
104,428
|
|
|
|
1,523,120
|
|
|
|
$
|
195,763
|
|
|
$
|
2,925,543
|
|
As of June 30, 2018, the balance of other
payables-shareholders is $195,763. As of June 30, 2017, the combined balance of other payables-shareholders includes $1,800,000
of salary payable, $461,766 loans payable to Mr. Han and Mr. He, and $663,777 of payment made by Beijing Lianlv on behalf of the
shareholders to settle a legal claim of the Company.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
8 – Income taxes
China
ACM is organized in the United States. China ACM had no taxable income for United States income tax purposes for the years ended
June 30, 2018 and 2017, respectively. As of June 30, 2018, China ACM’s net operating loss carry forward for United States
income taxes was approximately $0.3 million. The net operating loss carry forwards are available to reduce future years’
taxable income through year 2038. 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.
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 adjusted our deferred tax assets on net operating loss carryforwards in the U.S at the lower enacted
tax rate of 21%. However, this adjustment has no effect on the Company’s income tax expense 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. However, this one-time transition tax had no effect on the Company’s income
tax expense as the Company has no undistributed foreign earnings prior to December 31, 2017 because the Company has had foreign
losses through the quarter ended 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
is 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 was entitled to a reduction in its income tax rate from 25% to 15% until July 21, 2018. The Company has completed
the application for the updated certificate as of the report date and is waiting for the approval.
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 laws 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.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Loss
before provision for income taxes consisted of:
|
|
Years
ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
USA and BVI
|
|
$
|
(2,744,479
|
)
|
|
$
|
(1,352,589
|
)
|
PRC
|
|
|
(4,655,486
|
)
|
|
|
(9,685,531
|
)
|
|
|
$
|
(7,399,965
|
)
|
|
$
|
(11,038,120
|
)
|
Significant
components of deferred tax assets were as follows:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Deferred tax assets
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,972,087
|
|
|
$
|
2,588,917
|
|
Accrued claims charges
|
|
|
611,363
|
|
|
|
190,094
|
|
Impairment loss of long-lived assets
|
|
|
393,673
|
|
|
|
393,673
|
|
Net operating loss carryforward in China
|
|
|
145,641
|
|
|
|
411,436
|
|
Net operating loss carryforward in the U.S.
|
|
|
62,852
|
|
|
|
238,649
|
|
Valuation allowance
|
|
|
(4,185,616
|
)
|
|
|
(3,822,769
|
)
|
Total deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of June 30, 2018 and 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 carryforwards in the PRC.
If the Company is unable to generate taxable income 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 June 30, 2018, the Company has a net operating loss carry forward in the PRC
that expires in 2022. As a result, the Company provided a 100% allowance on all deferred tax assets of approximately $4.1 million
and $3.8 million related to its operations in the PRC as of June 30, 2018 and 2017, respectively.
The
Company has incurred losses from its United States operations during all periods presented. Accordingly, management provided approximately
$0.1 million and $0.2 million of valuation allowance against the deferred tax assets related to the Company’s United States
operations as of June 30, 2018 and 2017, respectively, because the deferred tax benefits of the net operating loss carry forward
in the United States might not be utilized.
The
following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended June 30, 2018
and 2017.
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
U.S. statutory rates
|
|
|
21
|
%
|
|
|
34
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(21
|
%)
|
|
|
(34
|
%)
|
PRC statutory rates
|
|
|
25
|
%
|
|
|
25
|
%
|
Preferential tax treatment
|
|
|
(10
|
%)
|
|
|
(10
|
%)
|
Change in valuation allowance
|
|
|
5
|
%
|
|
|
(27
|
%)
|
Non-deductible PRC expenses
|
|
|
(20
|
%)
|
|
|
12
|
%
|
Effective income tax rates
|
|
|
(0
|
%)
|
|
|
(0
|
%)
|
As
of June 30, 2018 and 2017, the Company had $178,190 and $103,419 of other business taxes payable, respectively.
|
(b)
|
Uncertain
tax positions
|
There
were no uncertain tax positions as of June 30, 2018 and 2017. Management does not anticipate any potential future adjustments
which would result in a material change to its tax positions. For the years ended June 30, 2018 and 2017, the Company did not
incur any tax related interest or penalties.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
In
August 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 were to vest in two tranches upon achieving certain performance-based
milestones. On January 15, 2018, 50,000 shares vested on the first tranche and the remaining 56,859 shares have been forfeited
and cancelled.
In
August 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.
In
January 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. As of June 30, 2018, there was no
shares available under the 2009 Plan.
For the years ended June 30, 2018 and
2017, the Company recognized approximately $0.4 million and $0.3 million compensation expense related to restricted stock grants,
respectively.
