CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(UNAUDITED)
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 Organization and description of business
China Advanced Construction Materials Group, Inc. (CADC
Delaware) was incorporated in the State of Delaware on February 15, 2007. CADC
Delaware, through its 100% owned subsidiaries and its variable interest entities
(VIEs), is engaged in producing general ready-mix concrete, customized
mechanical refining concrete, and other concrete-related products that are
mainly sold in the Peoples Republic of China (PRC). CADC Delaware has a
wholly owned subsidiary in the British Virgin Islands, Xin Ao Construction
Materials, Inc. (BVI-ACM), which is a holding company with no operations.
BVI-ACM has a wholly owned foreign enterprise, Beijing Ao Hang Construction
Material Technology Co., Ltd. (China-ACMH), and China-ACMH has contractual
agreements with an entity which is considered as a VIE.
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 Delawares state of incorporation from Delaware
to Nevada.
Beijing XinAo Concrete Group (Xin Ao), a VIE, is engaged in
the business of consulting, concrete mixing and equipment rental services. Xin
Ao has five wholly owned subsidiaries (collectively, and with Xin Ao, the
VIEs) in the PRC: (1) Beijing Heng Yuan Zheng Ke Technical Consulting Co., Ltd
(Heng Yuan Zheng Ke), (2) Beijing Hong Sheng An Construction Materials Co.,
Ltd (Hong Sheng An), (3) Beijing Heng Tai Hong Sheng Construction Materials
Co., Ltd (Heng Tai), (4) Da Tong Ao Hang Wei Ye Machinery, Equipment Rental
Co., Ltd (Da Tong) and (5) Luan Xian Heng Xin Technology Co., Ltd (Heng
Xin). There were no operations since establishment of these five entities and
the Company is not planning to pursue operations for these entities. As a
result, the Company has determined to dissolve these entities between March 2016
and June 2016. As of the date of this report, Da Tong and Heng Xi have already
been dissolved and the other three entities are still under the administrative
process of dissolution.
China ACM, BVI-ACM, China-ACMH and the VIEs are collectively
referred to as the Company.
Note 2 Summary of significant accounting policies
Liquidity
In assessing the Companys liquidity, the Company monitors and
analyzes its cash on-hand and its operating and capital expenditure commitments.
The Companys 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 Companys 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 Companys working capital was approximately $11.6
million as of September 30, 2016 as compared to $16.4 million as of June 30,
2016. As of September 30, 2016, the Company had cash on-hand of approximately
$8.2 million and restricted cash balances of approximately $4.6 million with the
remaining current assets mainly composed of accounts receivables, other
receivables and prepayments and advances.
Although the Company believes that it can realize its current
assets in the normal course of business, the Companys ability to repay its
current obligations will depend on the future realization of its current assets.
Management has considered its historical experience, the economy, trends in the
construction industry, the expected collectability of the accounts and other
receivables and the realization of the prepayments on inventory, and provided
for an allowance for doubtful accounts as of September 30, 2016. The Company
expects to realize the balances net of the allowance 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 its available source of funds through the following:
7
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
-
Financial support and credit guarantee commitment from the Companys
majority shareholders (See Note 9 - Related party transactions).
-
Other available sources of financing from PRC banks and other financial
institutions given the Companys credit history.
Based on the above considerations, the Companys management is
of the opinion that it has sufficient funds to meet the Companys working
capital requirements and debt obligations as they become due. However, there is
no assurance that management will be successful in their plan. There are a
number of factors that could potentially arise that could result in shortfalls
to the Companys plan, such as the demand for the Companys products, economic
conditions, the competitive pricing in the concrete-mix industry, the Companys
operating results continuing to deteriorate and the Companys bank and
shareholders not being able to provide continued support.
Basis of presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (US GAAP) for interim financial
information pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). These financial statements include the accounts of all
directly, indirectly owned subsidiaries and variable interest entities listed
below. All material intercompany transactions and balances have been eliminated
in consolidation. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, considered necessary to give a fair
presentation have been included. Interim results are not necessarily indicative
of results of a full year. The information in this Form 10-Q should be read in
conjunction with information included in the annual report for the fiscal year
ended June 30, 2016 on Form 10-K filed with the SEC on September 28, 2016 and
have been consistently applied.
