CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these
consolidated financial statements.
The accompanying notes are an integral part of these
consolidated financial statements.
The accompanying notes are an integral part of these
consolidated financial statements.
The accompanying notes are an integral part of these
consolidated financial statements.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Organization and description of business
China Advanced Construction Materials Group, Inc. (CADC
Delaware) was incorporated in the State of Delaware on February 15, 2007. CADC
Delaware, through its 100% owned subsidiaries and its variable interest entities
(VIEs), is engaged in producing general ready-mix concrete, customized
mechanical refining concrete, and other concrete-related products that are
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 has already dissolved and
the other four entities are still under the administrative process of
dissolving.
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 $16.4
million as of June 30, 2016 as compared to $27.9 million as of June 30, 2015. As
of June 30, 2016, cash on-hand balance of approximately $1.0 million and
restricted cash balance of approximately $4.1 million with the remaining current
assets are mainly composed of accounts receivables, other receivables, and
prepayments and advances.
Although the Company believes that it can realize its current
assets, the Companys ability to repay its current obligations will depend on
the future realization of its current assets. Management had considered the
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 June 30, 2016. The Company expects to realize the
balances net of the allowance within normal operating cycle of twelve months
period. If the Company is unable to realize its current assets within the normal
operating cycle of twelve months period, the Company may have to consider its
available source of funds through the following:
|
|
Financial support and credit guarantee
commitment from the Companys majority shareholders (See Note 11 Related party
transactions).
|
|
|
Other available sources of financing from the
PRC banks and other financial institutions given the Companys credit
history.
|
F-6
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 not continuing to deteriorate and the Companys bank and
shareholders being able to provide continued support.
Basis of presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (US GAAP) and have been consistently applied.
Principles of consolidation
The 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
|
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:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Current assets
|
$
|
90,518,451
|
|
$
|
115,628,360
|
|
Property, plant and equipment
|
|
4,709,794
|
|
|
10,154,170
|
|
Other noncurrent
assets
|
|
-
|
|
|
491,100
|
|
Total assets
|
|
95,228,245
|
|
|
126,273,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
(72,579,677
|
)
|
|
(87,520,412
|
)
|
|
|
|
|
|
|
|
Intercompany
payables*
|
|
(7,355,650
|
)
|
|
(8,650,651
|
)
|
|
|
|
|
|
|
|
Total liabilities
|
|
(79,935,327
|
)
|
|
(96,171,063
|
)
|
|
|
|
|
|
|
|
Net Assets
|
$
|
15,292,918
|
|
$
|
30,102,567
|
|
* Payables to China - ACMH and BVI-ACM are eliminated upon
consolidation.
F-7
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 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, upon which the carrying values were based.
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 June 30, 2016 and 2015, were
translated at RMB 6.64 to $1.00 and RMB 6.11 to $1.00, respectively. The average
translation rates applied to the consolidated statements of operations and
comprehensive loss and cash flows for the years ended June 30, 2016 and 2015
were RMB 6.43 and RMB 6.14 to $1.00, respectively.
Translation gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations. 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 and technical service agreements to be
pervasive evidence of an arrangement);
|
|
|
|
|
|
Delivery has occurred or services have been rendered;
|
|
|
|
|
|
The sellers price to the buyer is fixed or determinable;
and
|
|
|
|
|
|
Collectability of payment is reasonably assured.
|
The Company sells its concrete products and provides concrete
technical services 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 or services are provided 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.
F-8
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments
The US GAAP accounting standards 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.
The carrying value of long-term capital lease obligations
approximate their fair value as interest rates approximate the market rate.
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 June 30, 2016 and 2015, the Company had deposits in excess of federally
insured limits totaling approximately $0.9 million and $ 2.6 million,
respectively.
Restricted cash
As of June 30, 2016 and 2015, restricted cash consisted of
collateral representing cash deposits for short term loans, 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.
F-9
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE 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 1 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 June 30, 2016 and June 30, 2015, the Company determined that no
reserves for obsolescence were necessary.
Short term investments
The Company entered into an investment agreement with a
financial investment company in April 2015. The agreement allows the Company to
invest up to RMB 100 million ($16.4 million) for maximum periods of two years.
The Company can redeem the investment at any time within the agreed period upon
30-day notice. The financial investment company invests the Companys funds in
certain financial instruments including bonds, mortgage trust or mutual funds.
The rates of return on these investments were estimated to be approximately at
10% per annum by such a financial investment company. As of June 30, 2016 the
Company did not experience gain or loss on the redemption of its investment and
all of the investments were returned to the Company.
Prepayments and advances
Prepayments are monies 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.
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
|
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.
F-10
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company makes various assumptions and estimates regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. The Company uses set criteria that are reviewed and
approved by various levels of management, and estimates the fair value of the
asset or asset group by using discounted cash flow analyses. If these estimates
or their related assumptions change in the future, it is required to record
impairment charges for the underlying assets at such time. Any such resulting
impairment charges could be material to the Companys results of operations.
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 are impaired. 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 7). There was no
impairment charge for the year ended June 30, 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.
Advances on equipment purchases, net
The Company advances monies to a supplier for equipment
purchase. These advances are interest free and unsecured.
The Company has made advances to a supplier to construct
specialized equipment to expand its operation into construction material
recycling. However, the Company did not finalize its plan on whether to continue
to pursue such business while its supplier cannot refund the advances due to the
unique specification. As a result, for each of the years ended June 30, 2016 and
2015, the Company recorded a bad debt allowance for advances on equipment
purchases for approximately $1.1 million and $1.2 million, respectively.