Following
is a summary of the restricted stock grants:
Restricted
stock grants
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
|
Aggregate
Intrinsic
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
|
|
Forfeited
|
|
|
(56,859
|
)
|
|
$
|
2.89
|
|
|
$
|
(164,323
|
)
|
Granted
|
|
|
56,859
|
|
|
$
|
4.30
|
|
|
$
|
244,494
|
|
Vested
|
|
|
(106,859
|
)
|
|
$
|
3.64
|
|
|
$
|
(388,994
|
)
|
Unvested as of June 30, 2018
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Common
Stock Issued for Debt Settlement
In
April 2018, the Board granted an aggregate of 985,889 shares of restricted common stock, which were issued on May 4, 2018 with
a fair value of $2,021,073, determined using the closing price of $2.05 on April 3, 2018, to Mr. Xianfu Han, the Chief Executive
Officer (“CEO”) of the Company, to repay the debt the Company owed to the CEO.
In
April 2018, the Board granted an aggregate of 896,766 shares of restricted common stock, which were issued on May 4, 2018 with
a fair value of $1,838,370, determined using the closing price of $2.05 on April 3, 2018, to Mr. Weili He, the Chief Financial
Officer (“CFO”) of the Company’s, to repay the debt the Company owes to the CFO.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Common
Stock Issued for Compensation
In
April 2018, the Board granted an aggregate of 200,000 shares of common stock, which were issued with a fair value of $410,000,
determined using the closing price of $2.05 on April 3, 2018, to two employees under the 2009 Plan.
In
May 2018, the Board granted an aggregate of 218,336 shares of common stock, which were issued with a fair value of $589,507, determined
using the closing price of $2.70 on May 21, 2018, to five employees under the 2009 Plan.
Issuance
of Common Stock
In
May 2018, the Company sold 300,000 shares of common stock at the price of $2.00 per share to certain unrelated third-party individuals.
The issuances were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities
Act of 1933, as amended.
In
June 2018, the Board granted an aggregate of 500,000 shares of common stock with a fair value of $2,825,000, determined using
the closing price of $5.65 on June 28, 2018, to two service providers. These shares were issued in July 2018 and to be amortized
over the service period of one year starting from July 1, 2018.
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 the required 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 June
30, 2018 and 2017, the remaining reserve to fulfill the 50% registered capital requirement amounted to approximately $0.8 million
as of each of the years ended June 30, 2018 and 2017.
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 $0.5 million
and $0.7 million for each of the years ended June 30, 2018 and 2017, respectively.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 $424,000. 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, 2023, with annual payments of approximately $25,000. The Company has a lease agreement for office space in New York
through May 31, 2019, with annual payments of $27,600.
Operating
lease expenses are allocated between the cost of revenue and selling, general, and administrative expenses. Total operating lease
expenses were approximately $0.4 million and $0.2 million for the years ended June 30, 2018 and 2017, respectively. Future annual
lease payments under non-cancelable operating leases with a term of one year or more consist of the following:
Twelve
months ending June 30,
|
|
Amount
|
|
2019
|
|
$
|
489,000
|
|
2020
|
|
|
449,000
|
|
2021
|
|
|
449,000
|
|
2022
|
|
|
449,000
|
|
2023
|
|
|
131,000
|
|
Total
|
|
$
|
1,967,000
|
|
Guarantee
In
April 2018, the Company guaranteed approximately $10.4 million (RMB 69,000,000) that a related-party borrowed from the bank:
Name
of party being guaranteed
|
|
Guaranteed
amount
|
|
|
Guarantee
expiration date
|
Beijing Lianlv (borrower)
|
|
$
|
10,419,000
|
|
|
April 11, 2019
|
The
Company did not, however, accrue any liability in connection with such guarantee because the borrower has been current in its
repayment obligation. As of the date of this report, the Company has evaluated the guarantee and has concluded that the likelihood
of having to make any payments under the guarantee agreement is remote.
Contingencies
From
time to time, the Company is a party to various legal actions. The majority of these claims and proceedings relate to or arise
from, commercial disputes, labor contract complaints and sales contract complaints. The Company accrues costs related to these
matters when they become probable and as a result the amount of loss can be reasonably estimated (See Dispute Matters Arising
in the Ordinary Course of Business for more information). In determining whether a loss from a claim is probable, and if it is
possible to estimate the loss, the Company reviews and evaluates its litigation and regulatory matters on at least a quarterly
basis in light of potentially relevant factual and legal developments. If the Company determines a favorable outcome is probable,
or that the amount of loss cannot be reasonably estimated, the Company does not accrue costs for a potential litigation loss.
In those situations, the Company discloses an estimate of the probable losses or a range of possible losses, if such estimates
can be made as indicated below (See Legal Matters). Currently, except as otherwise noted below, the Company does not believe that
it is possible to estimate the potential losses incurred or a range of reasonably possible losses related to the outstanding claims.
Legal costs incurred in connection with loss contingencies are expensed as incurred.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2018, the Company’s
VIE, Xin Ao, was subject to several civil lawsuits for which the Company estimated that it is more than likely to pay judgments
in the amount of approximately $4.4 million (including interest and penalty of $0.2 million). These amounts are presented in the
accompanying consolidated balance sheets (See Accrued Contingent Liabilities). During the year ended June 30, 2018, additional
estimated claims charges of approximately $2.8 million for remaining claim balances are presented in the accompanying consolidated
statements of operations under the caption “Estimated claims charges”.
