CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 – Organization and description of business
China Advanced Construction Materials
Group, Inc. (“CADC Delaware”) was incorporated in the State of Delaware on February 15, 2007. CADC Delaware, through
its 100% owned subsidiaries and its variable interest entities (“VIEs”), is engaged in producing general ready-mix
concrete,customized mechanical refining concrete, and other concrete-related products that are only sold in the People’s
Republic of China (the “PRC”). CADCDelaware has a wholly-owned subsidiary in the British Virgin Islands, Xin Ao Construction
Materials, Inc. (“BVI-ACM”), which is a holding companywith 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 – Restatement
This financial statements for the quarter
ended December 31, 2017 have been restated to reflect various legal actions arising and coming to management’s attention
after the financial statements for the year ended June 30, 2017 and the six months ended December 31, 2017 were initially filed.
See Note 14 - Commitments and contingencies for the detail disclosures and impact due to those legal actions.
The impact of those restatements on the
December 31, 2017 unaudited financial statements is reflected in the following table:
|
|
December
31, 2017
|
|
Consolidated
Balance Sheets
|
|
Original
|
|
|
Restatement
|
|
|
As
restated
|
|
Other receivable – related party
|
|
$
|
-
|
|
|
$
|
1,421,906
|
|
|
$
|
1,421,906
|
|
Total assets
|
|
|
66,747,341
|
|
|
|
1,421,906
|
|
|
|
68,169,247
|
|
Accrued contingent liabilities
|
|
|
-
|
|
|
|
4,400,710
|
|
|
|
4,400,710
|
|
Total liabilities
|
|
|
54,965,191
|
|
|
|
4,400,710
|
|
|
|
59,365,901
|
|
Accumulated deficit
|
|
|
(41,054,643
|
)
|
|
|
(3,882,705
|
)
|
|
|
(44,937,348
|
)
|
Total Shareholders’ Equity
|
|
|
11,782,150
|
|
|
|
(2,978,804
|
)
|
|
|
8,803,346
|
|
|
|
For
the three months ended
December 31, 2017
|
|
Consolidated
statement of Operations
|
|
Original
|
|
|
Restatement
|
|
|
As
restated
|
|
Estimated claim charges
|
|
$
|
-
|
|
|
$
|
(170,414
|
)
|
|
$
|
(170,414
|
)
|
Total other expenses, net
|
|
|
(232,241
|
)
|
|
|
(170,414
|
)
|
|
|
(402,655
|
)
|
Net income
|
|
|
466,607
|
|
|
|
(170,414
|
)
|
|
|
296,193
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.20
|
|
|
|
(0.08
|
)
|
|
|
0.12
|
|
Diluted
|
|
|
0.20
|
|
|
|
(0.08
|
)
|
|
|
0.12
|
|
|
|
For
the six months ended
December 31, 2017
|
|
Consolidated
statement of Operations
|
|
Original
|
|
|
Restatement
|
|
|
As
restated
|
|
Estimated claim charges
|
|
$
|
-
|
|
|
$
|
(2,615,412
|
)
|
|
$
|
(2,615,412
|
)
|
Total other expenses, net
|
|
|
(561,692
|
)
|
|
|
(2,615,412
|
)
|
|
|
(3,177,104
|
)
|
Net (loss)
|
|
|
(78,983
|
)
|
|
|
(2,615,412
|
)
|
|
|
(2,694,395
|
)
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.03
|
)
|
|
|
(1.10
|
)
|
|
|
(1.13
|
)
|
Diluted
|
|
|
(0.03
|
)
|
|
|
(1.10
|
)
|
|
|
(1.13
|
)
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note 3 – Summary of significant accounting policies
Liquidity
In assessing the Company’s liquidity,
the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s
liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations.
The Company engages in the production
of advanced construction materials for large-scale infrastructure, commercial and residential developments. The Company’s
business is capital intensive and the Company is highly leveraged. Debt financing in the form of short term bank loans, loans
from related parties and bank acceptance notes have been utilized to finance the working capital requirements and the capital
expenditures of the Company. Due to recurring losses, the Company’s working capital was approximately $5.6 million as of
December 31, 2017, as compared to $6.2 million as of June 30, 2017. As of December 31, 2017, the Company had cash on-hand of approximately
$1.1 million, with remaining current assets mainly composed of accounts 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 December 31, 2017.
The Company expects to realize the balance of its current assets net of the allowance for doubtful accounts within the normal
operating cycle of a twelve month period. If the Company is unable to realize its current assets within the normal operating cycle
of a twelve month period, the Company may have to consider supplementing its available sources of funds through the following:
|
●
|
Financial
support and credit guarantee commitments from the Company’s officers/shareholders (See Note 8 - Related party transactions).
|
|
|
|
|
●
|
Other
available sources of financing from PRC banks and other financial institutions, given the Company’s credit history.
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Based on the above considerations, the
Company’s management is of the opinion that it has sufficient funds to meet the Company’s working capital requirements
and debt obligations as they become due. However, there is no assurance that management will be successful in their plans. There
are a number of factors that could potentially arise that could undermine the Company’s plans, such as changes in the demand
for the Company’s products, economic conditions, competitive pricing in the concrete-mix industry, the Company’s operating
results continuing to deteriorate, additional legal liabilities as discussed below, 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 officers to affiliated entities
owned by them. 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 13 in the accompanying notes to the unaudited
condensed 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 December 31, 2017,
the Company’s VIE, Xin Ao, was subject to several civil lawsuits with potential judgments in the amount of approximately
$14.3 million (see Note 13 in the accompanying notes to the unaudited condensed 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 their 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 December 31, 2017 would be reduced from approximately
$5.6 million to a net working capital deficiency of approximately $8.4million.