Management is still making efforts to collect partially or negotiate with the
supplier for some other alternative solutions to minimize the Companys loss.
However, as management believes the collection of the full payment are remote,
management has written-off the full balance of the advances on equipment
purchase against the allowance for doubtful account during the year ended June
30, 2016.
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. Unrecognized expense is deferred and included in the
consolidated balance sheets, and amortized over the remaining requisite service
period. The Companys expected volatility assumption is based on the historical
volatility of Companys stock or the expected volatility of similar entities.
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 forward. Under this accounting
standard, the effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recognized if it is more likely than not that some portion, or all
of, a deferred tax asset will not be realized.
F-11
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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 and repair and maintenance
Research and development, and repair and maintenance 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.
Research and development costs for the years ended June 30, 2016 and 2015 were
approximately $0.7 million and $1.1 million, respectively. Repair and
maintenance costs for the years ended June 30, 2016 and 2015 were approximately
$0.6 million and $0.2 million, respectively.
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. 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
Comprehensive income consists of net income and foreign
currency translation adjustments.
F-12
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 Amendments to the
ASC 842 Leases. This update requires lessee to recognize the assets and
liability (the lease liability) arising from operating leases on the balance
sheet for the lease term. When measuring assets and liabilities arising from a
lease, a lessee (and a lessor) should include payments to be made in optional
periods only if the lessee is reasonably certain to exercise an option to extend
the lease or not to exercise an option to terminate the lease. Within a twelve
months or less lease term, a lessee is permitted to make an accounting policy
election not to recognize lease assets and liabilities. If a lessee makes this
election, it should recognize lease expense on a straight-line basis over the
lease term. In transition, this update will be effective for public entities for
fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. Management is evaluating the effect, if any, on the
Companys consolidated financial statements.
In April 2016, the FASB issued ASU 2016-09, Compensation -
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting. The ASU includes multiple provisions intended to simplify various
aspects of the accounting for share-based payments. While aimed at reducing the
cost and complexity of the accounting for share-based payments, the amendments
are expected to significantly impact net income, EPS, and the statement of cash
flows. Implementation and administration may present challenges for companies
with significant share-based payment activities. The ASU is effective for public
companies in annual periods beginning after December 15, 2016, and interim
periods within those years. Management is evaluating the effect, if any, on the
Companys consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10,
Revenue from
Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing
. The objective is to clarify the two aspects of Topic 606:
identifying performance obligations and the licensing implementation guidance,
while retaining the related principles for these areas. The ASU affects the
guidance in ASU 2014-09,
Revenue from Contracts with Customers (Topic
606),
which is not yet effective. The effective date and transition
requirements for this ASU are the same as the effective date and transition
requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU
2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date,
defers the effective date of ASU 2014-09 by one year. This
update will be effective for public companies in annual periods beginning after
December 15, 2017, and interim periods within those years. Management is
evaluating the effect, if any, on the Companys consolidated financial
statements.
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance
Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff
Announcements at the March 3, 2016 EITF Meeting, The amendments rescinds SEC
paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging
Issues Task Force (EITF) meeting. Specifically, registrants should not rely on
the following SEC Staff Observer comments upon adoption of Topic 606: 1) Revenue
and Expense Recognition for Freight Services in Process, which is codified in
paragraph 605-20-S99-2; 2) Accounting for Shipping and Handling Fees and Costs,
which is codified in paragraph 605-45-S99-1; 3) Accounting for Consideration
Given by a Vendor to a Customer (including Reseller of the Vendor's Products),
which is codified in paragraph 605-50-S99-1; 4) Accounting for Gas-Balancing
Arrangements (i.e., use of the "entitlements method"), which is codified in
paragraph 932-10-S99-5, which is effective upon adoption of ASU 2014-09.
Management is evaluating the effect, if any, on the Companys consolidated
financial statements.
In May 2016, the FASB issued ASU 2016-12,
Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients.
The object is to address certain issues identified by the
FASB-IASB Joint Transition Resource Group for Revenue Recognition. The
amendments in this Update affect the guidance in Accounting Standards Update
2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet
effective. The effective date and transition requirements for the amendments in
this Update are the same as the effective date and transition requirements for
Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards
Update 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral
of the Effective Date
, defers the effective date of Update 2014-09 by one
year. This update will be effective for public companies in annual periods
beginning after December 15, 2017, and interim periods within those years
Management is evaluating the effect, if any, on the Companys consolidated
financial statements.
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.
F-13
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company does not believe other recently issued but not yet
effective accounting standards, if currently adopted, would have a material
effect on the consolidated financial position, statements of operations and cash
flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the current year presentation. These reclassifications have no effect on the
accompanying consolidated statements of operations and cash flows.
Note 3 Supplemental disclosure of cash flow information
For the years ended June 30, 2016 and 2015, the Company paid
interest in the amounts of approximately $0.8 million and $1.4 million,
respectively.
Cash payments for income tax for the years ended June 30, 2016
and 2015 were approximately $0 and $0.5 million, respectively.
Non-cash investing and financing activities
During the year ended June 30, 2016, pursuant to the
three-party settlement agreement, the Company offset capital lease obligations
with prepayment and advances on equipment purchases for approximately $0.7
million, and with accounts and notes receivable for approximately $0.2 million.
The Company had receivables of approximately $1.7 million as a result of
disposal of certain assets and liabilities during the year ended June 30, 2016
and the net assets disposal value was approximately $2.0 million (see Note 6).
