The accompanying notes are an integral part of these
financial statements.
The accompanying notes are an integral part of these
financial statements.
The accompanying notes are an integral part of these
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017 (UNAUDITED) AND DECEMBER
31, 2016
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Adamant DRI Processing and Minerals Group
(“Adamant’ or “the Company” or “Group”), is a Nevada corporation incorporated in July
2014 and successor by merger to UHF Incorporated, a Delaware corporation (“UHF”).
The Company produces Direct Reduced Iron
(“DRI”) using advanced reduction rotary kiln technology with iron ore as the principal raw material. ‘Reduced
Iron’ derives its name from the chemical change that iron ore undergoes when it is heated in a furnace at high temperatures
in the presence of hydrocarbon-rich gasses. ‘Direct reduction’ refers to processes which reduce iron oxides to
metallic iron below the melting point of iron.
UHF was the successor to UHF Incorporated,
a Michigan corporation (“UHF Michigan”), as a result of domicile merger effected on December 29, 2011.
On June 30, 2014, UHF entered into and
closed a share exchange agreement, or the Target Share Exchange Agreement, with Target Acquisitions I, Inc., a Delaware corporation
(“Target”), and the stockholders of Target (the “Target Stockholders”), pursuant to which UHF acquired
100% of the issued and outstanding capital stock of Target for 43,375,638 shares of UHF’s common stock and one share of UHF’s
series A convertible preferred stock, convertible into an additional 17,839,800 shares of common stock. Since UHF’s
certificate of incorporation only authorized the issuance of 50,000,000 shares of common stock, UHF did not have sufficient
authorized but unissued shares of common stock to complete the acquisition of Target, so the Board of Directors authorized the
issuance to one of the Target Stockholders one share of series A convertible preferred stock convertible into 17,839,800 shares
of common stock at such time as UHF amended its certificate of incorporation to increase the number of authorized shares of common
stock or merged with and into another corporation which had sufficient shares of authorized but unissued shares of common stock
for issuance upon conversion. Following the closing of the share exchange, UHF had outstanding 45,920,310 shares of common
stock and one share of series A convertible preferred stock, which was converted into 17,839,800 common shares on August 29, 2014.
For accounting purposes, the share exchange
transaction with Target and the Target Stockholders was treated as a reverse acquisition, with Target as the acquirer and UHF as
the acquired party. The shares issued to Target’s shareholders were accounted for as a recapitalization of Target
and were retroactively restated for the periods presented because after the share exchange, Target’s shareholders owned the
majority of UHF’s outstanding shares and exercised significant influence over the operating and financial policies of
the consolidated entity, and UHF was a non-operating shell with nominal net assets prior to the acquisition. Pursuant to Securities
and Exchange Commission (“SEC”) rules, this is considered a capital transaction in substance, rather than a business
combination.
On July 4, 2014, the Company entered into
an Agreement and Plan of Merger with UHF, pursuant to which UHF merged with and into Adamant with Adamant as the surviving
entity (the “Merger”), as a result of which each outstanding share of common stock of UHF at the effective time of
the Merger was converted into one share of the common stock of Adamant, and the outstanding share of series A Preferred Stock
was converted into 17,839,800 shares of common stock. The Merger was effected on August 29, 2014.
As a result of the acquisition of Target
and UHF, the Company now owns all of the issued and outstanding capital stock of Real Fortune BVI, which in turn owns all of the
issued and outstanding capital stock of Real Fortune Holdings Limited, a Hong Kong limited company (“Real Fortune HK”),
which in turn owns all of the issued and outstanding capital stock of Zhangjiakou Tongda Mining Technologies Service Co., Ltd.
(“China Tongda”), a Chinese limited company.
The Company operates in China through
Zhuolu Jinxin Mining Co., Ltd. (“China Jinxin”), the Company’s variable interest entity which the Company controls
through a series of agreements between China Jinxin and China Tongda and, as of January 24, 2014, owned Haixing Huaxin Mining Industry
Co., Ltd. (“China Huaxin”) which is owned by China Tongda. The Group’s current structure is as follows:
China Jinxin is an early stage mining company
which processes iron ore at its production facility in Hebei Province. China Jinxin currently does not own any mines or hold any
mining rights. In 2015, management determined to further upgrade the facility to enable it to produce DRI due to increased
demand for DRI products in China; accordingly, China Jinxin will produce DRI at its facility. Through contractual arrangements
among China Tongda and China Jinxin, and its shareholders, the Company controls China Jinxin’s operations and financial affairs.