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 unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These
financial statements include the accounts of all the directly and indirectly owned subsidiaries and VIEs listed below. All intercompany
transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, considered necessary to give a fair presentation have been included. Interim results are not
necessarily indicative of results of a full year. The information in this Form 10-Q/A should be read in conjunction with information
included in the amended annual report for the fiscal year ended June 30, 2017 on Form 10-K/A filed with the SEC on November 21,
2018.
Principles of consolidation
The unaudited condensed consolidated financial
statements reflect the activities of the following subsidiaries and VIEs. All material intercompany transactions have been eliminated.
|
|
|
|
Ownership
|
|
Subsidiaries and VIEs
|
|
Place incorporated
|
|
percentage
|
|
BVI-ACM
|
|
British Virgin Island
|
|
|
100%
|
|
China-ACMH
|
|
Beijing, China
|
|
|
100%
|
|
Xin Ao
|
|
Beijing, China
|
|
|
VIE
|
|
VIEs are generally entities that lack
sufficient equity to finance their activities without additional financial support from other parties or whose equity holders
lack adequate decision-making ability. All VIEs with which the Company is involved must be evaluated to determine the primary
beneficiary of the risks and rewards of the VIEs. The primary beneficiary is required to consolidate the VIEs for financial reporting
purposes.
Management makes ongoing assessments of
whether China ACM is the primary beneficiary of Xin Ao. Based upon a series of contractual arrangements, the Company determined
that Xin Ao is a VIE subject to consolidation and that China ACM is the primary beneficiary. Accordingly, the accounts of Xin
Ao are consolidated with those of China ACM.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The carrying amount of the VIE’s assets and liabilities
are as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
(unaudited and as restated)
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
64,815,278
|
|
|
$
|
76,607,089
|
|
Property, plants and equipment
|
|
|
3,192,948
|
|
|
|
3,644,203
|
|
Total assets
|
|
|
68,008,226
|
|
|
|
80,251,292
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
(57,689,969
|
)
|
|
|
(67,885,085
|
)
|
|
|
|
|
|
|
|
|
|
Intercompany payables*
|
|
|
(7,210,196
|
)
|
|
|
(7,088,094
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
(64,900,165
|
)
|
|
|
(74,973,179
|
)
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
3,108,061
|
|
|
$
|
5,278,113
|
|
* Payables to China-ACMH and BVI-ACM have been eliminated upon
consolidation.
Use of estimates and assumptions
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation
of the Company’s unaudited condensed consolidated financial statements include the allowance for doubtful accounts, deferred
income taxes, prepayments and advances, stock-based compensation, and fair value and useful lives of property, plant and equipment.
Actual results could be materially different from those estimates.
Foreign currency translation
The reporting currency of the Company
is the U.S. dollar. The functional currency of China ACM and BVI-ACM is the U.S. dollar. China-ACMH and Xin Ao use their local
currency Chinese Renminbi (“RMB”) as their functional currency. In accordance with the U.S. GAAP guidance on Foreign
Currency Translation, the Company’s results of operations and cash flows are translated at the average exchange rates during
the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at
historical exchange rates. As a result, amounts related to assets and liabilities reported on the unaudited condensed consolidated
statements of cash flows will not necessarily agree with changes in the corresponding balances on the unaudited condensed consolidated
balance sheets.
Asset and liability accounts at December
31, 2017 and June 30, 2017 were translated at RMB 6.51 and RMB 6.78 to USD$1.00, respectively. The average translation rates applied
to the consolidated statements of operations and comprehensive loss for the three months ended December 31, 2017 and 2016 were
RMB 6.76 and RMB 6.79 to USD$1.00, respectively. The average translation rates applied to the unaudited condensed consolidated
statements of operations and comprehensive loss and cash flows for the six months ended December 31, 2017 and 2016 were RMB 6.64
and RMB 6.75 to 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 each of the three and six months ended December
31, 2017 and 2016. The effects of foreign currency translation adjustments are included in shareholders’ equity as a component
of accumulated other comprehensive income.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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);
|
|
|
|
|
●
|
Delivery
has occurred;
|
|
|
|
|
●
|
The seller’s
price to the buyer is fixed or determinable; and
|
|
|
|
|
●
|
Collectability
of payment is reasonably assured.
|
The Company sells its concrete products
primarily to major local construction companies. Sales agreements are signed with each customer. The agreements list all terms
and conditions with the exception of the delivery date and quantity, which are evidenced separately in purchase orders. The purchase
price of products is fixed in the agreement and customers are not permitted to renegotiate after the contracts have been signed.
The agreements include a cancellation clause if the Company or customers breach the contract terms specified in the agreement.
The Company includes the shipping and handling fee in both
revenue and cost of revenue.
Financial instruments
US GAAP, regarding fair value of financial
instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The three levels of inputs are defined
as follows:
Level 1 inputs to the valuation methodology
are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument;
Level 3 inputs to the valuation methodology
are unobservable.
Financial instruments included in current
assets and current liabilities are reported in the unaudited condensed consolidated balance sheets at face value or cost, which
approximate fair value because of the short period of time between the origination of such instruments and their expected realization
and their current market rates of interest.
Cash and cash equivalents
The Company considers all highly liquid investments with the
original maturity of three months or less at the date of purchase to be cash equivalents.
Restricted cash
As of December 31, 2017 and June 30, 2017,
restricted cash consisted of collateral representing cash deposits for bank guarantees and notes payable.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Accounts receivable
The Company extends unsecured credit to
its customers in the normal course of business. Accounts are considered past due after 30 days. In establishing the required allowance
for doubtful accounts, management considers historical experience, the economic environment, trends in the construction industry
and the expected collectability of the overdue receivables. Management reviews its accounts receivable each reporting period to
determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of
the full amount is no longer probable. Account balances are charged off against the allowance after all means of collection have
been exhausted and the potential for recovering is considered remote. The Company provides 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% of 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.