The Company had receivables of approximately $0.8 million as a
result of disposal of property, plant and equipment during the year ended June
30, 2015. Pursuant to a three-party settlement agreement, the Company offset
accounts receivable with capital lease obligations for approximately $2.4
million during the year ended June 30, 2015. The Company issued stock to payoff
shareholder debt of approximately $0.9 million (see Note 12).
Other
During the year ended June 30, 2016, the Company offset
approximately $20.1 million of accounts receivable and accounts payable pursuant
to certain three-party settlement agreements.
During the year ended June 30, 2016, the Company reclassified
approximately $5.4 million from prepayments and advances to other receivables as
the suppliers products do not meet the Companys specification need and the
Company has requested for the advances to be refunded.
Note 4 Accounts receivable, net
Accounts receivable, net consisted of the following:
F-14
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
51,812,683
|
|
$
|
68,566,418
|
|
Less: Allowance for doubtful accounts
|
|
(11,524,131
|
)
|
|
(28,209,249
|
)
|
Total accounts receivable,
net
|
$
|
40,288,552
|
|
$
|
40,357,169
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
28,209,249
|
|
$
|
31,667,803
|
|
Provision for (recovery of) doubtful accounts
|
|
2,591,465
|
|
|
(4,034,039
|
)
|
Less: write-off
|
|
(17,482,713
|
)
|
|
(66,839
|
)
|
Exchange rate effect
|
|
(1,793,870
|
)
|
|
643,324
|
|
Ending balance
|
$
|
11,524,131
|
|
$
|
28,209,249
|
|
Note 5 Inventories
Inventories consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
$
|
1,023,471
|
|
$
|
1,416,664
|
|
Note 6 Other receivables
Other receivables
Other receivables and allowance for doubtful accounts consisted
of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Other receivables, current
|
$
|
7,742,057
|
|
$
|
3,483,549
|
|
Less: Allowance for doubtful accounts,
current
|
|
(2,334,672
|
)
|
|
(2,403,362
|
)
|
Other receivables - current,
net
|
|
5,407,385
|
|
|
1,080,187
|
|
Other receivable from sale of asset group
|
|
1,685,645
|
|
|
-
|
|
|
$
|
7,093,030
|
|
$
|
1,087,187
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
2,403,362
|
|
$
|
2,810,887
|
|
Provision for (recovery of) doubtful accounts
|
|
129,212
|
|
|
-
|
|
Less: write-off
|
|
-
|
|
|
(426,189
|
)
|
Exchange rate effect
|
|
(197,902
|
)
|
|
18,664
|
|
Ending balance
|
$
|
2,334,672
|
|
$
|
2,403,362
|
|
F-15
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 in the foreseeable future. The Company entered 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. The
Company received RMB 3.0 million (approximately $0.5 million) subsequently in
July and August 2016. Pursuant to the terms of the agreement, the remaining
consideration of RMB 8.2 million (approximately $1.2 million) are to be paid by
December 31, 2016.
As of February 29, 2016, the book value of the net assets
underlying the lease and the determination of the $0.4 million loss is as
follows:
|
Total consideration
|
$
|
1,685,645
|
|
|
Asset Group
|
|
|
|
|
Accounts receivable
|
|
4,906,752
|
|
|
Inventories
|
|
337,873
|
|
|
Property plant and equipment
|
|
430,497
|
|
|
Prepaid
|
|
46,725
|
|
|
Accounts payable
|
|
(2,865,550
|
)
|
|
Other
payables
|
|
(796,220
|
)
|
|
Total of Asset Group
|
|
2,060,077
|
|
|
Total loss from sale of Asset Group
|
|
(374,432
|
)
|
|
Exchange rate effect
|
|
(12,474
|
)
|
|
Total loss from sale of Asset Group
|
$
|
(386,906
|
)
|
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 7 Property, plant and equipment
Property, plant and equipment consist of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Machinery and equipment
|
$
|
754,997
|
|
$
|
2,363,324
|
|
Transportation equipment
|
|
4,299,862
|
|
|
1,030,710
|
|
Leased equipment
|
|
-
|
|
|
11,287,442*
|
|
Office equipment
|
|
1,172,059
|
|
|
1,305,992
|
|
Buildings and improvements
|
|
314,909
|
|
|
393,205
|
|
Total
|
|
6,541,827
|
|
|
16,380,673
|
|
Less: Accumulated
depreciation
|
|
(1,832,033
|
)
|
|
(6,224,825
|
)
|
Plant and equipment, net
|
$
|
4,709,794
|
|
$
|
10,155,848
|
|
*The Company had reclassified the leased equipment to
transportation equipment as all the capital lease term were ended in February
2016.
F-16
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Long-lived assets are reviewed for impairment if events and
changes in circumstances indicate that their carrying amounts may not be
recoverable. Due to the recurring losses in the Companys operations, the
Company assessed the recoverability of all of its remaining long-lived assets at
June 30, 2016 and 2015, respectively. Such assessment did not result in
any impairment charges for the year ended June 30, 2015. However, during the year
ended June 30, 2016, the competitive pricing in the concrete-mix industry in the
city of Beijing, PRC has effected the Companys operations, and continue to
deteriorate the Companys projected cash flow. Based on the Companys
evaluation, the amount deviated from the sum of the discounted cash flows
expected to be generated from the long-lived assets and were less than the carrying
value by approximately $2.6 million. As a result, an impairment loss was
recorded and included in operating expenses for the year ended June 30, 2016.