As a result of these agreements, China Tongda is considered the primary beneficiary of China Jinxin (see Note 2) and accordingly,
China Jinxin’s results of operations and financial condition are consolidated in the Group’s financial statements.
All issued and outstanding shares of China Jinxin are held by 15 Chinese citizens.
On January 17, 2014, the Company entered
into a series of substantially identical agreements with five shareholders of Haixing Huaxin Mining Industry Co., Ltd. (“China
Huaxin”) pursuant to which the Company acquired 100% of the outstanding shares of China Huaxin. The consideration
paid to the shareholders of China Huaxin for their interests consisted of cash of RMB 10 million ($1.64 million) and 5.1 million
shares of the Company’s common stock, valued at $0.014 per share ($71,400).
China Tongda, the Company’s wholly-owned
Chinese subsidiary, filed a notice of transfer with respect to the change of ownership of China Huaxin with the local company registration
authority which was approved on January 23, 2014.
China Huaxin was established in August
2010 and is located in Haixing Qingxian Industrial Park, Cangzhou, Hebei Province PRC. China Huaxin is engaged in producing
and selling DRI. Prior to 2015, China Huaxin conducted no business activities other than construction of its DRI production
facility. Construction of the DRI Facility was completed, and China Huaxin completed trial production and expected to
commence commercial production in May 2015. However, as a result of environmental initiatives by national, provincial and local
government authorities in China, starting in June 2015, China Huaxin began upgrading the DRI facilities by converting the existing
coal-gas station systems to liquefied natural gas (“LNG”) station systems. The conversion to LNG systems
will reduce pollutants and produce higher quality DRIs with less impurities. China Huaxin completed the upgrading and resumed trial
production from its upgraded DRI facilities, China Huaxin is currently doing equipment debugging and adjustment, and expects the
official production to resume in the end of 2017.
On April 25, 2017, China Tongda
incorporated Yancheng DeWeiSi Business Trading Co., Ltd (“DeWeiSi”) with registered capital of RMB 10,000,000
($1.48 million), to be paid before April 19, 2047. DeWeiSi is wholly-owned subsidiary of China Tongda. DeWeiSi is engaged in
the sale of mineral products (except petroleum and petroleum products), hardware products, construction materials, and
steel.
The consolidated interim financial information
as of June 30, 2017 and for the six and three month periods ended June 30, 2017 and 2016 was prepared without audit, pursuant to
the rules and regulations of the SEC. Certain information and footnote disclosures, which are normally included in consolidated
financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”) was not included. The interim consolidated financial information should be read in conjunction with the Financial
Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2016, previously filed with the SEC. In the opinion of management, all adjustments (which include normal recurring adjustments)
necessary to present a fair statement of the Company’s consolidated financial position as of June 30, 2017, results of operations
for the six and three months ended June 30, 2017 and 2016, and cash flows for the six months ended June 30, 2017 and 2016, as applicable,
were made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or
any future periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated
Financial Statements (“CFS”) are prepared in conformity with US GAAP. Adamant, Real Fortune BVI and Real Fortune
HK’s functional currency is the US Dollar (‘‘USD’’ or “$”), and China Tongda and
its wholly owned subsidiaries' DeWeiSi, China Jinxin and China Huaxin’s functional currency is Chinese
Renminbi (‘‘RMB’’). The accompanying CFS are translated from functional currencies and presented in
USD.
Principles of Consolidation
The CFS include the financial statements
of the Company, its subsidiaries and its VIE (China Jinxin) for which the Company’s subsidiary China Tongda is the primary
beneficiary; and China Tongda’s 100% owned subsidiaries China Huaxin and DeWeiSi. All transactions and balances among the Company,
its subsidiaries and VIE are eliminated in consolidation.
The Company follows the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 which requires
a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE or is entitled
to a majority of the VIE’s residual returns. In determining China Jinxin to be the VIE of China Tongda, the Company
considered the following indicators, among others:
China Tongda has the right to control and
administer the financial affairs and operations of China Jinxin and to manage and control all assets of China Jinxin. The equity
holders of China Jinxin as a group have no right to make any decision about China Jinxin’s activities without the consent
of China Tongda. China Tongda will be paid quarterly, management consulting and technical support fees equal to all pre-tax profits,
if any, of that quarter. If there are no earnings before taxes and other cash expenses, during any quarter, no fee shall be
paid. If China Jinxin sustains losses, they will be carried to the next period and deducted from the next service fee. China Jinxin
has the right to require China Tongda to pay China Jinxin the amount of any loss incurred by China Jinxin.