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 net realizable value and an allowance is made for writing down the inventory to its net realizable value,
if lower than cost. As of December 31, 2017 and June 30, 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, VAT tax refunds 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 recovered approximately $0.3
million and provided allowance of approximately $0.1 million on unrealizable prepayments for the three months ended December 31,
2017 and 2016, respectively. The Company provided allowance of approximately $0.5 million and $0.2 million on unrealizable prepayments
for the six months ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and June 30, 2017, the Company provided
approximately $0.5 million and $0, respectively, bad debt allowance for prepayments and advances.
Property, plant and equipment
Property, plant and equipment are stated
at cost. Expenditures for maintenance and repairs are charged to operations as incurred while additions, renewals and improvements
are capitalized. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using
the straight-line method with a 5% residual value. Leasehold improvements are amortized over the lesser of estimated useful lives
or remaining lease terms, as appropriate.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The estimated useful lives of assets are as follows:
|
|
Useful life
|
Transportation equipment
|
|
7-10 years
|
Plant and machinery
|
|
10 years
|
Office equipment
|
|
5 years
|
Buildings and improvements
|
|
3-20 years
|
Accounting for long-lived assets
The Company classifies its long-lived
assets into: (i) machinery and equipment; (ii) transportation equipment; (iii) office equipment; and (iv) buildings and improvements.
Long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets
may not be fully recoverable. It is possible that these assets could become impaired as a result of technological or other industry
changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of
the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the
extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including
discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
If the value of an asset is determined
to be impaired, the impairment to be recognized is measured in the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition
costs.
There were no impairment charges for the
three and six months ended December 31, 2017 and 2016.
Competitive pricing pressures and changes
in interest rates could materially and adversely affect the Company’s estimates of future net cash flows to be generated
by the long-lived assets, and thus could result in future impairment losses.
Stock-based compensation
The Company records stock-based compensation
expense at fair value on the grant date and recognizes the expense over the employee’s requisite service period. The Company’s
expected volatility assumption is based on the historical volatility of Company’s stock. The expected life assumption is
primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for
the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend
yield is based on the Company’s current and expected dividend policy.
Income taxes
The Company accounts for income taxes
in accordance with ASC 740, “Income Taxes,” which requires the Company to use the 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 is 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 for calendar years ended December 31, 2015 to 2017 are subject to examination
by any applicable tax authorities.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Value Added Tax
Enterprises or individuals who sell commodities,
engage in repairs 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 excludes potential
dilution and is computed by dividing the income (loss) available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities
or other contracts, such as warrants, options, restricted stock based grants and convertible preferred stock, to issue common
stock were exercised and converted into common stock. Common stock equivalents having an anti-dilutive effect on earnings per
share are excluded from the calculation of diluted earnings per share.
Stock dividends or stock splits are to
be accounted for retroactively if the stock dividends or stock splits occur during the period, or retroactively if the stock dividends
or stock splits occur after the end of the period but before the release of the financial statements, by reflecting their effective
as of the beginning of each period presented.
Dilution is computed by applying the treasury
stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time
of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during
the period.
Comprehensive income (loss)
Comprehensive income (loss) consists of
net income (loss) and foreign currency translation adjustments.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single,
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current
revenue recognition guidance. The new guidance will require revenue to be recognized when promised goods or services are transferred
to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods
or services. This accounting standard was originally effective for reporting periods beginning after December 15, 2017, with
early adoption permitted for reporting periods beginning after December 15, 2016. ASU No. 2015-14 simply defers the effective
date of ASU No. 2014-09 to reporting periods beginning after December 15, 2017 for public entities and beginning after December
15, 2018 for all other entities, with early adoption permitted for reporting periods after December 15, 2016. The adoption of
ASU 2014-09 on July 1, 2018 has not had a material effect on the Company’s unaudited condensed 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 March 2016, the FASB issued Accounting
Standards Update (ASU) No., 2016-09, Compensation-Stock Options (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The areas for simplification in this amendment include the income tax consequences, classification of awards as either equity
or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this update
are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other
entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual
periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity
early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that
includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The adoption
of this ASU has not had a material effect on the Company’s unaudited condensed consolidated financial statements.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
In June 2016, the FASB issued ASU No.
2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured
at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its unaudited
condensed consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No.
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity
in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide
guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of
Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective
Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds from the
Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned;
(6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization
Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective
for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition
method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments
for those issues would be applied prospectively as of the earliest date practicable. Management does not believe the adoption
of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.
In October 2016, the FASB issued ASU No.
2016-17, Consolidation (Topic 810): Interests held through related parties that are under common control. The amendments in this
ASU require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary,
to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE
held through related parties, including related parties that are under common control with the reporting entity. The amendments
are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December
15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption
in an interim period. Management does not believe the adoption of this ASU would have a material effect on the Company’s
unaudited condensed consolidated financial statements.
In November 2016, the FASB issued ASU
No. 2016-18, “Statement of Cash Flows: Restricted Cash”. The amendments address diversity in practice that exists
in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendment is effective
for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Management believes that the adoption of this ASU on the Company’s statement of cash flows will increase cash and cash equivalents
by the amount of the restricted cash on the Company’s unaudited condensed consolidated financial statements.
In 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, 2016, including interim periods within those fiscal years. For all other entities, the
amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years
beginning after December 15, 2019. Management plans to adopt this ASU early after the quarter ending December 2017. The Company
does not believe that the adoption of this ASU would have a material effect on the Company’s unaudited condensed 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.