The discounted cash flows were determined using certain expected changes to the
current operational assumptions and were based upon, but not limited to, the
following assumptions:
|
|
Projected selling units and growth in the
Companys concrete-mix market along with the consideration of which the
Company had remained with one concrete mixture station.
|
|
|
Projected unit selling price in the
concrete-mix market in the city of Beijing, PRC.
|
|
|
Projected unit purchase cost in the cement
market in the city of Beijing, PRC.
|
|
|
Selling and general and administrative expenses
to be in line with the growth in the concrete-mix market.
|
|
|
Projected bank borrowings interest rate.
|
Depreciation expense for the years ended June 30, 2016 and 2015
amounted to approximately $2.0 million and $2.1 million, respectively, of which,
approximately $1.5 million and $1.5 million were depreciation expense for the
leased equipment for the years ended June 30, 2016 and 2015, respectively.
Note 8 Prepayments and advances
Prepayments and advances consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Advances on inventory
purchases
|
$
|
37,209,699
|
|
$
|
51,979,493
|
|
Deferred stock-based compensation
|
|
-
|
|
|
498,604
|
|
Total prepayments and
advances
|
$
|
37,209,699
|
|
$
|
52,478,097
|
|
Note 9 Credit Facilities
Short term loans - banks:
The outstanding balances on these loans consisted of the
following:
F-17
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Loans from China Construction
Bank, each with an interest rate from 4.35% per
annum, due September,
October and December, 2016, and March 2017, of which,
$3,010,080 was
repaid in September 2016; guaranteed by Beijing Jinshengding
Mineral
Products Co., LTD and Mr. Xianfu Han.
|
|
12,404,320
|
|
|
5,729,500
|
|
|
|
|
|
|
|
|
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.
|
|
4,515,120
|
|
|
4,911,000
|
|
|
|
|
|
|
|
|
Loan from Citic Bank,
interest rate at 7.80% per annum; guaranteed by Beijing
Jinshengding
Mineral Products Co., LTD, Mr. Xianfu Han and Mr. Weili He. This
loan
was repaid in full in August 2015.
|
|
-
|
|
|
3,274,000
|
|
|
|
|
|
|
|
|
|
$
|
16,555,440
|
|
$
|
13,914,500
|
|
The above guarantor is a supplier to the Company. Mr. Xianfu
Han and Mr. Weili He are the Companys Chief Executive Officer and interim Chief
Financial Officer, respectively. Also see Note 11 Related party transactions.
Interest expenses were approximately $0.8 million and $1.4
million for the years ended June 30, 2016 and 2015, respectively.
Bank guarantees:
Bank guarantees represent amounts due to issuing banks after
beneficiary vendors completed shipments. Bank guarantees are non-interest
bearing and due within six months. The outstanding balances on these bank
guarantees consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Bank guarantees due to China
Construction Bank, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, and
Mr. Xianfu Han, a related party. The guarantees were repaid in
full in November 2015.
|
$
|
-
|
|
$
|
12,441,200
|
|
As of June 30, 2016 and June 30, 2015, the Company had
restricted cash for short-term loans and bank guarantees of approximately
$22,000 and $2.6 million, respectively.
Notes payable:
Bank notes are issued to a third party for inventory purchases.
The notes payable were guaranteed by Beijing Jinshengding Mineral Products Co.,
LTD and Mr. Xianfu Han and amounted to approximately $18.1 million (RMB 120
million) and $30.5 million (RMB 187 million) as of June 30, 2016 and June 30,
2015, respectively, and were non-interest bearing with expiration dates between
July and December 2016. The restricted cash for the notes was approximately $4.1
million and $8.5 million as of June 30, 2016 and June 30, 2015, respectively.
Note 10 Capital lease obligations
Capital lease obligations consisted of the following:
F-18
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Lease obligations for
concrete pump trucks, paid off in February 2016
|
$
|
-
|
|
$
|
1,152,950
|
|
|
|
|
|
|
|
|
Lease obligations for
concrete mixer trucks, paid off in September 2015
|
|
-
|
|
|
95,420
|
|
|
|
|
|
|
|
|
Lease obligations for
concrete mixer, paid off in February 2016
|
|
-
|
|
|
266,757
|
|
|
|
|
|
|
|
|
Total
|
|
-
|
|
|
1,515,127
|
|
|
|
|
|
|
|
|
Less: Deferred interest
|
|
-
|
|
|
(25,743
|
)
|
|
|
|
|
|
|
|
|
|
-
|
|
|
1,489,384
|
|
|
|
|
|
|
|
|
Less: Capital lease
obligations - current
|
|
-
|
|
|
(1,489,384
|
)
|
|
|
|
|
|
|
|
Capital lease obligations -
non current
|
$
|
-
|
|
$
|
-
|
|
Interest expenses were approximately $25,000 and $0.2 million
for the years ended June 30, 2016 and 2015, respectively.
Note 11 Related party transactions
Other payables shareholders
Two shareholders 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 and officers of the Company also
guaranteed certain of the Companys short-term loans payable to banks (see Note
9). The other payables balance also includes the Companys salary payables to
the two shareholders.
In December 2014, the Company issued an aggregate of 174,865
shares of restricted common stock to pay off certain other payables to two
shareholders (see Note 13). Other payables - shareholders consisted of the
following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Xianfu Han
|
$
|
715,086
|
|
$
|
315,762
|
|
Weili He
|
|
776,039
|
|
|
367,916
|
|
|
$
|
1,491,125
|
|
$
|
683,678
|
|
Note 12 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 year ended June 30,
2016. As of June 30, 2016, China ACMs net operating loss carry forward for
United States income taxes was approximately $0.6 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
June 30, 2016 and 2015, valuation allowance for deferred tax assets was approximately $0.2 million and $0.3
million, respectively. Management reviews this valuation allowance periodically
and makes changes accordingly.