Principles of consolidation
The unaudited condensed consolidated financial statements
reflect the activities of the following subsidiaries and VIEs. All material
intercompany transactions have been eliminated.
|
|
|
|
Ownership
|
Subsidiaries and
VIEs
|
|
Place
incorporated
|
|
percentage
|
BVI-ACM
|
|
British Virgin Island
|
|
100%
|
China-ACMH
|
|
Beijing, China
|
|
100%
|
Xin Ao
|
|
Beijing, China
|
|
VIE
|
Heng Yuan Zheng Ke
|
|
Beijing, China
|
|
VIE
|
Hong Sheng An
|
|
Beijing, China
|
|
VIE
|
Heng Tai
|
|
Beijing, China
|
|
VIE
|
Da Tong*
|
|
Datong, China
|
|
VIE
|
Heng Xin**
|
|
Luanxian, China
|
|
VIE
|
*Dissolved in August 2016
** Dissolved in November 2016
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 and its subsidiaries. Based upon a series of
contractual arrangements, the Company determined that Xin Ao and its
subsidiaries are VIEs subject to consolidation and that China ACM is the primary
beneficiary. Accordingly, the accounts of Xin Ao and its subsidiaries are
consolidated with those of China ACM.
The carrying amount of the VIEs assets and liabilities are as
follows:
8
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Current assets
|
$
|
87,571,976
|
|
$
|
90,518,451
|
|
Property, plant and equipment
|
|
4,424,310
|
|
|
4,709,794
|
|
Total assets
|
|
91,996,286
|
|
|
95,228,245
|
|
|
|
|
|
|
|
|
Liabilities
|
|
(74,137,991
|
)
|
|
(72,579,677
|
)
|
|
|
|
|
|
|
|
Intercompany
payables*
|
|
(7,297,139
|
)
|
|
(7,355,650
|
)
|
|
|
|
|
|
|
|
Total liabilities
|
|
(81,435,130
|
)
|
|
(79,935,327
|
)
|
|
|
|
|
|
|
|
Net assets
|
$
|
10,561,156
|
|
$
|
15,292,918
|
|
* Payables to China - ACMH and BVI-ACM are eliminated upon
consolidation.
Use of estimates and assumptions
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. The significant
estimates and assumptions made in the preparation of the Companys unaudited
condensed consolidated financial statements include deferred income taxes,
allowance for doubtful accounts, deferred stock-based compensation, the 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
its VIEs use their local currency Chinese Renminbi (RMB) as their functional
currency. In accordance with the US GAAP guidance on Foreign Currency
Translation, the Companys results of operations and cash flows are translated
at the average exchange rates during the period, assets and liabilities are
translated at the exchange rates at the balance sheet dates, and equity is
translated at historical exchange rates. As a result, amounts related to assets
and liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
Asset and liability accounts at September 30 and June 30, 2016,
were translated at RMB 6.67 to $1.00 and RMB 6.64 to $1.00, respectively. The
average translation rates applied to the consolidated statements of operations
and comprehensive loss and cash flows for the three months ended September 30,
2016 and 2015 were RMB 6.67 and RMB 6.27 to $1.00, respectively.
Translation gains (losses) that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations. There were no foreign
currency transaction
gains or losses for each of the three months ended September 30, 2016 and 2015.
The effects of foreign currency translation adjustments are included in
shareholders equity as a component of accumulated other comprehensive income.
Revenue recognition
Revenue is realized or realizable and earned when four criteria
are met:
-
Persuasive evidence of an arrangement exists (the Company considers its
sales contracts to be pervasive evidence of an arrangement);
9
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The Company sells its concrete products primarily to major
local construction companies. Sales agreements are signed with each customer.
The agreements list all terms and conditions with the exception of delivery date
and quantity, which are evidenced separately in purchase orders. The purchase
price of products is fixed in the agreement and customers are not permitted to
renegotiate after the contracts have been signed. The agreements include a
cancellation clause if the Company or customers breach the contract terms
specified in the agreement.
The Company recognizes revenue when title and ownership of the
goods are transferred upon shipment to the customer by the Company and
collectability of payment is reasonably assured.
The Company includes the shipping and handling fee in both
revenue and cost of revenue.
Financial instruments
US GAAP regarding fair value of financial instruments and
related fair value measurements define fair value, establish a three-level
valuation hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The three levels of inputs are defined as follows:
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities
in active markets;
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial
instrument;
Level 3 inputs to the valuation
methodology are unobservable.