In May 2017, the FASB issued ASU 2017-09,
Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides
guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required
to apply modification accounting under ASC 718. For all entities, this ASU is effective for annual reporting periods, including
interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including
adoption in any interim period. The adoption of this ASU would not have a material effect on the Company’s unaudited condensed
consolidated financial statements.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The
amendments in Part I of the Update change the reclassification analysis of certain equity-lined financial instruments (or embedded
features) with down round features. The amendments in Part II of this Update re-characterize the indefinite deferral of certain
provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. For public business
entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years
beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is
permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in
Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company
does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated
financial statements.
In 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
unaudited condensed consolidated financial statements.
In September 2017, the FASB issued ASU
2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic
842). This Accounting Standards Update adds SEC paragraphs pursuant to an SEC Staff Announcement made at the July 20, 2017 Emerging
Issues Task Force meeting. The Company does not believe the adoption of this ASU would have a material effect on the Company’s
unaudited condensed consolidated financial statements.
In November 2017, the FASB issued ASU
2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts
with Customers (Topic 606). This Accounting Standards Update supersedes various SEC paragraphs and amends an SEC paragraphs pursuant
to the issuance of Staff Accounting Bulletin No. 116 and SEC Release No.33-10403. The Company does not believe the adoption of
this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.
In July 2018, the FASB issued ASU No.
2018-11, Leases (Topic 842): Targeted Improvements. The amendments is to assisting stakeholders with implementation questions
and issues as organizations prepare to adopt the new leases standard affect the amendments in ASU 2016-02. Many stakeholders inquired
about the following two requirements in the new leases standard: 1) Comparative reporting requirements for initial adoption and
2) For lessors only, eparating lease and nonlease components in a contract and allocating the consideration in the contract to
the separate components. ASU 2018-11 is effective for annual and interim reporting periods beginning after December 15, 2018.
Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2018-11 on its unaudited condensed
consolidated financial statements and related disclosures.
The Company does not believe other recently
issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited
condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been
reclassified to conform to the current year presentation. These reclassifications have no effect on the accompanying unaudited
condensed consolidated financial statements.
Note 4 – Accounts receivable, net
Accounts receivable, net consisted of the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
63,355,822
|
|
|
$
|
63,370,426
|
|
Less: Allowance for doubtful accounts
|
|
|
(16,435,334
|
)
|
|
|
(15,827,349
|
)
|
Total accounts receivable, net
|
|
$
|
46,920,488
|
|
|
$
|
47,543,077
|
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Movement of allowance for doubtful accounts is as follows:
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
15,827,349
|
|
|
$
|
11,524,131
|
|
(Recovery of) provision for doubtful accounts
|
|
|
(54,203
|
)
|
|
|
3,987,890
|
|
Add: recovery
|
|
|
-
|
|
|
|
524,789
|
|
Exchange rate effect
|
|
|
662,188
|
|
|
|
(209,461
|
)
|
Ending balance
|
|
$
|
16,435,334
|
|
|
$
|
15,827,349
|
|
During the six months ended December 31,
2017 and 2016, the Company offset approximately $2.0 million and $0.9 million of accounts receivable and accounts payable pursuant
to certain three-party settlement agreements, respectively.
Note 5 – Other receivables, net
Other receivables
Other receivables consisted of the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Other receivables
|
|
$
|
1,440,619
|
|
|
$
|
1,653,351
|
|
Other receivable from sale of Asset Group
|
|
|
-
|
|
|
|
18,867
|
|
Less: Allowance for doubtful accounts
|
|
|
(312,766
|
)
|
|
|
(1,432,095
|
)
|
Total other receivables, net
|
|
$
|
1,127,853
|
|
|
$
|
240,123
|
|
$0.92 million of other receivable was
from Beijing Jinshengding Mineral Products Co., Ltd., a supplier to the Company. The Company collected the loan advance in January
2018.
Movement of allowance for doubtful accounts is as follows:
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
1,432,095
|
|
|
$
|
2,334,672
|
|
Recovery of doubtful accounts
|
|
|
(1,155,679
|
)
|
|
|
(852,275
|
)
|
Less: write-off
|
|
|
-
|
|
|
|
-
|
|
Exchange rate effect
|
|
|
36,350
|
|
|
|
(50,302
|
)
|
Ending balance
|
|
$
|
312,766
|
|
|
$
|
1,432,095
|
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note 6 – Property, plant and equipment, net
Property, plants and equipment consist of the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Machinery and equipment
|
|
$
|
929,279
|
|
|
$
|
896,326
|
|
Transportation equipment
|
|
|
4,427,703
|
|
|
|
4,249,609
|
|
Office equipment
|
|
|
1,217,830
|
|
|
|
1,168,846
|
|
Buildings and improvements
|
|
|
321,570
|
|
|
|
308,636
|
|
Construction in progress
|
|
|
33,120
|
|
|
|
-
|
|
Total
|
|
|
6,929,502
|
|
|
|
6,623,417
|
|
Less: Accumulated depreciation and amortization
|
|
|
(3,703,434
|
)
|
|
|
(2,979,214
|
)
|
Plants and equipment, net
|
|
$
|
3,226,068
|
|
|
|
3,644,203
|
|
Depreciation and amortization expense
amounted to approximately $0.3 million for each of the three months ended December 31, 2017 and 2016. Depreciation and amortization
expense amounted to approximately $0.6 million for each of the six months ended December 31, 2017 and 2016.
Note 7 – Credit Facilities
Short term loans - banks:
Outstanding balances on short-term bank loans consisted of
the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Loans from China Construction Bank,
with an interest rate of 4.35% per annum, due March 2018, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr.