F-19
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
All of the Companys income is generated in the PRC, through
VIEs. The Companys VIEs had cumulative losses of approximately $15.3 million
and $1.0 million as of June 30, 2016 and June 30, 2015, respectively.
Accordingly, no provision has been made for U.S. deferred taxes related to
future repatriation of these earnings.
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.
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:
|
|
Years ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
USA and BVI
|
$
|
(1,556,270
|
)
|
$
|
(1,603,513
|
)
|
China
|
|
(12,504,769
|
)
|
|
(1,460,243
|
)
|
|
$
|
(14,061,039
|
)
|
$
|
(3,063,756
|
)
|
Provision for income taxes consisted of:
|
|
Years ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Current provision:
|
|
|
|
|
|
|
USA
|
$
|
-
|
|
$
|
-
|
|
China
|
|
(23
|
)
|
|
(335,869
|
)
|
Total current provision
|
|
(23
|
)
|
|
(335,869
|
)
|
Deferred provision:
|
|
|
|
|
|
|
USA
|
|
-
|
|
|
-
|
|
China
|
|
(1,744,952
|
)
|
|
(764,487
|
)
|
Total deferred provision
|
|
(1,744,952
|
)
|
|
(764,487
|
)
|
Total provision for income
taxes
|
$
|
(1,744,975
|
)
|
$
|
(1,100,356
|
)
|
F-20
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Significant components of deferred tax assets were as follows:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
5,169,993
|
|
$
|
4,591,891
|
|
Impairment loss
of long-lived assets
|
|
393,673
|
|
|
-
|
|
Net operating loss carryforward
in China
|
|
975,894
|
|
|
-
|
|
Net operating
loss carryforward in the U.S.
|
|
217,020
|
|
|
309,393
|
|
Valuation allowance
|
|
(6,756,580
|
)
|
|
(3,064,527
|
)
|
Total deferred tax assets -
current
|
$
|
-
|
|
$
|
1,836,757
|
|
As of June 30, 2015, 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 provision for doubtful accounts. As such, as of June 30,
2015, the Company provided approximately $2.8 million of valuation allowance to
the deferred tax assets related to its China operations, all of which was
against deferred tax assets current related to its allowance for doubtful
accounts, as management estimates that certain bad debts may not be deductible
against future pre-tax income by the Chinese tax authorities. During the year
ended June 30, 2016, the Company incurred and recognized additional $2.4 million
deferred tax assets in relation to provision for doubtful accounts, incurred and
recognized additional $0.4 million deferred tax assets in relation to impairment
loss of long-lived assets, and incurred and recognized additional $1.0 million
deferred tax assets in relation to the net operating carryforward in China.
However, the Company continued to incur losses in its China operations and
believes it is more likely than not that it will not have sufficient income to
utilize its deferred tax assets. As a result, the Company had provided 100%
allowance on all the deferred tax assets of $6.5 million as of June 30, 2016.
The Company has incurred losses from its U.S. operations during
all periods presented. Accordingly, management provided approximately $0.2
million and $0.3 million of valuation allowance against the deferred tax assets
related to the Companys U.S. operations as of June 30, 2016 and June 30, 2015,
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:
|
|
Valuation
|
|
|
|
Allowance
|
|
For deferred tax assets
|
|
|
|
As of June 30, 2015
|
$
|
3,064,527
|
|
Allowance for
doubtful accounts
|
|
2,414,859
|
|
Impairment loss of long-lived
assets
|
|
393,673
|
|
Change in net
operating loss carry forward in China
|
|
975,894
|
|
Change in net operating loss
carry forward in U.S.
|
|
(92,373
|
)
|
As of June 30, 2016
|
$
|
6,756,580
|
|
F-21
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Taxes payable consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Other taxes payable
|
$
|
95,708
|
|
$
|
12,859
|
|
The following table reconcile the U.S. statutory rates to the
Companys effective tax rate for the years ended June 30, 2016 and 2014.
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
U.S. statutory rates
|
|
34%
|
|
|
34%
|
|
Foreign income not recognized in the U.S.
|
|
(34%
|
)
|
|
(34%
|
)
|
PRC statutory rates
|
|
25%
|
|
|
25%
|
|
Preferential tax treatment
|
|
(10%
|
)
|
|
(10%
|
)
|
Change in valuation allowance
|
|
(27%
|
)
|
|
2%
|
|
Non-deductible PRC expenses*
|
|
-
|
|
|
(32%
|
)
|
Other**
|
|
-
|
|
|
(22%
|
)
|
Effective income tax rates
|
|
(12%
|
)
|
|
(37%
|
)
|
*This represents certain freight costs disallowed for
deductions by PRC tax authorities according to certain VAT tax policy.
**This represents the expenses (income) incurred by the Company that are not
subject to PRC income taxes during the years.
(b)
Uncertain tax positions
There were no uncertain tax positions as of June 30, 2016 and
June 30, 2015. Management does not anticipate any potential future adjustments
which would result in a material change to its tax positions. For the years
ended June 30, 2016 and 2015, the Company did not incur any tax related interest
and penalties.
Note 13 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 September 9, 2014, the Board granted an aggregate of
150,000 shares of common stock, which were issued with a market value of
$625,500 to its 13 employees under the Companys 2009 Equity Incentive Plan (the
2009 Plan). These shares are vested in two equal installments every six months
from the date of grant. As of June 30, 2016, all of the shares were vested.