The shareholders of China Jinxin pledged
their equity interests in China Jinxin to China Tongda to guarantee China Jinxin’s performance of its obligations under the Management
Entrustment and Option Agreements. If either China Jinxin or its equity owners is in breach of the Equity Pledge or Exclusive
Purchase Option Agreements, then China Tongda is entitled to require the equity owners of China Jinxin to transfer their equity
interests in China Jinxin to it.
The shareholders of China Jinxin irrevocably
granted China Tongda or its designated person an exclusive option to acquire, at any time, all of the assets or outstanding shares
of China Jinxin, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in China Jinxin
shall be the lower of (i) the actual registered capital of China Jinxin or (ii) RMB 500,000 ($74,000), unless an appraisal is required
by the laws of China.
Each shareholder of China Jinxin executed
an irrevocable power of attorney to appoint China Tongda as its attorney-in-fact to exercise all of its rights as equity owner
of China Jinxin, including 1) attend the shareholders’ meetings of China Jinxin and/or sign the relevant resolutions; 2)
exercise all the shareholder's rights and shareholder's voting rights that the shareholder is entitled to under the laws of the
PRC and the Articles of Association of China Jinxin, including but not limited to the sale or transfer or pledge or disposition
of the shares in part or in whole; 3) designate and appoint the legal representative, Chairman of the Board of Directors (“BOD”),
Directors, Supervisors, the Chief Executive Officer, Financial Officer and other senior management members of China Jinxin; and
4) execute the relevant share purchases and other terms stipulated in the Exclusive Purchase Option and Share Pledge Agreements.
However, the VIE is monitored by the Company
to determine if any events have occurred that could cause its primary beneficiary status to change. These events include whether:
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a.
|
China Jinxin's governing documents or contractual arrangements
are changed in a manner that changes the characteristics or adequacy of China Tongda's equity investment at risk.
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|
b.
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The equity investment in China Jinxin or some part thereof
is returned to its shareholders or China Tongda, and other entities become exposed to expected losses of China Jinxin.
|
|
c.
|
China Jinxin undertakes additional activities or acquires
additional assets, beyond those anticipated at the later of the inception of China Jinxin or the latest reconsideration event,
that increase the entity's expected losses.
|
|
d.
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China Jinxin receives an additional equity investment that
is at risk, or China Jinxin curtails or modifies its activities in a way that decreases its expected losses.
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There has been no change in the VIE structure during the six
and three months ended June 30, 2017 and 2016, and none of the events listed in a-d above have occurred.
The accompanying CFS include the accounts of Adamant, Real
Fortune BVI, Real Fortune HK, China Tongda, China Jinxin, China Huaxin and DeWeiSi, which are collectively referred to as the
"Company". All significant intercompany accounts and transactions were eliminated in the CFS.
Going Concern
The Company incurred a net loss of $2.67 million for the six months ended June 30, 2017. The Company also had a working capital
deficit of $53.32 million as of June 30, 2017. In addition, China Jinxin refused to sell its iron ore concentrate to its sole
customer because of the low price offered. These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The CFS do not include any adjustments that might result from the outcome of this uncertainty. China Jinxin
is upgrading its facility and equipment, which when completed, will enable the Company to produce DRI. China Jinxin's DRI
facility upgrade was almost complete as of the date of this report and the Company is currently in the final stage of adjusting
the equipment and making certain modifications to the facility after the relevant authority's inspection and testing. A shareholder
of the Company indicated she will continue to fund China Jinxin, although there is no written agreement in place and China
Jinxin currently owes her $10.42 million. In addition, China Huaxin currently owes $24.70 million to three of the Company's
shareholders for constructing its DRI facility; one is the major lender of China Jinxin who lent $16.92 million to China Huaxin,
and the other two are also members of the Company's management. In addition, China Huaxin borrowed $5.11 million from companies
owned by its major shareholder. China Huaxin completed trial production and expected to commence commercial production in
May 2015. However, as a result of environmental initiatives by national, provincial and local government authorities in China,
in June 2015, China Huaxin began upgrading the DRI facilities by converting the existing coal-gas station systems to liquefied
natural gas ("LNG") station systems. The conversion to LNG systems will reduce pollutants and produce higher quality DRIs
with less impurities. China Huaxin has completed the upgrading and resumed trial production at its upgraded DRI facilities.