Xianfu Han, Ms. Chunying Wang, Mr. Weili He and Ms. Junkun Chen.
|
|
|
2,305,316
|
|
|
|
17,700,720
|
|
|
|
|
|
|
|
|
|
|
Loans from China Construction Bank, each with an
interest rate of 5.66% per annum, due between January 2018 and August 2018, guaranteed by Beijing Jinshengding Mineral Products
Co., LTD, Mr. Xianfu Han, Ms. Chunying Wang, Mr. Weili He, and Ms. Junkun Chen.
|
|
|
19,257,073
|
(1)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loans from China Construction
Bank, each with an interest rate of 5.66% per annum, due between September 2018 and October 2018, guaranteed by Beijing Jinshengding
Mineral Products Co., Ltd , Mr. Xianfu Han, Ms. Chunying Wang, Mr. Weili He, and Ms. Junkun Chen.
|
|
|
5,532,759
|
(1)
|
|
|
-
|
|
|
|
$
|
27,095,148
|
|
|
$
|
17,700,720
|
|
|
(1)
|
As of the
date of this report, these loan balances are past due and in default due to nonpayment.
The Company is in the process of negotiating a renewal of the loans with the bank and
the Company did not receive any demand notice from the bank to pay off the loans immediately.
|
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 8 – Related party transactions.
The Company has an approximately $32.3
million (RMB210, 000,000) credit facility from China Construction Bank (the “CCB Credit Facility”), which was extended
in August 2017 through August 2018. The Company’s availability under the CCB Credit Facility was $5.2 million as of December
31, 2017.
In January 2018, one short-term bank loan
totaling $3,611,662 (RMB 23,500,000) was due and the Company renewed the loan with a new short-term bank loan totaling $3,596,293
(RMB 23,400,000), which matures on July 16, 2018. Interest expense was approximately $0.2 million for each of the three months
ended December 31, 2017 and 2016. Interest expense was approximately $0.6 million and $0.4 million for the six months ended December
31, 2017 and 2016, respectively.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Notes payable:
Bank notes are issued under the CCB Credit
Facility for inventory purchases. The notes payable are guaranteed by Beijing Jinshengding Mineral Products Co., LTD., Xianfu
Han and his spouse, Chunying Wang, and Weili He and his spouse, Junkun Chen, and amounted to approximately $0 and $14.0 million
as of December 31, 2017 and June 30, 2017, respectively. The notes are generally charged with a transaction fee of 0.1% of the
note amount. The restricted cash for the notes was approximately $0 and $4.2 million as of December 31, 2017 and June 30, 2017,
respectively.
Note 8 – 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 $24,000.
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 December 31, 2017 and June 30, 2017, the Company prepaid $5,457,469 and $6,996,400 to Beijing Lianlv for inventory
purchases, respectively.
Other receivable - related party
This balance represents litigation against
Xin Ao who entered into a capital lease agreement on behalf of Beijing Lianlv, an entity whose shareholders are Mr. Han and Mr.
He. The balance was subsequently indemnified by Mr. Han and Mr. He in September 2018. As of December 31, 2017, other receivable-related
party is from Beijing Lianlv for $1,421,906.
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 7). The
other payables-shareholders balance also includes the Company’s salary payable to the two individuals and payment made on
XinAo’s behalf to a legal claim.
Other payables – shareholders consisted of the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
(unaudited and as restated)
|
|
|
|
|
Xianfu Han
|
|
$
|
1,250,534
|
|
|
$
|
1,402,423
|
|
Weili He
|
|
|
1,384,758
|
|
|
|
1,523,120
|
|
|
|
$
|
2,635,292
|
|
|
$
|
2,925,543
|
|
As of December 31, 2017, the balance of
other payables-shareholders includes $2,160,000 salary payable and $475,291 of loans payable. 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 a payment made by Beijing Lianlv on behalf of the shareholders to settle a legal claim of the Company.
Note 9 – Income taxes
(a) Corporate income tax
China ACM is organized in the United States.
China ACM had no taxable income for United States income tax purposes for the six months ended December 31, 2017 and 2016, respectively.
China ACM’s net operating income for the six months ended December 31, 2017, amounted to approximately $0.2 million. As
of December 31, 2017, China ACM’s net operating loss carry forwards for United States income taxes was approximately $0.2
million. The net operating loss carry forwards are available to reduce future years’ taxable income through year 2037. Management
believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history
and continued losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax
asset to reduce the asset to zero. Management reviews this valuation allowance periodically and makes changes accordingly.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
On December 22, 2017, the “Tax Cuts
and Jobs Act” (“The Act”) was enacted. Under the provisions of the Act, the U.S. corporate tax rate decreased
from 35% to 21%. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting
in a U.S. statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal
years. Accordingly, we have remeasured our deferred tax assets on net operating loss carryforwards in the U.S at the lower enacted
cooperated tax rate of 21%. However, this remeasurment had no effect on the Company’s income tax expense as the Company
has provided a 100% valuation allowance on its net 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 cumulative foreign losses as of December
31, 2017.
BVI-ACM is incorporated in the British
Virgin Islands (“BVI”), where its income tax rate is 0% under current BVI law.
China-ACMH and VIE-Chinese operations
China-ACMH and Xin Ao are governed by
the income tax laws of the PRC. Income tax provisions with respect to operations in the PRC are calculated at the applicable tax
rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under
the Chinese Enterprise Income Tax (“EIT”) law, the statutory corporate income tax rate applicable to most companies
is 25%. In 2009, Xin Ao applied and received an Enterprise High-Tech Certificate. The High-Tech Certificate 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 is entitled
to a reduction in its income tax rate from 25% to 15% until July 21, 2018. The Company already completed the application for the
updated certificate as of the report date and will obtain the formal documentation recently.
The EIT Law imposes a 10% withholding
income tax, subject to reduction based on tax treaties where applicable, for dividends distributed by a foreign invested enterprise
to its immediate holding company outside China. Such dividends were exempted from PRC tax under the previous income tax law and
regulations. The Company intends to permanently reinvest undistributed earnings of its Chinese operations located in the PRC.