Effective September 22, 2014, the Board granted and issued
1,875 shares of common stock to an officer. The grant was under the 2009 Plan
and the employment agreement by and between the Company and the grantee. In
addition, such grant was to fulfill the Companys contractual obligation in the
employment agreement. As a result, the shares were vested immediately upon the
issuance.
Effective June 29, 2015, the Board granted an aggregate of
100,000 shares of common stock, which were issued with a market value of
$380,000 to two employees under the 2009 Plan. These shares are vested in two
equal installments every three months from the date of grant. As of June 30,
2016, all of the shares were vested.
Effective June 29, 2015, at the annual meeting held on that
date, the Stockholders of the Company approved to increase by 200,000 shares of
common stock reserved under the 2009 Plan. Effective June 30, 2016, at the
annual meeting held on that date, the Stockholders of the Company approved to
increase an additional 200,000 shares of common stock reserved under the 2009
Plan.
For the years ended June 30, 2016 and 2015, the Company
recognized $0.5 million and $0.5 million of compensation expenses related to
restricted stock grants, respectively.
F-22
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the restricted stock grants:
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
Restricted stock grants
|
|
Shares
|
|
|
Fair Value Per Share
|
|
|
Value
|
|
Nonvested as of June 30, 2014
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Granted
|
|
251,875
|
|
|
4.02
|
|
|
1,013,413
|
|
Vested
|
|
(76,875
|
)
|
|
4.17
|
|
|
320,663
|
|
Nonvested as of June 30, 2015
|
|
175,000
|
|
$
|
3.96
|
|
$
|
692,750
|
|
Vested
|
|
(175,000
|
)
|
|
3.96
|
|
|
692,750
|
|
Nonvested as of June 30, 2016
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Stock Issuance
Effective December 2, 2014, the Board authorized the issuance
of 174,865 shares of restricted common stock to two shareholders for repayments
of certain other payables. These other payables were originated from the
professional expenses the shareholders paid on behalf of the Company.
2013 Employee Stock Purchase Plan (the ESPP)
On November 21, 2013, the Company adopted the 2013 ESPP, which
became effective as of such date. Under the ESPP, the Board may grant or provide
for the grant of rights to eligible employees to purchase shares of the
Companys common stock by payroll deduction or cash contribution.
The aggregate number of shares of common stock that may be
issued under the ESPP is 280,000 shares initially plus an annual increase in the
number of shares on July 1 of each year, commencing on July 1, 2014 and ending
on July 1, 2023, which equals to one percent of the number of shares of Common
Stock outstanding on each such date, and subjects to proportionate adjustment in
the event of a merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company, under which circumstances, the class(es) and number of shares and price
per share of stock subject to outstanding rights, may also be adjusted by the
Board or the committee delegated by the Board.
The ESPP will be administered by the Board unless and until
Board delegates administration to a committee composed of two or more
non-employee directors.
Any employee of the Company or any parent (if any) and
subsidiary corporation of the Company (the Affiliate), who is not a natural
person resident in the United States, who has been in the employ of the Company
or any Affiliate for such continuous period as required by the Board preceding
the grant of rights under the ESPP is eligible to participate in the ESPP during
the applicable offering period, subject to administrative rules established by
the Board.
The ESPP is implemented by sequential offerings, the
commencement and duration of which will be determined by the Board. The purchase
price at which each share of common stock may be acquired in an offering period
upon the exercise of all or any portion of a purchase right will be established
by the Board. However, the purchase price on each purchase date will not be less
than the greater of the book value or the fair market value of a share of the
Common Stock on the purchase date.
Effective July 10, 2014, two employees received an aggregate of
65,102 shares of the Company's common stock, at $4.99 per share, the closing
stock price on July 9, 2014, and the Company was paid in full a total of
$324,860 (RMB 2 million) under the ESPP.
Effective September 9, 2014, four employees received an
aggregate of 202,086 shares of the Companys common stock, at $4.17 per share,
the closing stock price on September 8, 2014, and the Company was paid in full a
total of $842,692 (RMB 5.2 million) under the ESPP.
F-23
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 14 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. The remaining reserve to fulfill the 50%
registered capital requirement amounted to approximately $1.9 million and $2.1
million as of June 30, 2016 and June 30, 2015.
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 15 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 $0.7 million and $1.0
million for each of the years ended June 30, 2016 and 2015.
Note 16 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 $203,000. The Company has a lease agreement to lease
office space from a related party through October 31, 2016, with annual payments
of approximately $25,000.
Operating lease expenses are allocated between the cost of
revenue and selling, general, and administrative expenses. Total operating lease
expenses for the years ended June 30, 2016 and 2015 were approximately $0.6
million and $1.6 million, respectively. Future annual lease payments, net of
rent prepayment non-cancelable operating leases with a term of one year or more
consist of the following:
Twelve months ending June 30,
|
|
|
Amount
|
|
2017
|
|
$
|
211,000
|
|
2018
|
|
|
51,000
|
|
Total
|
|
$
|
262,000
|
|
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 consolidated financial position, results of operations and cash
flows.
F-24
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Concentrations
For the year ended June 30, 2016, no customer accounted for
more than 10% of total revenue. For the year ended June 30, 2015, one customer
represented approximately 14.1% of total revenue. As of June 30, 2016 and 2015,
no customer accounted for more than 10% of the total balance of accounts
receivable.