As
of the date of this 10-K, the Company’s management does not expect any other material liability from the disposition of
claims from litigation individually, or in the aggregate that would have a material adverse impact on the Company’s consolidated
financial position, results of operations and cash flows.
Due
to the Company’s operations in the PRC and the legal environment in the PRC, it is possible that the Company’s VIE,
Xin Ao could be named as a defendant in the litigation based upon the guarantees of Mr. Han and Mr. He and/or their related parties.
(i)
|
Disputes
Arising in the Ordinary Course of Business
|
As
of June 30, 2018, the Company had approximately $4.4 million in accrued contingent liabilities, net of litigation paid by related
party of approximately $1.3 million, and an additional $2.8 million estimated claims charges for the year ended June 30, 2018.
As of June 30, 2018, further details regarding the type of litigation disputes and accrued costs associated with the claims are
summarized as follows:
|
Dispute
matter
|
|
Claim
amount as of June 30, 2018
|
|
|
Interest
and penalties
|
|
|
Total
claim amount as of June 30, 2018
|
|
|
1) Guarantees
|
|
$
|
2,234,358
|
|
|
$
|
-
|
|
|
$
|
2,234,358
|
|
|
2) Sales
|
|
|
20,922
|
|
|
|
9,324
|
|
|
|
30,246
|
|
|
3) Purchase
|
|
|
1,139,424
|
|
|
|
125,761
|
|
|
|
1,265,185
|
|
|
4) Leases
|
|
|
2,066,269
|
|
|
|
95,987
|
|
|
|
2,162,256
|
|
|
5) Labor
|
|
|
27,003
|
|
|
|
-
|
|
|
|
27,003
|
|
|
6) Others
|
|
|
12,738
|
|
|
|
-
|
|
|
|
12,738
|
|
|
Total
|
|
$
|
5,500,714
|
|
|
$
|
231,072
|
|
|
|
5,731,786
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
(1,300,999
|
)
|
|
Accrued contingent
liabilities
|
|
|
|
|
|
|
|
|
|
$
|
4,430,787
|
|
The
major legal cases are summarized as follows:
In December 2016, the Company
guaranteed approximately $2.2 million (RMB 14,736,000) that a third-party borrowed from bank:
|
Name of party being guaranteed
|
|
Guaranteed amount
|
|
|
Guarantee
expiration date
|
|
Tangshan Long Tang Trading Co., Ltd
|
|
$
|
2,225,136
|
|
|
December 29, 2017
|
This loan has not paid as of
the date of this report. As of the date of this report, the Company has evaluated the guarantee and has concluded that the likelihood
of having to make any payments under the guarantee agreement is probable. The Company accrued approximately $2.2 million contingent
liability in connection with such guarantee.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
(a)
|
On August 10, 2017, Guowang International Finance Leasing Co. Ltd. (“Gouwang”) filed a lawsuit
against Xin Ao in People’s Court of Nankai District, Tianjin Province (“Nankai Court”) to seek compensatory damages in
connection with Xin Ao’s failure to make payments under a financing lease agreement. On October 23, 2017, Nankai Court ruled
against Xin Ao and rendered a judgement to award damages in an amount of RMB 9,168,463 (approximately US$1.4 million) to Guowang
(the “Decision”). On September 26, 2018, Xin Ao made an appeal to the Decision in Tianjin First Intermediate People’s
Court. The appeal was rejected in its entirety with prejudice. As of date of this report, Xin Ao has not made any payment. This
agreement was initially entered into by Xin Ao for the benefit of a related party that is owned by the Company’s major shareholders.
Accordingly, the Company accrued approximately $1.4 million as a liability and a corresponding “Other Receivable –
Related Party” in the same amount. Should the entity not repay the Company, the major shareholders have agreed to indemnify
the Company for any unpaid amounts.
|
|
(b)
|
On
April 30, 2016, China Black Metal Materials Beijing Co., Ltd (“China Black Metal”) filed a lawsuit against Xin
Ao and Beijing Jinshengding Mineral Products Co., Ltd. (“Jinshengding”) in connection with their failure to make
payments under a lease agreement. The court ruled that effective December 28, 2016, the lease agreement was void and Xin Ao
and/or Jinshengding shall make a repayment to China Black Metal which shall include rent due from December 4, 2015 to December
28, 2016 in an amount of RMB 1,572,669, plus interest, expenses for utilities in an amount of RMB 271,579 (approximately US$41,000),
penalty under the agreement of RMB 250,000 (approximately US$38,000), legal fees of RMB 73,238 (approximately US$11,000) and
rent due from December 28, 2016 to June 30, 2018 of RMB 2,264,329 (approximately US$0.3 million). The total amount of compensation
is RMB 4,431,816 (approximately US$0.7 million). As of date of this report, Jinshengding has paid RMB 1,800,000 (approximately
US$0.3 million) out of the total compensation.
|
As of June 30, 2018, the Company’s
VIE, Xin Ao, was subject to several civil lawsuits with potential judgments in the amount of approximately $14.2 million and the
likelihood of the outcome of these lawsuits cannot be determined as of the date of this report. These lawsuits involved with the
Company were mainly due to the personal guarantees by Mr. Xianfu Han, and Mr. Weili He, the Company’s shareholders and officers,
which they are also the shareholders of Xin Ao. Because Mr. Han and Mr. He are the shareholders of Xin Ao, the plaintiffs included
Xin Ao in the joint complaints. Xin Ao was not involved in some of the lawsuits but named as a joint defendant in the lawsuits.