Current assets and current liabilities are reported in the
consolidated balance sheets at face value or cost, which approximate fair value
because of the short period of time between the origination of such instruments
and their expected realization and their current market rates of interest.
Cash and cash equivalents
The Company considers all highly liquid investments with the
original maturity of three months or less at the date of purchase to be cash
equivalents. The Company currently maintains substantially all of its day-to-day
operating cash balances with major financial institutions within PRC and US. As
of September 30 and June 30, 2016, the Company had deposits in excess of
federally insured limits totaling approximately $8.2 million and $0.9 million,
respectively.
Restricted cash
As of September 30 and June 30, 2016, restricted cash consisted
of collateral representing cash deposits for bank guarantees and notes payable.
Accounts receivable
During the normal course of business, the Company extends
unsecured credit to its customers. Accounts are considered past due after 30
days. In establishing the required allowance for doubtful accounts, management
considers the historical experience, the economy, trends in the construction
industry and the expected collectability of the overdue receivables. Management
reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
probable. Account balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovering is considered
remote. The Company provides a provision of 15% of allowance for doubtful
accounts for accounts receivable balance that are past due more than 180 days
but less than one year, 40% of allowance for doubtful accounts for accounts
receivable past due from one to two years, 75% of allowance for doubtful
accounts for accounts receivable past due beyond two years, 100% of allowance
for doubtful accounts for accounts receivable past due beyond three years, plus
additional amount as necessary, which the Companys collection department had
determined the collection of the full amount is remote with the approval from
the Companys management to provide 100% provision allowance for doubtful
accounts. The Companys management has continued to evaluate the reasonableness
of the valuation allowance policy and update it if necessary.
10
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Other receivables
Other receivables primarily include prepayments to be refunded
by our suppliers if the supplies do not meet the Companys specification need,
advances to employees, due from unrelated entities, VAT tax refunds and other
deposits. Management regularly reviews the aging of receivables and changes in
payment trends and records 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 a provision of 5% of allowance for doubtful accounts for other
receivables balance that are aged within one year, 50% of allowance for doubtful
accounts for other receivables aged from one to two years, 100% of allowance for
doubtful accounts for other receivables aged beyond two years.
Inventories
Inventories consist of raw materials and are stated at the
lower of cost or market, as determined using the weighted average cost method.
Management compares the cost of inventories with the market value and an
allowance is made for writing down the inventory to its market value, if lower
than cost. As of September 30 and June 30, 2016, the Company determined that no
reserves for obsolescence were necessary.
Prepayments and advances
Prepayments are funds deposited or advanced to outside vendors
for future inventory purchases. As a standard practice in China, many of the
Companys 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 the contract ends.
The Company wrote off approximately $0.1 million on
unrealizable prepayments for the three months ended September 30, 2016.
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 5% residual value. Leasehold
improvements are amortized over the lesser of estimated useful lives or lease
terms, as appropriate.
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
|
11
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Accounting for long-lived assets
The Company classifies its long-lived assets into: (i)
machinery and equipment; (ii) transportation equipment; (iii) office and
equipment; and (iv) buildings and improvements.
Long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be fully recoverable. It is possible that
these assets could become impaired as a result of technology 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.
Due to recurring losses, the deterioration of the concrete-mix
industry in the city of Beijing, PRC and competitive pricing pressure, the
Company has performed an impairment analysis and determined its long-lived
assets were impaired during the year ended June 30, 2016. As a result, the
Company recorded an impairment charge of $2.6 million for the year ended June
30, 2016. These charges were related to the impairment of the Companys
transportation equipment and plant and machinery. The loss was determined using
Level 3 inputs (See Note 6). There was no impairment charge for the three months
ended September 30, 2016 and 2015.
Competitive pricing pressure and changes in interest rates
could materially and adversely affect the Companys 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 Companys expected volatility assumption is based on the
historical volatility of Companys 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 Companys current and expected
dividend policy.
Income taxes
The Company accounts for income taxes in accordance with ASC
740, Income Taxes, which requires the Company to use the assets and liability
method of accounting for income taxes. Under the assets and liability method,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between financial statement carrying amounts and the tax bases of
existing assets and liabilities and operating loss and tax credit carry
forwards. Under this accounting standard, the effect on deferred income taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized if it is more likely than
not that some portion, or all of, a deferred tax asset will not be realized.