For the year ended June 30, 2016, no vendor accounted for more
than 10% of total purchases. For the year ended ended June 30, 2015, the Company
had one vendor that represented approximately 16.4% of total purchases. As of
June 30, 2016, one vendor accounted for approximately 10.5% of total balance of
accounts payable. As of June 30, 2015, no vendor accounted for more than 10% of
the total balance of accounts payable.
Note 18 Subsequent events
On August 20, 2016, the Company granted a total of 106,859
shares of the Companys restricted stock at $2.89 per share under the 2009
Equity Incentive Plan to a consultant as compensation for the consulting service
to be provided. The shares are to vest in two tranches upon achieving certain
milestones.
On August 20, 2016, the Company granted a total of 100,000
shares of the Companys restricted stock at $2.89 per share under the 2009
Equity Incentive Plan to two employees as compensation. The shares vested
immediately upon the grant.
F-25
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
SCHEDULE 1
- PARENT COMPANY BALANCE SHEETS
AS OF JUNE 30, 2016 AND 2015
(UNAUDITED)
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
$
|
456
|
|
$
|
456
|
|
Total current assets
|
|
456
|
|
|
456
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
Prepayments and
advances
|
|
-
|
|
|
498,604
|
|
Intercompany receivable
|
|
17,192,991
|
|
|
17,192,991
|
|
Investment in
subsidiaries
|
|
5,134,283
|
|
|
22,608,479
|
|
Total other assets
|
|
22,327,274
|
|
|
40,300,074
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
22,327,730
|
|
$
|
40,300,530
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Other payables -
shareholders
|
|
1,200,000
|
|
|
600,000
|
|
Total liabilities
|
$
|
1,200,000
|
|
$
|
600,000
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock $0.001 par
value, 1,000,000 shares authorized, no share issued or outstanding
|
|
-
|
|
|
-
|
|
Common stock,
$0.001 par value, 74,000,000 shares authorized, 2,180,799 shares issued
and outstanding as of June 30, 2016 and 2015
|
|
2,181
|
|
|
2,181
|
|
Additional paid-in-capital
|
|
38,373,584
|
|
|
38,373,584
|
|
Accumulated
deficit
|
|
(31,204,831
|
)
|
|
(15,398,817
|
)
|
Statutory reserves
|
|
6,248,357
|
|
|
6,248,357
|
|
Accumulated
other comprehensive income
|
|
7,708,439
|
|
|
10,475,225
|
|
Total shareholders' equity
|
|
21,127,730
|
|
|
39,700,530
|
|
Total liabilities and
shareholders' equity
|
$
|
22,327,730
|
|
$
|
40,300,530
|
|
The accompanying notes are an integral part of Schedule 1.
F-26
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
SCHEDULE 1
- PARENT COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE
YEARS ENDED JUNE 30, 2016 AND 2015
(UNAUDITED)
|
|
2016
|
|
|
2015
|
|
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
|
$
|
(1,098,604
|
)
|
$
|
(1,114,809
|
)
|
LOSS FROM OPERATIONS
|
|
(1,098,604
|
)
|
|
(1,114,809
|
)
|
EQUITY LOSS OF SUBSIDIARIES
|
|
(14,707,410
|
)
|
|
(3,049,303
|
)
|
NET LOSS
|
|
(15,806,014
|
)
|
|
(4,164,112
|
)
|
OTHER COMPREHENSIVE INCOME
(LOSS) -
|
|
|
|
|
|
|
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT
|
|
(2,766,786
|
)
|
|
319,747
|
|
COMPREHENSIVE LOSS
|
$
|
(18,572,800
|
)
|
$
|
(3,844,365
|
)
|
The accompanying notes are an integral part of Schedule 1.
F-27
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
|
SCHEDULE 1 - PARENT COMPANY STATEMENTS OF CASH FLOWS
|
FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
|
(UNAUDITED)
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
$
|
(15,806,014
|
)
|
$
|
(4,164,112
|
)
|
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
498,604
|
|
|
514,809
|
|
Loss from
subsidiaries
|
|
14,707,410
|
|
|
3,049,303
|
|
Changes in operating assets and liabilitie
|
|
|
|
|
|
|
Other
payables - shareholders
|
|
600,000
|
|
|
600,000
|
|
Net cash provided by (used in)
operating activitie
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
CASH, beginning of year
|
|
456
|
|
|
456
|
|
|
|
|
|
|
|
|
CASH, end of year
|
$
|
456
|
|
$
|
456
|
|
The accompanying notes are an integral part of Schedule 1.
F-28
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
UNAUDITED CONDENSED NOTES TO SCHEDULE 1
1. Basis of presentation
Certain information and footnote disclosures normally included
in financial statements prepared in conformity with generally accepted
accounting principles in the United States of America have been condensed or
omitted. China Advanced Construction Materials Group, Inc.s (the Company)
investment in subsidiaries is stated at cost plus equity in undistributed
earnings of subsidiaries.
2. Restricted net assets
Schedule I of Article 5-04 of Regulation S-X requires the
condensed financial information of registrant shall be filed when the restricted
net assets of consolidated subsidiaries exceed 25 percent of consolidated net
assets as of the end of the most recently completed fiscal year. For purposes of
the above test, restricted net assets of consolidated subsidiaries shall mean
that amount of the registrants proportionate share of net assets of
consolidated subsidiaries (after intercompany eliminations) which as of the end
of the most recent fiscal year may not be transferred to the parent company by
subsidiaries in the form of loans, advances or cash dividends without the
consent of a third party (i.e., lender, regulatory agency, foreign government,
etc.).