As a result, Xin Ao might have exposure to the pending judgements in the future under PRC laws.
On September 28, 2018, Mr. Han
and Mr. He signed an agreement with the Company to waive the liabilities of the Company and personally become responsible for all
of the pending potential judgements amount from these related civil lawsuits. Both Mr. Han and Mr. He agreed to liquidate their
personal assets or their ownership interest in their privately held companies to pay for any of the pending potential judgements
amounts of approximately $14.2 million.
The type of litigation disputes
with contingencies associated are summarized as follows as of June 30, 2018:
|
Dispute
matter
|
|
Claim
amount as of June 30, 2018
|
|
|
Interest
and penalties
|
|
|
Total
claim amount as of June 30, 2018
|
|
|
1) Guarantees
|
|
$
|
58,126,066
|
|
|
$
|
10,442,814
|
|
|
$
|
68,568,880
|
|
|
2) Purchase
|
|
|
1,643,380
|
|
|
|
41,476
|
|
|
|
1,684,856
|
|
|
3) Leases
|
|
|
928,387
|
|
|
|
-
|
|
|
|
928,387
|
|
|
4) Labor
|
|
|
236,542
|
|
|
|
-
|
|
|
|
236,542
|
|
|
Total
|
|
$
|
60,934,375
|
|
|
$
|
10,484,290
|
|
|
|
71,418,665
|
|
|
Settled claims
|
|
|
|
|
|
|
|
|
|
|
(57,257,305
|
)
|
|
Remaining claims
amount
|
|
|
|
|
|
|
|
|
|
$
|
14,161,360
|
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
major legal cases are summarized as follows:
|
1)
|
Claims
Resulting from Executives’ Personal Guarantee to Affiliated Entities
|
|
(a)
|
Mr. Xianfu Han, the
CEO and director of the Company and a shareholder of Xin Ao, Mr. Weili He, the interim CFO and director of the Company and a
shareholder of Xin Ao, and Xin Ao (the “Defendants”) were parties to a lawsuit filed on June 23, 2017, by China
Cinda Asset Management Co., Ltd. Beijing Branch (“Cinda Beijing Branch”) in the Beijing First
Intermediate People’s Court (the “Beijing Intermediate Court”) to seek compensatory damages, liquidated
damages, costs, and attorney’s fees for default in a certain loan repayment. The loan agreement was entered into by and
between Xin Ao Ecological Construction Materials Co., Ltd. (“Borrower”) and Cinda Beijing Branch dated as of June
23, 2014 with Mr. Han and Mr. He acting as the guarantors for such loans (the “Guarantors”). Mr. Han and Mr. He
together are the controlling shareholders of the Borrower, holding an aggregate of 60% equity interests of the Borrower. The
aggregate amount of the loan was RMB288,506,497 (approximately US$43.6 million) with interest at 12.8% per annum (the
“Loan”). Cinda Beijing Branch alleged that since the Borrower breached its obligation to make the repayment of
the Loan on the maturity date, the Guarantors, along with Xin Ao and those entities owned or controlled by the Guarantors,
should be brought into the lawsuit as co-defendants (the “Defendants”). On July 5, 2017, Beijing Intermediate
Court ruled in favor of Cinda Beijing Branch and issued a judgment for execution to freeze the Defendants’ assets, an
aggregate amount of RMB 304,972,608 (approximately US$46.1 million) which shall be used for the repayment of the Loan, the
liquidated damages, the interest on the Loan, and other costs and expenses undertaken by Cinda Beijing Branch. Following the
mediation, China Cinda Asset Management Co., Ltd. (“Cinda”), two shareholders of Da Tong Lianlv Technologies Co.,
Ltd. (“Datong Lianlv”), Beijing Ao Huan Fund Management Co., Ltd. (“Ao Huan”), and Shou Tai Jin Xin
(Chang Xing) Investment Management Co., Ltd (“Jin Xin”) entered into a certain limited partnership agreement (the
“Partnership Agreement”) on December 22, 2017 to settle the lawsuit. Datong Lianlv is an affiliate of the Company
and Xin Ao. Cinda is the parent company of Cinda Beijing Branch. As provided in the Partnership Agreement, the distributions
of the limited partnership shall be allocated to Cinda first, who made a capital contribution in the form of its rights,
title and interests in and to the repayment of the Loan in an aggregate amount of RMB 322,435,300 (approximately US$48.7
million) (the “Capital Contribution”). Pursuant to the Partnership Agreement, payment shall be made until Cinda
has received an amount equal to the aggregate of its unreturned Capital Contributions and a cumulative distribution equal to
7.5% of all distributions made. Datong Lianlv made its capital contribution in cash in an aggregate amount of RMB
150,000,000 (approximately US$22.5 million) along with its shareholders consent to transfer 99% of Datong Lianlv’s
equity interests to the limited partnership. The PRC legal counsel of Xin Ao indicated that Cinda and Cinda Beijing Branch
orally confirmed that this claim was fully settled in the form of the Partnership Agreement. In February 2018, the Cinda
Beijing Branch filed an enforcement order with the court as the partnership has not been formed at that time. The partnership
was subsequently formed in March 2018. No attempt to collect payment from Xin Ao has been made since the enforcement order was filed in
February 2018. Based upon the legal opinion issued by the Company’s PRC legal counsel, Xin Ao believes a
favorable outcome is probable of the exposure to the pending judgements as the enforcement order has been resolved with the establishment
of the Partnership.