ASC 740-10, Accounting for Uncertainty in Income Taxes,
defines uncertainty in income taxes and the evaluation of a tax position as a
two-step process. The first step is to determine whether it is more likely than
not that a tax position will be sustained upon examination, including the
resolution of any related appeals or litigation based on the technical merits of
that position. The second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of benefit to be recognized
in the financial statements. A tax position is measured at the largest amount of
benefit that is greater than 50 percent likelihood of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. Penalties and interest incurred related to
underpayment of income tax are classified as income tax expense in the period
incurred. United States federal, state and local income tax returns prior to
2013 are not subject to examination by any applicable tax authorities.
12
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Value Added Tax
Enterprises or individuals, who sell commodities, engage in
repair and maintenance, or import and export goods in the PRC are subject to a
value added tax. The standard VAT rate was 6% of gross sales for the Companys
industry, which was reduced to 3% of gross sales on July 1, 2014. Due to the
fact that the Company uses recycled raw materials to manufacture its products,
the State Administration of Taxation granted the Company a VAT tax exemption,
which expired in June 2015. From July 2015 going forward, the Company is subject
to VAT at the reduced rate of 3% of the gross sales price.
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 the US 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
dilution and is computed by dividing income (loss) available to common
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts, such as warrants, options,
restricted stock based grants and convertible preferred stock, to issue common
stock were exercised and converted into common stock. Common stock equivalents
having an anti-dilutive effect on earnings per share are excluded from the
calculation of diluted earnings per share. For each of the three months ended
September 30, 2016 and 2015, diluted loss per share is the same as basic loss
per share since the addition of any contingently issuable shares would be
anti-dilutive.
Stock dividends or stock splits be accounted for retroactively
if the stock dividends or stock splits occur during the period, or retroactively
if the stock dividends or stock splits occur after the end of the period but
before the release of the financial statements, by considering it outstanding of
the entirety of each period presented. Dilution is computed by applying the
treasury stock method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the
average market price during the period.
Comprehensive income (loss)
Comprehensive income (loss) consists of net income (loss) and
foreign currency translation adjustments.
Recent Accounting Pronouncements
In August 2016, the FASB has issued Accounting Standards Update
(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 is evaluating the
effect, if any, on the Companys consolidated financial statements.
13
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
In October 2016, the FASB has issued Accounting Standards
Update (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 Companys consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the current year presentation. These reclassifications have no effect on the
accompanying unaudited condensed consolidated statements of operations and cash
flows.
Note 3 Accounts receivable, net
Accounts receivable, net consisted of the following:
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
53,254,443
|
|
$
|
51,812,683
|
|
|
|
|
|
|
|
|
Less: Allowance for doubtful
accounts
|
|
(14,255,681
|
)
|
|
(11,524,131
|
)
|
|
|
|
|
|
|
|
Total accounts receivable,
net
|
$
|
38,998,762
|
|
$
|
40,288,552
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
11,524,131
|
|
$
|
28,209,249
|
|
Provision for doubtful accounts
|
|
2,702,640
|
|
|
2,591,465
|
|
Less: write-off
|
|
-
|
|
|
(17,482,713
|
)
|
Exchange rate effect
|
|
28,910
|
|
|
(1,793,870
|
)
|
Ending balance
|
$
|
14,255,681
|
|
$
|
11,524,131
|
|
Note 4 Inventories
Inventories consisted of the following:
14
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
Raw materials
|
$
|
690,852
|
|
$
|
1,023,471
|
|
Note 5 Other receivables, net
Other receivables
Other receivables consisted of the following:
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
Other receivables
|
$
|
1,829,724
|
|
$
|
7,742,057
|
|
Less: Allowance for doubtful accounts
|
|
(1,621,504
|
)
|
|
(2,334,672
|
)
|
Other receivables, net
|
|
208,220
|
|
|
5,407,385
|
|
Other receivable from sale of Asset Group
|
|
1,232,409
|
|
|
1,685,645
|
|
Total
|
$
|
1,440,629
|
|
$
|
7,093,030
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
2,334,672
|
|
$
|
2,403,362
|
|
Provision for (recovery of) doubtful accounts
|
|
(704,456
|
)
|
|
129,212
|
|
Less: write-off
|
|
-
|
|
|
-
|
|
Exchange rate effect
|
|
(8,712
|
)
|
|
(197,902
|
)
|
Ending balance
|
$
|
1,621,504
|
|
$
|
2,334,672
|
|
Other receivable from sale of Asset Group
On February 29, 2016, the Company terminated an operating lease
for its concrete plant in the eastern suburban area of Beijing due to the fact
that the plant was not operating at ideal capacity and the Company did not
anticipate it would be in the foreseeable future. The Company entered into an
agreement with the lessor to terminate its operating lease, which was originally
effective from August 18, 2013 to August 17, 2021, and for the sale of certain
of the Companys assets and liabilities (Asset Group) at the leased location.