China Huaxin is currently doing the equipment debugging and adjustments, and expects the official production to resume prior
to the end of 2017.
Use of Estimates
In preparing financial statements in conformity
with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Significant estimates, required by management, include the recoverability of long-lived assets,
allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from these
estimates.
Business Combination
For a business combination, the assets
acquired, the liabilities assumed and any noncontrolling interest in the acquiree are recognized at the acquisition date, measured
at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as
well as the noncontrolling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase
in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration
transferred plus any noncontrolling interest in the acquiree that excess in earnings is recognized as a gain attributable to the
acquirer.
Deferred tax liability and asset are recognized
for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities
assumed in a business combination in accordance with FASB ASC Subtopic 740-10.
Goodwill
Goodwill is the excess of purchase price
and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance
with FASB ASC Topic 350, “Intangibles-Goodwill and Other,” goodwill is not amortized but is tested for impairment,
annually or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level.
An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its fair value, with the
fair value of the reporting unit determined using discounted cash flow (“DCF”) analysis. A number of significant assumptions
and estimates are involved in the application of DCF analysis to forecast operating cash flows, including the discount rate,
the internal rate of return and projections of realizations and costs to produce. Management considers historical experience and
all available information at the time the fair values of its reporting units are estimated.
On January 23, 2014, the Company completed the acquisition of China Huaxin. Under the acquisition method of accounting, the
total purchase price is allocated to tangible assets and intangible assets acquired and liabilities assumed based on their
fair values with the excess recorded to goodwill. The Company recognized RMB 40.02 million ($6.54 million) of goodwill from
the acquisition. At December 31, 2015, the Company reappraised the fair value of China Huaxin by using the replacement cost
method since China Huaxin did not start official production in 2015 due to the upgrading of its DRI facilities. As of June
30, 2017 and December 31, 2016, the Company evaluated the impairment of goodwill using DCF analysis and concluded the goodwill
of Huaxin was not impaired.
Cash and Equivalents
For financial statement purposes, the Company considers all highly liquid investments with an original maturity of three months
or less to be cash equivalents. The Company's account in the Agriculture Bank of China, Zhuolu Branch of China Jinxin was
required to be frozen for RMB 654,300.00 ($94,320) since October 2016 as a result of a civil judgement for accidental death
in favor of a deceased employee (see Note 17). The Company's bank account in the Bank of China, Cangzhou Bohai district
Branch of China Huaxin was required to be frozen for RMB79,852 ($11,574) as a result of two civil judgements against the Company
to ensure repayment of two personal loans (see Note 17). Due to limited cash balances in the bank account, the Company
recorded $8,911 and $94,320 as restricted cash as of June 30, 2017 and December 31, 2016, respectively.
Accounts Receivable, net
The Company maintains reserves for potential
credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate
the adequacy of these reserves. The Company had $0 bad debt allowances at June 30, 2017 and December 31, 2016.
Inventory, net
Inventory mainly consists of iron ore,
iron ore concentrate, mineral powder and coal slime for DRI. Inventory is valued at the lower of average cost or market,
cost being determined on a moving weighted average basis method; including labor and all production overheads.
Property and Equipment, net
Property and equipment are stated at cost,
less accumulated depreciation. Major repairs and betterments that significantly extend original useful lives or improve productivity
are capitalized and depreciated over the period benefited. Maintenance and repairs are expensed as incurred. When property and
equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts,
and any gain or loss is included in operations. Depreciation of property and equipment is computed using shorter of useful
lives of the property or the unit of depletion method. For shorter-lived assets the straight-line method over estimated lives ranging
from 3 to 20 years is used as follows:
Office Equipment
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3-5 years
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Machinery
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10 years
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Vehicles
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5 years
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Building
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20 years
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Impairment of Long-Lived Assets
Long-lived assets, which include property
and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to
be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected
to be generated by it. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds its fair value (“FV”). FV is generally
determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its
review, the Company believes that, as of June 30, 2017 and December 31, 2016, there were $0.77 million and $1.07 million in impairments
of its long-lived assets, respectively (See Note 6).