|
|
(b)
|
On
July 11, 2018, Chengde County Rural Cooperatives Credit Union (the “Credit Union”) filed an arbitration demand
(“Arbitration Demand”) with the People’s Court of Shuangqiao District, Chengde, Hebei Province
(“Shuangqiao Court”) against certain entities and individuals (collectively the “Respondent”)
including Xin Ao and Chengde Tianhang Concrete Co Ltd. (“Chengde Tianhang”) and Chengde Kaixuan Real Estate
Development Co. Ltd. (“Chengde Kaixuan”) in connection with Tianhang’s potential default in its loan
repayment. In accordance with the loan agreement, Mr. Weili He and Mr. Xianfu Han together acted as the guarantors for
such loan. In addition, Mr. Han and Mr. He were the controlling shareholders and officers of Xin Ao, which is a
shareholder of Chengde Tianhang. Mr. Han and Mr. He were therefore named as co-respondents in the Arbitration
Demand, where the Bank sought property preservation. Shuangqiao Court, accepting the Arbitration Demand of the Bank,
rendered a decision to seize the bank deposits or equivalents of Respondent in an aggregate amount of RMB 26,000,000
(approximately US$3.9 million).
|
|
(c)
|
On
October 9, 2017, Yong Fan filed a lawsuit against Beijing Lianlv Technology Group Co. Ltd (“Beijing Lianlv”),
Xin Ao, and Mr. Weili He, in connection with Beijing Lianlv’s failure to pay off the principal and interest of RMB2,927,400
(approximately US$0.4 million) under its loan agreement (the “Loan Agreement”). Given that Mr. Weili He acted
as the guarantor for such loan, Mr. He was brought into the lawsuit as one of the co-defendants. Since Mr. He is one
of the controlling shareholders of Xin Ao, Xin Ao was also brought into the lawsuit as one of the co-defendants. The Court
rendered a judgement in May 2018, ruling that
|
|
1)
|
Beijing
Lianlv shall pay Yong Fan the damages in an amount of RMB 2.895 million (approximately US$0.4 million) as principal of the
loan and an amount of RMB32,400 (approximately US$5,000) as interest of the loan (the amount of expected interest was computed
on the basis of the amount of principal with a simple rate of 24%per annum. As of the date of the report, Beijing Lianlv has
not made any payment);
|
|
2)
|
Xin
Ao and Mr. Weili He are entitled to the right of recourse to Beijing Lianlv.
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
(d)
|
On
January 8, 2018, Agricultural Bank of China Tangshan Branch (the “Bank”)
filed an arbitration demand (“Arbitration Demand”) with People’s Court
of Fengrun District, Tangshan, Hebei Province (“Fengrun Court”) against certain
entities and individuals including Xin Ao and Tangshan Xinglong Technology Development
Co. Ltd. (“Xinlong”) in connection with Xinlong’s breach of a loan
agreement. In accordance with the loan agreement, Xin Ao, as the guarantor on such loan
from the Bank, was named as co-respondent to the Arbitration Demand, where the Bank sought
property preservation. Fengrun Court, accepting the Arbitration Demand of the Bank, rendered
a decision to seize the bank deposits or equivalents of respondents in an aggregate amount
of RMB 51,000,000 (approximately USD $7.7 million) against the respondents. Mr. Han and
Mr. He provided personal indemnities for Xin Ao’s potential guarantee liability.
|
|
(a)
|
Beijing
Jinlong Datong Trading Co. Ltd. (“Jinlong”) filed a lawsuit on April 6, 2017 against Beijing Yucheng Jianda Concrete
Co. Ltd. (“Chengyu”) in the People’s Court in Changping District, Beijing (“Changping Court”)
to seek compensatory damages, interest and attorney’s fees (“Chengyu Action”). A Concrete Purchase Agreement
was entered into by and between Chengyu and Lida Jiye Co. Ltd. (“Lida”) on April 30, 2016 for a construction project
(the “Project”). The purchase price of the concrete supplied by Lida was in an aggregate amount of RMB 5,595,093.2
(approximately US$0.8 million), the payment of which was overdue. On April 5, 2017, Lida entered into a debt assignment agreement
with Jinlong to assign its right, title and interests in and to the repayment of such overdue purchase price against Chengyu.