Under the agreement, the carrying value of the Asset Group was determined to be
RMB 13.7 million (approximately $2.1 million), and was settled for RMB 11.2
million (approximately $1.7 million). The Company recognized approximately $0.4
million loss from the sale of the Asset Group for the year ended June 30, 2016.
Pursuant to the terms of the agreement, the remaining consideration of RMB 8.2
million (approximately $1.2 million) as of September 30, 2016 are to be paid by
December 31, 2016.
In accordance with ASC 205, the Company did not report the sale
of the Asset Group as discontinued operations as the sale of the Asset Group did
not represent a strategic shift that has a major effect on the Companys
operations and financial results.
Note 6 Property, plant and equipment
Property, plant and equipment consist of the following:
15
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
$
|
753,849
|
|
$
|
754,997
|
|
|
|
|
|
|
|
|
Transportation equipment
|
|
4,319,156
|
|
|
4,299,862
|
|
|
|
|
|
|
|
|
Office equipment
|
|
1,167,510
|
|
|
1,172,059
|
|
|
|
|
|
|
|
|
Buildings and improvements
|
|
313,687
|
|
|
314,909
|
|
|
|
|
|
|
|
|
Total
|
|
6,554,202
|
|
|
6,541,827
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
(2,129,892
|
)
|
|
(1,832,033
|
)
|
|
|
|
|
|
|
|
Plant and equipment, net
|
$
|
4,424,310
|
|
|
4,709,794
|
|
Depreciation expense for the three months ended September 30,
2016 and 2015 amounted to approximately $0.3 million and $0.5 million,
respectively.
Note 7 Prepayments and advances
Prepayments and advances consisted of the following:
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
|
|
|
|
|
|
|
Advances on inventory purchases
|
$
|
33,796,223
|
|
$
|
37,209,699
|
|
Note 8 Credit Facilities
Short term loans - banks:
The outstanding balances on these loans consisted of the
following:
|
|
September 30,
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Loans from China Construction Bank, each
with an interest rate from 4.35% per annum, due October and December
2016, and March and September 2017, among which, $1.5 million was paid in
October 2016, guaranteed by Beijing Jinshengding Mineral Products Co., LTD
and Mr. Xianfu Han.
|
|
13,492,800
|
|
|
12,404,320
|
|
|
|
|
|
|
|
|
Loan from Bank of Beijing, interest rate at
5.66% per annum, due March 2017, guaranteed by Beijing Jinshengding
Mineral Products Co., LTD and Mr. Xianfu Han.
|
|
4,497,600
|
|
|
4,515,120
|
|
|
|
|
|
|
|
|
|
$
|
17,990,400
|
|
$
|
16,555,440
|
|
Beijing Jinshengding Mineral Products Co., LTD is a supplier to
the Company. Mr. Xianfu Han is the Companys Chief Executive Officer. Also see
Note 9 Related party transactions.
Interest expenses were approximately $0.2 million and $0.2
million for the three months ended September 30, 2016 and 2015, respectively.
16
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Notes payable:
Bank notes are issued to a third party 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 $20.5 million and $18.1 million as of
September 30, 2016 and June 30, 2016, respectively, and were non-interest
bearing with expiration dates between October 2016 (repaid) and February 2017.
The restricted cash for the notes was approximately $4.6 million and $4.1
million as of September 30 and June 30, 2016, respectively.
Note 9 Related party transactions
Other payables shareholders
Two shareholders have advanced funds to BVI-ACM for working capital
purposes. The advances are non-interest bearing, unsecured, and are payable in
cash on demand. These two shareholders are officers of the Company. They and their
spouses also guaranteed certain short-term loans payable and notes payable of
the Company (see Note 8). The other payables balance also includes the Companys
salary payables to the two shareholders.