As a result, there is no deferred tax expense related to withholding tax on the future repatriation of these earnings.
Income (loss) before provision for income taxes consisted of:
|
|
Three months ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited and as restated)
|
|
|
(unaudited)
|
|
USA and BVI
|
|
$
|
(377,947
|
)
|
|
$
|
(194,777
|
)
|
PRC
|
|
|
674,140
|
|
|
|
(4,957,361
|
)
|
|
|
$
|
296,193
|
|
|
$
|
(5,152,138
|
)
|
|
|
Six months ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited and as restated)
|
|
|
(unaudited)
|
|
USA and BVI
|
|
$
|
(687,030
|
)
|
|
$
|
(838,301
|
)
|
PRC
|
|
|
(2,007,365
|
)
|
|
|
(9,634,609
|
)
|
|
|
$
|
(2,694,395
|
)
|
|
$
|
(10,472,910
|
)
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Significant components of deferred tax assets were as follows:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
(unaudited and as restated)
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,590,748
|
|
|
$
|
2,588,917
|
|
Accrued claims charges
|
|
|
582,406
|
|
|
|
190,094
|
|
Impairment loss of long-lived assets
|
|
|
393,673
|
|
|
|
393,673
|
|
Net operating loss carryforward in China
|
|
|
145,604
|
|
|
|
411,436
|
|
Net operating loss carryforward in the U.S.
|
|
|
33,742
|
|
|
|
238,649
|
|
Valuation allowance
|
|
|
(3,746,173
|
)
|
|
|
(3,822,769
|
)
|
Total deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2017 and June 30, 2017,
the Company believes it is more likely than not that its PRC operations will be unable to fully utilize its net 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 continues to incur losses in its PRC operations, it is more likely than not that it will not have sufficient
income to utilize its deferred tax assets. As of December 31, 2017, the Company has net operating loss carry forwards in the PRC
that expire in 2021. As a result, the Company provided a 100% valuation allowance on it net deferred tax assets of approximately
$3.7 million and $3.6 million related to its operations in the PRC as of December 31, 2017 and June 30, 2017, respectively. The
valuation allowance has been (decreased) increased by $(141,470) and $771,499 for the three months ended December 31, 2017 and
2016, respectively. The valuation allowance has been (decreased) increased by $(76,596) and $1,500,980 for the six months ended
December 31, 2017 and 2016, respectively.
The Company has incurred losses from its
United States operations during all periods presented. Accordingly, management provided approximately $34,000 and $0.2 million
valuation allowance against the deferred tax assets related to the Company’s United States operations as of December 31,
2017 and June 30, 2017, respectively, because the deferred tax benefits of the net operating loss carry forward in the United
States might not be utilized.
As of December 31, 2017 and June 30, 2017,
the Company had $113,441 and $103,419 of other business tax (principally VAT) payables, respectively.
(b) Uncertain tax positions
There were no uncertain tax positions
as of December 31, 2017 and June 30, 2017. Management does not anticipate any potential future adjustments which would result
in a material change to its tax positions. For the three and six months ended December 31, 2017 and 2016, the Company did not
incur any tax related interest or penalties.
Note 10 – Shareholders’ equity
Restricted Stock Grants
Restricted stock grants are measured based
on the market price on the grant date. The Company has granted restricted shares of common stock to the members of the board of
directors (the “Board”), senior management and consultants.
Effective August 20, 2016, the Board granted
an aggregate of 106,859 shares of restricted common stock, which was issued with a fair value of $308,823 to a consultant under
the 2009 Plan. These shares shall vest in two tranches upon achieving certain performance-based milestones. On January 15, 2018,
50,000 shares have vested on the first tranche and 56,859 shares have been forfeited and cancelled on the second tranche.
Effective August 20, 2016, the Board granted
an aggregate of 100,000 shares of restricted common stock, which was issued with a fair value of $289,000 to two employees under
the 2009 Plan. These shares vested immediately upon grant. As of December 31, 2017, there were 56,859 shares available under the
2009 Plan.
For the three months ended December 31,
2017 and 2016, the Company did not recognize any compensation expense related to restricted stock grants. For the six months ended
December 31, 2017 and 2016, the Company recognized $0 and approximately $0.3 million, respectively, of compensation expense related
to restricted stock grants.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Vested
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Unvested as of December 31, 2017 (unaudited)
|
|
|
106,859
|
|
|
$
|
2.89
|
|
|
$
|
308,823
|
|
Note 11 – Reserves and dividends
The laws and regulations of the PRC require
that before a foreign invested enterprise can legally distribute profits, it must first satisfy all its tax liabilities, provide
for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, after
setting aside statutory reserves. Statutory reserves include the surplus reserve fund and the common welfare fund.
The Company is required to transfer 10%
of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the Company’s registered capital. As of December 31, 2017 and June 30, 2017, the
remaining reserve to fulfill the 50% registered capital requirement amounted to approximately $0.9 million and $0.8 million, respectively.
Transfers to statutory reserves must be
made before the distribution of any dividends to the Company’s shareholders. The surplus reserve fund is non-distributable
other than during liquidation. The surplus reserve fund can however be used to fund previous years’ losses, if any, and
may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion
to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered capital.
The PRC government restricts distributions
of registered capital and the additional investment amounts required by foreign invested enterprises. Approval by the PRC government
must be obtained before distributions of these amounts can be returned to the shareholders.
Note 12 – Employee post-retirement benefits
The Company offers a defined contribution
plan to eligible employees which consists of two parts: (i) the first part, paid by the Company, is 20% of the employee’s
compensation from the prior year and (ii) the second part, paid by the employee, is 8% of the employee’s compensation. The
Company’s contributions of employment benefits were approximately $0.1 million and $0.2 million for the three months ended
December 31, 2017 and 2016, respectively. The Company’s contributions of employment benefits were approximately $0.3 million
and $0.4 million for the six months ended December 31, 2017 and 2016, respectively.