Chengyu was notified on such transaction on April 6, 2017. Xin Ao, as the contractor of the Project and one of the interested
parties whose material interests are directly related to the proceeding, was bought into the lawsuit as a co-defendant. Xin
Ao filed a counterclaim for a jurisdiction challenge, which was denied by the Changping Court. The Concrete Purchase Agreement
provided that “any dispute arising out of the agreement shall be governed by the court located in the place the agreement
was executed”, which was Changping, Beijing. On January 10, 2018, Changping Court rendered a decision in favor of Xin
Ao.
|
|
(b)
|
Nanling
Yirui Materials Supplier Co., Ltd. (Nanling Yirui”) filed a lawsuit against Sihong Jinghong Sheng Concrete Co., Ltd.
(“Sihong”) on October 23, 2017 in the People’s Court in Nanling County, Anhui Province, to seek compensatory
damages, interest and attorney’s fees. A Raw Material Purchase Agreement was entered into by and between Nanling Yirui
and Sihong on April 30, 2017. The purchase price of raw materials supplied by Nanling Yirui was in an aggregate amount of
RMB 3,452,799 (approximately US$0.5 million), the payment of which was overdue. Mr. Xianfu Han and Mr. Weili He are the shareholders
of Sihong. Since Mr. Han and Mr. He are the controlling shareholders of Xin Ao, Xin Ao was also brought into the lawsuit as
a co-defendant. The Court rendered a final judgement in June 2018 in favor of Nanling Yirui. As of the date of the report,
Sihong has not made any payment.
|
On
March 6, 2018, Beijing Chengda Yu Concrete Co., Ltd (“Beijing Chengda”) filed a lawsuit against Xin Ao in connection
with Xin Ao’s breach of a rental lease. Beijing Chengda stated that on January 24, 2014 both parties entered into a lease
agreement (the “Agreement”). A lease addendum was later entered into on February 25, 2014. The Agreement provided
that, effective from July 18, 2013 to April 30, 2018, XinAo shall rent Beijing Chengda’s property, the Concrete Station,
and assume all credits and debts incurred during the term of the lease agreement. Mr. Xianfu Han and Mr. Weili He signed a personal
guaranty agreement with Xin Ao to undertake the liabilities of Xin Ao in the event of its breach on the lease agreement. On March
31, 2017, Beijing Chengda was sued by Beijing Zhongtong Jiang Xin’hang Construction Materials Co., Ltd for an unpaid balance
in an amount of RMB 6,246,059 (approximately US$0.9 million in total) in connection with utilizing the Concrete Station. Beijing
Chengda then brought a lawsuit against Xin Ao for the payment of such unpaid balance together with the legal fees in connection
with the lawsuit. The case is still under review by the court, and no potential judgment amount has been decided.
During
2017, Sihong Jinghong Sheng Concrete Co., Ltd. (“Sihong”) was subject to certain labor disputes. The potential total
amounts of judgment is around RMB 1,701,979 (approximately US$0.3 million). Mr. Xianfu Han and Mr. Weili He are the shareholders
of Sihong. Since Mr. Han and Mr. He are the controlling shareholders of Xin Ao, Xin Ao was also brought into the lawsuit as a
co-defendant. As of the date of the report, Sihong has not made any payment.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements
The Company has employment agreements with
its two executive officers, Mr. Han and Mr. He from July 1, 2017 until June 30, 2020. Each agreement calls for an annual
base salary of $360,000 plus bonus, if any. If employment is terminated for death, disability or for cause, they are entitled to
any unpaid base salary, vacation, bonus for the fiscal year ending on or prior to the date of termination and unreimbursed expenses
through the date of termination. If employment is terminated for no cause, they will be entitled to the benefits previously mentioned
plus two months additional base salary and continued medical benefits in accordance with the Company’s plan subject to the
execution (and non-revocation) of a general release of claims against the Company and its affiliates.
Note
13 - Concentrations of risk
Credit
Risk
The
Company is exposed to credit risk from its cash in bank and fixed deposits, and accounts and notes receivable, other receivables
and advances on equipment purchases.
As
of June 30, 2018, approximately $0.3 million was on deposit with a bank located in the PRC subject to credit risk. In China, the
insurance coverage of each bank is RMB 500,000 (approximately USD $0.1 million). As of June 30, 2018, approximately $0.1 million
was on deposit with a bank located in the US subject to credit risk. In the US, the insurance coverage of each bank is USD $250,000.
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 year ended June 30, 2018, the Company had one customer accounting for approximately 11.1% of total revenue. For the year ended
June 30, 2017, the Company had one customer accounting for approximately 12.0% of total revenue. As of June 30, 2018 and 2017,
no customer accounted for more than 10% of the total balance of accounts receivable. As June 30, 2018 and 2017, the total accounts
receivable for top five customers is approximately $10.2 million and $17.9 million, respectively.