Other payables - shareholders consisted of the following:
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
|
|
|
|
|
|
|
Xianfu Han
|
$
|
890,735
|
|
$
|
715,086
|
|
|
|
|
|
|
|
|
Weili He
|
|
903,082
|
|
|
776,039
|
|
|
|
|
|
|
|
|
|
$
|
1,793,817
|
|
$
|
1,491,125
|
|
Note 10 Income taxes
(a) Corporate income tax
China ACM was organized in the United States. China ACM had no
taxable income for United States income tax purposes for the three months ended
September 30, 2016 and 2015, respectively. As of September 30, 2016, China ACMs
net operating loss carry forward for United States income taxes was
approximately $0.4 million. The net operating loss carry forward are available
to reduce future years taxable income through year 2033. Management believes
that the realization of the benefits from these losses appears uncertain due to
the Companys 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. As of September 30 and June 30, 2016,
valuation allowance for deferred tax assets was approximately $0.2 million and
$0.2 million, respectively. Management reviews this valuation allowance
periodically and makes changes accordingly.
BVI-ACM was incorporated in the British Virgin Islands (BVI)
and where its income tax rate is 0% under the current laws of the BVI.
China-ACMH and VIEs-Chinese operations
China-ACMH and VIEs are governed by the income tax laws of the
PRC and the income tax provision in respect to operations in the PRC is
calculated at the applicable tax rates on the taxable income for the periods
based on existing legislation, interpretations and practices in respect thereof.
Under the 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 certificate was awarded based
on Xin Aos involvement in producing high-tech products, its research and
development, as well as its technical services. As granted by the State
Administration of Taxation of the PRC, Xin Ao is entitled to a reduction in its
income tax rate from 25% to 15% until 2018.
17
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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.
Loss before provision for income taxes consisted of:
|
|
Three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
USA and BVI
|
$
|
(643,524
|
)
|
$
|
(399,845
|
)
|
China
|
|
(4,677,248
|
)
|
|
(692,306
|
)
|
|
$
|
(5,320,772
|
)
|
$
|
(1,092,151
|
)
|
Significant components of deferred tax assets were as follows:
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
5,482,794
|
|
$
|
5,169,993
|
|
Impairment loss
of long-lived assets
|
|
393,673
|
|
|
393,673
|
|
Net operating loss carryforward
in China
|
|
1,364,681
|
|
|
975,894
|
|
Net operating
loss carryforward in the U.S.
|
|
244,914
|
|
|
217,020
|
|
Valuation allowance
|
|
(7,486,062
|
)
|
|
(6,756,580
|
)
|
Total deferred tax assets -
current
|
$
|
-
|
|
$
|
-
|
|
As of September 30 and June 30, 2016, the Company believes it
is more likely than not that its China operations will be unable to fully
utilize its deferred tax assets related to its allowance for doubtful accounts,
impairment loss of long-lived assets and the net operating loss carry forward in
China. As the Company continued to incur losses in its China operations, it is
more likely than not that it will not have sufficient income to utilize its
deferred tax assets. As of September 30, 2016, the Company has a net operating
loss carry forward in China that expires in 2021. As a result, the Company had
provided 100% allowance on all the deferred tax assets of approximately $7.3
million and $6.5 million as of September 30 and June 30, 2016, respectively.
The Company has incurred losses from its U.S. operations during
all periods presented. Accordingly, management provided approximately
$0.3 million and $0.2 million of valuation allowance against the deferred tax
assets related to the Companys U.S. operations as of September 30, 2016 and
June 30, 2016, respectively, since the deferred tax benefits of the net
operating loss carry forward in the U.S. might not be utilized.
Changes to valuation allowance for deferred tax assets were as
follows:
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September 30, 2016
|
|
|
June
30, 2016
|
|
For deferred tax assets
|
|
|
|
|
|
|
Beginning balance
|
$
|
6,756,580
|
|
|
3,064,527
|
|
Allowance for
doubtful accounts
|
|
312,801
|
|
|
2,414,859
|
|
Impairment loss of long-lived
assets
|
|
-
|
|
|
393,673
|
|
Change in net
operating loss carry forward in China
|
|
388,787
|
|
|
975,894
|
|
Change in net
operating loss carry forward in U.S.
|
|
27,894
|
|
|
(92,373
|
)
|
|
|
|
|
|
|
|
Ending balance
|
$
|
7,486,062
|
|
|
6,756,580
|
|
18
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(b) Uncertain tax positions
There were no uncertain tax positions as of September 30 and
June 30, 2016. Management does not anticipate any potential future adjustments
which would result in a material change to its tax positions. For the three
months ended September 30, 2016 and 2015, the Company did not incur any tax
related interest and penalties.