Note 13 – Commitments and contingencies
Lease Commitments
The Company has a lease agreement
for a concrete service plant with an unrelated party which expired on September 30, 2017, with annual payments of
approximately $207,000. The lease was renewed through September 30, 2022, with annual payments of approximately $432,000. The
Company has a lease agreement for roadway access to the west side entry of the concrete service plant with an
unrelated party, which will expire on June 30, 2019, with annual payment of approximately $15,000. The Company has a lease
agreement for office space from Mr. Weili He, the Company’s Interim Chief Financial Officer, through October 31, 2023,
with annual payments of approximately $25,000.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Operating lease expenses are allocated
between the cost of revenue and selling, general, and administrative expenses. Total operating lease expenses were approximately
$0.1 million for each of the three months ended December 31, 2017 and 2016. Total operating lease expenses were approximately
$0.2 million for each of the six months ended December 31, 2017 and 2016. Future annual lease payments under non-cancelable operating
leases with a term of one year or more consist of the following:
Twelve months ending December 31,
|
|
Amount
|
|
2018
|
|
$
|
468,000
|
|
2019
|
|
|
439,000
|
|
2020
|
|
|
432,000
|
|
2021
|
|
|
432,000
|
|
2022
|
|
|
324,000
|
|
Total
|
|
$
|
2,095,000
|
|
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.
As of December 31, 2017, 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 $0.1 million). These amounts are presented in the
accompanying consolidated balance sheets (See Accrued Contingent Liabilities). During the three and six months ended December
31, 2017, additional estimated claims charges of approximately $0.2 million and $2.6 milion, respectively, on some of the remaining
claims is presented in the accompanying consolidated statements of operations under the caption “Estimated claims charges”.
As of the date of this Amended 10-Q, the
Company’s management does not expect any other material liability from the disposition of claims as of the date of this
amended 10-Q report 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 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 December 31, 2017, the
Company had approximately $4.4 million in accrued contingent liabilities, net of litigation paid by related party of approximately
$1 million, and an additional approximately $0.2 million estimated claims charges for the three months ended December 31, 2017.
As of December 31, 2017, 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
December 31,
2017
|
|
|
Interest and penalties
|
|
|
Total claim amount as of
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) Guarantees
|
|
$
|
2,274,118
|
|
|
$
|
|
|
|
$
|
2,274,118
|
|
|
2) Sales
|
|
|
21,294
|
|
|
|
8,722
|
|
|
|
30,016
|
|
|
3) Purchase
|
|
|
1,159,705
|
|
|
|
122,325
|
|
|
|
1,282,030
|
|
|
4) Leases
|
|
|
1,711,466
|
|
|
|
97,528
|
|
|
|
1,808,994
|
|
|
5) Labor
|
|
|
27,483
|
|
|
|
-
|
|
|
|
27,483
|
|
|
6) Other
|
|
|
12,965
|
|
|
|
-
|
|
|
|
12,965
|
|
|
Total
|
|
$
|
5,207,031
|
|
|
$
|
228,575
|
|
|
|
5,435,606
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
(1,034,896
|
)
|
|
Accrued contingent liabilities
|
|
|
|
|
|
|
|
|
|
$
|
4,400,710
|
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The major legal cases are summarized as
follows:
In December 2016, the Company guaranteed
approximately $2.3 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
|
|
$
|
2,274,127
|
|
|
December 29, 2017
|
This loan has not been repaid 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 $2.3 million contingent
liability in connection with such guarantee.
(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 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 of RMB 1,572,669 (approximately US$0.2
million), plus interest, expenses for utilities of RMB 271,579 (approximately US$41,000), a penalty 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 December 31, 2017 of RMB
1,136,297 (approximately US$0.2 million). The total amount of compensation is RMB 3,303,783 (approximately US$0.5 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 December 31, 2017, the
Company’s VIE, Xin Ao, was subject to several civil lawsuits with potential judgments of approximately $14.3 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 their 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 judgement amounts from these related civil lawsuits. Both Mr. Han and Mr. He agreed to liquidate
their personal assets or their ownership interests in their privately held companies to pay for any of the pending potential judgements
amounts of approximately $14.3 million.
On December 10, 2018, Mr. Han
and Mr. He entered into an amendment No. 1 to the indemnification agreement to clarify the indemnification terms which Mr. Han
and Mr. He’s certain actions including but not limited to personal guarantees, loans or investments in their own name to
other entities which has caused Xinao to be involved as a co-defendant in certain legal proceedings. Mr. Han and Mr. He have agreed
to unconditionally indemnify Xin Ao for all losses, damages, legal fees, expenses or other costs related to the legal proceedings
whereby Xin Ao was named as a co-defendant or defendant due to Mr. Han and Mr. He being a shareholder of Xin Ao. The indemnification
for the amended terms are irrevocable. In addition, Mr. Han and Mr. He agreed to unconditionally indemnify Xin Ao for all the
losses, damages, legal fees, expenses and other costs, including additional interest, related to the legal proceedings accrued
and contingencies determined in the future.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The type of litigation disputes
with contingencies associated are summarized as follows as of December 31, 2017:
|
Dispute matter
|
|
Claims
amount as of December
31,
2017
|
|
|
Interest and Penalties
|
|
|
Total claims amount as of
December 31,
2017
|
|
|
1) Guarantees
|
|
$
|
59,160,639
|
|
|
$
|
8,014,877
|
|
|
$
|
67,175,516
|
|
|
2) Purchase
|
|
|
1,672,631
|
|
|
|
19,023
|
|
|
|
1,691,654
|
|
|
4) Leases
|
|
|
944,911
|
|
|
|
-
|
|
|
|
944,911
|
|
|
5) Labor
|
|
|
240,752
|
|
|
|
-
|
|
|
|
240,752
|
|
|
Total
|
|
$
|
62,018,933
|
|
|
$
|
8,033,900
|
|
|
|
70,052,833
|
|
|
Settled claims
|
|
|
|
|
|
|
|
|
|
|
(55,745,401
|
)
|
|
Remaining claims amount
|
|
|
|
|
|
|
|
|
|
$
|
14,307,432
|
|
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$43.4 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$45.8 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$48.5 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 had 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 and has no exposure for
the pending judgement 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 Chengde Tianhang’s potential default of 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, They are also the 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 the
Respondent in an aggregate amount of RMB 26,000,000 (approximately US$3.9 million). Currently, none of the Company’s
funds on deposit have been seized.