The condensed parent company financial statements have been
prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the
restricted net assets of the subsidiaries of China Advanced Construction
Materials Group, Inc. exceed 25% of the consolidated net assets of China
Advanced Construction Materials Group, Inc. The ability of the Companys Chinese
operating affiliates to pay dividends may be restricted due to the foreign
exchange control policies and availability of cash balances of the Chinese
operating subsidiaries. Because a significant portion of the Companys
operations and revenues are conducted and generated in the Peoples Republic of
China (PRC), a significant portion of our revenues being earned and currency
received are denominated in Renminbi (RMB). RMB is subject to the exchange
control regulation in China, and, as a result, we may be unable to distribute
any dividends outside of China due to PRC exchange control regulations that
restrict our ability to convert RMB into US Dollars.
3. 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 September 9, 2014, the Board granted an aggregate of
150,000 shares of common stock, which were issued with a market value of
$625,500 to its 13 employees under the Companys 2009 Equity Incentive Plan (the
2009 Plan). These shares are vested in two equal installments every six months
from the date of grant. As of June 30, 2016, all of the shares were vested.
Effective September 22, 2014, the Board granted and issued
1,875 shares of common stock to an officer. The grant was under the 2009 Plan
and the employment agreement by and between the Company and the grantee. In
addition, such grant was to fulfill the Companys contractual obligation in the
employment agreement. As a result, the shares were vested immediately upon the
issuance.
Effective June 29, 2015, the Board granted an aggregate of
100,000 shares of common stock, which were issued with a market value of
$380,000 to two employees under the 2009 Plan. These shares are vested in two
equal installments every three months from the date of grant. As of June 30,
2016, all of the shares were vested.
Effective June 29, 2015, at the annual meeting held on that
date, the Stockholders of the Company approved to increase by 200,000 shares of
common stock reserved under the 2009 Plan. Effective June 30, 2016, at the
annual meeting held on that date, the Stockholders of the Company approved to
increase an additional 200,000 shares of common stock reserved under the 2009
Plan.
For the years ended June 30, 2016 and 2015, the Company
recognized $0.5 million and $0.5 million of compensation expenses related to
restricted stock grants, respectively.
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, 2014
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Granted
|
|
251,875
|
|
|
4.02
|
|
|
1,013,413
|
|
Vested
|
|
(76,875
|
)
|
|
4.17
|
|
|
320,663
|
|
Nonvested as of June 30, 2015
|
|
175,000
|
|
$
|
3.96
|
|
$
|
692,750
|
|
Vested
|
|
(175,000)
|
|
|
3.96
|
|
|
692,750
|
|
Nonvested as of June 30, 2016
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
F-29
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
UNAUDITED CONDENSED NOTES TO SCHEDULE 1
Stock Issuance
Effective December 2, 2014, the Board authorized the issuance
of 174,865 shares of restricted common stock to two shareholders for repayments
of certain other payables. These other payables were originated from the
professional expenses the shareholders paid on behalf of the Company.
2013 Employee Stock Purchase Plan (the ESPP)
On November 21, 2013, the Company adopted the 2013 ESPP, which
became effective as of such date. Under the ESPP, the Board may grant or provide
for the grant of rights to eligible employees to purchase shares of the
Companys common stock by payroll deduction or cash contribution.
The aggregate number of shares of common stock that may be
issued under the ESPP is 280,000 shares initially plus an annual increase in the
number of shares on July 1 of each year, commencing on July 1, 2014 and ending
on July 1, 2023, which equals to one percent of the number of shares of Common
Stock outstanding on each such date, and subjects to proportionate adjustment in
the event of a merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company, under which circumstances, the class(es) and number of shares and price
per share of stock subject to outstanding rights, may also be adjusted by the
Board or the committee delegated by the Board.
The ESPP will be administered by the Board unless and until
Board delegates administration to a committee composed of two or more
non-employee directors.
Any employee of the Company or any parent (if any) and
subsidiary corporation of the Company (the Affiliate), who is not a natural
person resident in the United States, who has been in the employ of the Company
or any Affiliate for such continuous period as required by the Board preceding
the grant of rights under the ESPP is eligible to participate in the ESPP during
the applicable offering period, subject to administrative rules established by
the Board.
The ESPP is implemented by sequential offerings, the
commencement and duration of which will be determined by the Board. The purchase
price at which each share of common stock may be acquired in an offering period
upon the exercise of all or any portion of a purchase right will be established
by the Board. However, the purchase price on each purchase date will not be less
than the greater of the book value or the fair market value of a share of the
Common Stock on the purchase date.
Effective July 10, 2014, two employees received an aggregate of
65,102 shares of the Company's common stock, at $4.99 per share, the closing
stock price on July 9, 2014, and the Company was paid in full a total of
$324,860 (RMB 2 million) under the ESPP.
Effective September 9, 2014, four employees received an
aggregate of 202,086 shares of the Companys common stock, at $4.17 per share,
the closing stock price on September 8, 2014, and the Company was paid in full a
total of $842,692 (RMB 5.2 million) under the ESPP.
Note 4 Subsequent events
On August 20, 2016, the Company granted a total of 106,859
shares of the Companys restricted stock at $2.89 per share under the 2009
Equity Incentive Plan to a consultant as compensation for the consulting service
to be provided. The shares are to vest in two tranches upon achieving certain
milestones.
On August 20, 2016, the Company granted a total of 100,000
shares of the Companys restricted stock at $2.89 per share under the 2009
Equity Incentive Plan to two employees as compensation. The shares vested
immediately upon the grant.
F-30