Note 11 Shareholders equity
Restricted Stock Grants
Restricted stock grants are measured based on the market price
on the grant date. The Company has granted restricted shares of common stock to
the members of the board of directors (the Board), senior management and
consultants.
Effective August 20, 2016, the Board granted an aggregate of
106,859 shares of restricted common stock, which were issued with a market value
of $308,823 to a consultant under the 2009 Plan. These shares shall be vested in
two tranches upon achieving certain performance-based milestones. As of
September 30, 2016, these shares have not vested and the milestones have not
been determined by the Board.
Effective August 20, 2016, the Board granted an aggregate of
100,000 shares of restricted common stock, which were issued with a market value
of $289,000 to two employees under the 2009 Plan. These shares are vested
immediately upon grant.
For each of the three months ended September 30, 2016 and 2015,
the Company recognized approximately $0.3 million of compensation expenses
related to restricted stock grants.
Following is a summary of the restricted stock grants:
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
Restricted stock grants
|
|
Shares
|
|
|
Fair
Value Per Share
|
|
|
Value
|
|
Nonvested as of June 30, 2016
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Granted
|
|
206,859
|
|
$
|
2.89
|
|
$
|
597,823
|
|
Vested
|
|
(100,000
|
)
|
$
|
2.89
|
|
$
|
289,000
|
|
Nonvested as of September 30, 2016
|
|
106,859
|
|
$
|
2.89
|
|
$
|
308,823
|
|
Note 12 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, after the
statutory reserves. The 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
Companys registered capital. As of June 30, 2016, the remaining reserve to
fulfill the 50% registered capital requirement amounted to $1.9 million. As of
September 30, 2016, the capital requirement amount reduced to approximately $1.7
million after the dissolution of Da Tong.
19
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The transfer to this reserve must be made before the
distribution of any dividends to the Companys 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 Chinese government restricts distributions of registered
capital and the additional investment amounts required by foreign invested
enterprises. Approval by the Chinese government must be obtained before
distributions of these amounts can be returned to the shareholders.
Note 13 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 employees compensation from the prior year and (ii) the second
part, paid by the employee, is 8% of the employees compensation. The Companys
contributions of employment benefits were approximately $0.2 million for each of
the three months ended September 30, 2016 and 2015.
Note 14 Commitments and contingencies
Lease Commitments
The Company has a lease agreement for a concrete service plant
with an unrelated party which will expire on September 30, 2017, with annual
payments of approximately $202,000. The Company has a lease agreement for a
roadway access in the west side entry of the concrete service plant with an
unrelated party which will expire on June 30, 2019. The Company has a lease
agreement to lease office space from a related party through October 31, 2018,
with annual payments of approximately $24,000.
Operating lease expenses are allocated between the cost of
revenue and selling, general, and administrative expenses. Total operating lease
expenses for the three months ended September 30, 2016 and 2015 were
approximately $60,000 and $200,000, respectively. Future annual lease payments
under non-cancelable operating leases with a term of one year or more consist of
the following:
Twelve months
ending September 30,
|
|
Amount
|
|
2017
|
$
|
241,000
|
|
2018
|
|
39,000
|
|
2019
|
|
13,000
|
|
Total
|
$
|
293,000
|
|
Legal Contingencies
From time to time, the Company is a party to various legal
actions arising in the ordinary course of business. The Company accrues costs
associated with these matters when they become probable and the amount can be
reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred. The Companys management does not expect any liability
from the disposition of such claims and litigation individually or in the
aggregate would have a material adverse impact on the Companys unaudited
condensed consolidated financial position, results of operations and cash flows.
Note 15 - Concentrations
For the three months ended September 30, 2016, the Company had
two customers representing approximately 16.8% and 16.5% of total revenue. For
the three months ended September 30, 2015, the Company had one customer
representing approximately 12.4% of total revenue. As of September 30 and June
30, 2016, no customer accounting for more than 10% of the total balance of
accounts receivable.
20
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
For the three months ended September 30, 2016, the Company had
two vendors representing approximately 10.7% and 10.2% of total purchases. For
the three months ended September 30, 2015, the Company had one vendor
representing approximately 10.1% of total purchases. As of September 30, 2016,
the Company had one vendor accounting for approximately 10.7% of total balance
of accounts payable. As of June 30, 2016, no vendor accounted for more than 10%
of the total balance of accounts payable.
21