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
(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 a certain 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 on 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 as the Company is currently in the process of appealing the judgement);
|
|
2)
|
Xin Ao and Mr. Weili
He are entitled to the right of recourse to Beijing Lianlv.
|
|
(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”) (collectively
the “Respondents”) 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).
Currently, none of the Company’s funds on deposit have been seized.
|
|
(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 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 of 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 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$262,000). Since Mr. Xianfu Han and Mr. Weili 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 UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note 14 - Concentrations of risk
Credit Risk
The Company is exposed to credit risk
from its cash in bank and fixed deposits, and accounts receivable, other receivables and advances on equipment purchases.
As of December 31 and June 30, 2017, approximately
$0.7 million and $4.2 million were on deposit with a bank located in the PRC subject to credit risk, respectively. In China, the
insurance coverage of each bank is RMB 500,000 (approximately USD$77,000). 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 three months ended December 31,
2017, the Company had two customers accounting for approximately 24.4% and 15.5% of total revenue, respectively. For the three
months ended December 31, 2016, two customers accounted for 32.9% and 11.6% of total revenue. For the six months ended December
31, 2017, the Company had two customers accounting for approximately 16.8% and 11.9% of total revenue, respectively. For the six
months ended December 31, 2016, one customer accounted for 22.0% of total revenue. As of December 31, 2017 and June 30, 2017,
no customer accounted for more than 10% of the total balance of accounts receivable.
For the three months ended December 31,
2017, the Company had two vendors accounting for approximately 18.0% and 10.8% of total purchases. For the three months ended
December 31, 2016, the Company had one vendor representing approximately 14.4% of total purchases. For the six months ended December
31, 2017, no vendor accounted for more than 10% of total purchases. For the six months ended December 31, 2016, the Company had
one vendor representing approximately 15.8% of total purchases. As of December 31, 2017 and June 30, 2017, no vendor accounted
for more than 10% of the total balance of accounts payable.
Note 15 – Subsequent events
Restricted Stock Grants
Effective January 19, 2018, the Board
granted an aggregate of 56,859 shares of restricted common stock, which were issued with a fair value of $244,494 to one employee
under the 2009 Plan. These shares vested immediately upon grant.
In April 2018, the Company guaranteed
approximately US$10.6 million (RMB 69,000,000) that a related-party borrowed from bank as follows:
Name of party being guaranteed
|
|
Guaranteed amount
|
|
|
Guarantee
expiration date
|
Beijing Lianlv (borrower)
|
|
$
|
10,604,454
|
|
|
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 obligations. 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.
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.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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.
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.
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.
In July 2018, the Company adopted 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”). The
proposal was approved by the Company’s shareholders at its annual meeting on December 27, 2018.
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 20, 2018, CACM Group NY, Inc.
(“CACM”) was incorporated in the State of New York and is 100% owned by China ACM. The establishment of CACM is to
expand the Company’s construction material business in the New York. As of the date of the report, CACM has not commenced
any operations.
On August 23, 2018, the Company sold 50,000
shares of common stock at the price of $3.00 per share for total proceeds of USD$150,000 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.
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 September 30, 2018, the Company no longer complies with Nasdaq Listing Rules 5620(a) and 5810(c)(2)(G) (the
“
Annual Meeting Requirement
”).
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 had 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 September 30, 2018, or December 27, 2018, to regain compliance.
On October 15, 2018,
the Company received notification from Nasdaq indicating that, since the Company has not yet filed its Form 10-K for the fiscal
year ended June 30, 2018, the Company no longer complied with Nasdaq Listing Rule 5250(c)(1) (the “
Periodic Filing Requirement
”).
The notification received
had no immediate effect on the listing of the Company’s common stock on Nasdaq. Under the Nasdaq Listing Rules, the Company
had until November 14, 2018 to submit a plan to regain compliance. If the Company’s plan is accepted, Nasdaq may grant an
extension of up to 180 days from the filing’s due date, or until April 15, 2019, to regain compliance.
The Company submitted its compliance plan for
the Annual Meeting Requirement on July 31, 2018 to Nasdaq. On August 8, 2018, Nasdaq, considering that the Company was proposing
to seek shareholder approval to re-domicile the Company in the Cayman Islands, granted the Company an extension until December
27, 2018 to regain compliance with the Annual Meeting Requirement by holding an annual meeting of shareholders. The Company has
met this condition on December 27, 2018 by holding such meeting. The Company received notice from Nasdaq on January 11, 2019 that
it was in compliance with the Annual Meeting Requirement.
The Company also submitted a compliance plan
for the Periodic Filing Requirement on November 16, 2018 to Nasdaq. On December 20, 2018, Nasdaq granted the Company an extension
until January 7, 2019 to regain compliance with the Periodic Filing Requirement. The Company met this condition on January 7, 2019
by filing the required information. The Company received notice from Nasdaq on January 11, 2019 and was in compliance with the
Periodic Filing Requirement.