For
the year ended June 30, 2018, the Company had one vendor accounting for approximately 11.4% of total purchases. For the year ended
June 30, 2017, the Company had one vendor representing approximately 19.0% of total purchases. As of June 30, 2018 and 2017, no
vendor accounted for more than 10% of the total balance of accounts payable.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
14 – Subsequent events
Unregistered
Sales of Equity Securities.
On
July 25, 2018, the Company sold 45,977 shares of common stock at the price of $6.525 per share for total proceeds of USD$300,000
to certain third-party individuals. The issuances were completed pursuant to the exemption from registration provided by Regulation
S promulgated under the Securities Act of 1933, as amended.
On
August 23, 2018, the Company sold 50,000 shares of common stock at the price of $3.0 per share for total proceeds of USD$150,000
to certain third-party individual. The issuances were completed pursuant to the exemption from registration provided by Regulation
S promulgated under the Securities Act of 1933, as amended.
Agreement
and Plan of Merger
In
July 2018, the Company proposed to adopt the Agreement and Plan of Merger by and between the Company and China Advanced Construction
Materials Group, Inc., an exempted company incorporated under the laws of the Cayman Islands and a wholly owned subsidiary of
the Company (“CADC Cayman”).
Notice
of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.
|
On
July 5, 2018, the Company received a notification letter from the Nasdaq Listing Qualifications Staff of The NASDAQ Stock Market
LLC (“
Nasdaq
”) indicating that, since the Company has not yet held an annual meeting of stockholders within
twelve months of the end of the Company’s fiscal year ended June 30, 2017, the Company no longer complies with Nasdaq Listing
Rules 5620(a) and 5810(c)(2)(G).
The
notification received has no immediate effect on the listing of the Company’s common stock on Nasdaq. Under the Nasdaq Listing
Rules, the Company has until August 20, 2018 to submit a plan to regain compliance. If the Company’s plan is accepted, Nasdaq
may grant an extension of up to 180 calendar days from June 30, 2018, or December 27, 2018, to regain compliance.
The
Company has submitted a compliance plan on July 31, 2018 to the Staff. On August 8, 2018, the Staff, considering the Company was
proposing to seek shareholder approval to re-domicile the Company in the Cayman Islands, determined to grant the Company an extension
until December 27, 2018 to regain compliance with the Rule by holding an annual meeting of shareholders.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
SCHEDULE 1 - PARENT COMPANY BALANCE SHEETS
AS OF JUNE 30, 2018 AND 2017
(UNAUDITED)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
378,730
|
|
|
$
|
456
|
|
Other receivables
|
|
|
2,300
|
|
|
|
-
|
|
Prepaid expenses
|
|
|
40,458
|
|
|
|
-
|
|
Total current assets
|
|
|
421,488
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Intercompany receivable
|
|
|
18,574,784
|
|
|
|
17,192,991
|
|
Total other assets
|
|
|
18,574,784
|
|
|
|
17,192,991
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
18,996,272
|
|
|
|
17,193,447
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Other payables
|
|
|
2,000
|
|
|
|
-
|
|
Other payables - shareholders
|
|
|
-
|
|
|
|
1,800,000
|
|
Total current liabilities
|
|
|
2,000
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES:
|
|
|
|
|
|
|
|
|
Loss in excess of investment in subsidiaries
|
|
|
9,292,064
|
|
|
|
5,514,463
|
|
Total other liabilities
|
|
|
9,292,064
|
|
|
|
5,514,463
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,294,064
|
|
|
|
7,314,463
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 1,000,000 shares authorized, no share issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value, 74,000,000 shares authorized, 5,488,649 and 2,387,658 shares issued and outstanding as of June 30, 2018 and 2017, respectively
|
|
|
5,489
|
|
|
|
2,388
|
|
Additional paid-in-capital
|
|
|
48,360,368
|
|
|
|
38,662,377
|
|
Deferred stock compensation
|
|
|
(2,825,000
|
)
|
|
|
-
|
|
Deficit
|
|
|
(49,642,916
|
)
|
|
|
(42,242,951
|
)
|
Statutory reserves
|
|
|
6,248,092
|
|
|
|
6,248,092
|
|
Accumulated other comprehensive income
|
|
|
7,556,175
|
|
|
|
7,209,078
|
|
Total shareholders’ equity
|
|
|
9,702,208
|
|
|
|
9,878,984
|
|
Total liabilities and shareholders’ equity
|
|
$
|
18,996,272
|
|
|
$
|
17,193,447
|
|
The accompanying notes are an integral part of Schedule 1.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
SCHEDULE 1 - PARENT COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED JUNE 30, 2018 AND 2017
(UNAUDITED)
|
|
2018
|
|
|
2017
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
$
|
(2,247,106
|
)
|
|
$
|
(889,000
|
)
|
LOSS FROM OPERATIONS
|
|
|
(2,247,106
|
)
|
|
|
(889,000
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE), NET
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13
|
|
|
|
-
|
|
Finance expense
|
|
|
(26
|
)
|
|
|
-
|
|
Equity loss of subsidiaries
|
|
|
(5,152,846
|
)
|
|
|
(10,149,120
|
)
|
TOTAL OTHER EXPENSE, NET
|
|
|
(5,152,859
|
)
|
|
|
(10,149,120
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(7,399,965
|
)
|
|
|
(11,038,120
|
)
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS) -
|
|
|
|
|
|
|
|
|
foreign currency translation income (loss)
|
|
|
347,097
|
|
|
|
(499,361
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
$
|
(7,052,868
|
)
|
|
$
|
(11,537,481
|
)
|
The accompanying notes are an integral part of Schedule 1.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
SCHEDULE 1 - PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2018 AND 2017
(UNAUDITED)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,399,965
|
)
|
|
$
|
(11,038,120
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
1,388,501
|
|
|
|
289,000
|
|
Loss from subsidiaries
|
|
|
5,152,846
|
|
|
|
10,149,120
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(2,300
|
)
|
|
|
-
|
|
Prepaid expenses
|
|
|
(40,458
|
)
|
|
|
-
|
|
Intercompany receivable
|
|
|
(42,350
|
)
|
|
|
|
|
Other payables
|
|
|
2,000
|
|
|
|
-
|
|
Other payables - shareholders
|
|
|
720,000
|
|
|
|
600,000
|
|
Net cash used in operating activities
|
|
|
(221,726
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
600,000
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
600,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
378,274
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of year
|
|
|
456
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
CASH, end of year
|
|
$
|
378,730
|
|
|
$
|
456
|
|
|
|
|
|
|
|
|
|
|
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Common stocks issued to repay shareholders
|
|
$
|
3,859,443
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of Schedule 1.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC.
UNAUDITED CONDENSED NOTES TO SCHEDULE
1
Certain information and footnote
disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have
been condensed or omitted. The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings
of subsidiaries.
Schedule I of Article 5-04 of Regulation
S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above
test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of
net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may
not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of
a third party (i.e., lender, regulatory agency, foreign government, etc.).
The condensed parent company financial
statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries
of China Advanced Construction Materials Group, Inc. exceed 25% of the consolidated net assets of China Advanced Construction Materials
Group, Inc. The ability of our Chinese operating affiliates to pay dividends may be restricted due to the foreign exchange control
policies and availability of cash balances of the Chinese operating subsidiaries. Because a significant portion of our operations
and revenues are conducted and generated in China, a significant portion of our revenues being earned and currency received are
denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may be unable to
distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into
US Dollars.
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.
In August 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 were to vest in two tranches upon achieving certain performance-based milestones. On January 15, 2018, 50,000 shares
vested on the first tranche and the remaining 56,859 shares have been forfeited and cancelled.
In August 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.
In January 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. As of June 30, 2018, there was no shares available under the 2009 Plan.
For the years ended June 30, 2018 and 2017, the Company recognized approximately $0.4 million and $0.3
million compensation expense related to restricted stock grants, respectively.
Following is a summary of the restricted
stock grants:
Restricted stock grants
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
Per Share
|
|
|
Aggregate
Intrinsic
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
|
|
Forfeited
|
|
|
(56,859
|
)
|
|
$
|
2.89
|
|
|
$
|
(164,323
|
)
|
Granted
|
|
|
56,859
|
|
|
$
|
4.30
|
|
|
$
|
244,494
|
|
Vested
|
|
|
(106,859
|
)
|
|
$
|
3.64
|
|
|
$
|
(388,994
|
)
|
Unvested as of June 30, 2018
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Common Stock Issued for Debt Settlement
In April 2018, the Board granted an aggregate
of 985,889 shares of restricted common stock, which were issued on May 4, 2018 with a fair value of $2,021,073, determined using
the closing price of $2.05 on April 3, 2018, to Mr. Xianfu Han, the Chief Executive Officer (“CEO”) of the Company,
to repay the debt the Company owed to the CEO.
In April 2018, the Board granted an aggregate
of 896,766 shares of restricted common stock, which were issued on May 4, 2018 with a fair value of $1,838,370, determined using
the closing price of $2.05 on April 3, 2018, to Mr. Weili He, the Chief Financial Officer (“CFO”) of the Company’s,
to repay the debt the Company owes to the CFO.
Common Stock Issued for Compensation
In April 2018, the Board granted an aggregate
of 200,000 shares of common stock, which were issued with a fair value of $410,000, determined using the closing price of $2.05
on April 3, 2018, to two employees under the 2009 Plan.
In May 2018, the Board granted an aggregate
of 218,336 shares of common stock, which were issued with a fair value of $589,507, determined using the closing price of $2.70
on May 21, 2018, to five employees under the 2009 Plan.
Issuance of Common Stock
In May 2018, the Company sold 300,000 shares
of common stock at the price of $2.00 per share to certain unrelated third-party individuals. The issuances were completed pursuant
to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
In June 2018, the Board granted an aggregate
of 500,000 shares of common stock with a fair value of $2,825,000, determined using the closing price of $5.65 on June 28, 2018,
to two service providers. These shares were issued in July 2018 and to be amortized over the service period of one year starting
from July 1, 2018.