Income Taxes
The Company follows FASB ASC Topic 740,
“Income Taxes”, which requires recognition of deferred tax assets and liabilities for expected future tax consequences
of events included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts
at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
When tax returns are filed, it is likely
that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty
about their merits or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with
the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized
tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in
the statements of income. At June 30, 2017 and December 31, 2016, the Company did not take any uncertain positions that would necessitate
recording a tax related liability.
Revenue Recognition
The Company’s revenue recognition
policies are in compliance with FASB ASC Topic 605, “Revenue Recognition”. Sales are recognized when
a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed
or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of
the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition
are recorded as unearned revenue.
Sales are the invoiced value of iron ore
concentrate and DRI products, net of value-added tax (“VAT”). All of the Company’s iron ore concentrate sold
in the PRC is subject to a value-added tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on
raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT
receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.
Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.
Cost of Goods Sold
Cost of goods sold (“COGS”)
consists primarily of fuel and power, direct material and labor, depreciation of mining plant and equipment, attributable to the
production of iron ore concentrate. Any write-down of inventory to lower of cost or market is also recorded in COGS.
Concentration of Credit Risk
The operations of the Company are in the
PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, and by the general state of the PRC economy.
The Company has cash on hand and demand
deposits in accounts maintained with state-owned banks within the PRC. Cash in state-owned banks is not covered by insurance. The
Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in these bank accounts.
Statement of Cash Flows
In accordance with FASB ASC Topic 230,
“Statement of Cash Flows”, cash flows from the Company’s operations are calculated based upon the local currencies.
As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet. Cash from operating, investing and financing activities is net of
assets and liabilities acquired.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and equivalents, accrued liabilities and accounts payable,
carrying amounts approximate their fair values ("FV") due to their short maturities. FASB ASC Topic 825, "Financial Instruments,"
requires disclosure of the FV of financial instruments held by the Company. The carrying amounts reported in the balance sheets
for current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of
the short period of time between the origination of such instruments and their expected realization and the current market
rate of interest.
Fair Value Measurements and Disclosures
FASB ASC Topic 820, “Fair Value Measurements
and Disclosures,” defines FV, and establishes a three-level valuation hierarchy for disclosures of fair value measurement
that enhances disclosure requirements for FV measures. The three levels are defined as follow:
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●
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Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
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●
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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.
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●
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Level 3 inputs to the valuation methodology are unobservable and significant to the FV measurement.
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As of June 30, 2017 and December 31, 2016,
the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at FV.
Foreign Currency Translation and Comprehensive
Income (Loss)
The functional currency of China Jinxin
and China Huaxin is RMB. For financial reporting purposes, RMB is translated into USD as the reporting currency. Assets and
liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period.
Translation adjustments arising from the
use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated
other comprehensive income”. Gains and losses resulting from foreign currency transactions are included in income. There
was no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.
The Company uses FASB ASC Topic 220, “Comprehensive
Income”. Comprehensive income (loss) is comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive
loss for the six and three months ended June 30, 2017 and 2016 consisted of net loss and foreign currency translation adjustments.
Share-based compensation
The Company accounts for share-based compensation
awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires
that share-based payment transactions with employees be measured based on the grant-date FV of the equity instrument issued and
recognized as compensation expense over the requisite service period.
The Company accounts for share-based compensation
awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”.
Share-based compensation associated with the issuance of equity instruments to non-employees is measured at the FV of the equity
instrument issued or committed to be issued, as this is more reliable than the FV of the services received. The FV is measured
at the date that the commitment for performance by the counterparty has been reached or the counterparty's performance is complete.
Earnings (loss) per Share (EPS)
Basic EPS is computed by dividing net income
by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic EPS except
that the denominator is increased to include the number of additional common shares that would have been outstanding if all the
potential common shares, warrants and stock options had been issued and if the additional common shares were dilutive. Diluted
EPS is based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised.
Dilution is computed by applying the treasury stock method for the outstanding options and warrants, and the if-converted method
for the outstanding convertible instruments. Under the treasury stock 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. Under the if-converted method, outstanding convertible instruments are assumed
to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
Segment Reporting
FASB ASC Topic 280, “Segment Reporting”,
requires use of the “management approach” model for segment reporting. The management approach
model
is based on the way a company’s management organizes segments within the Company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography, legal structure, management structure,
or any other manner in which management disaggregates a company.
FASB ASC Topic 280 has no effect on the
Company’s CFS as substantially all of its operations are conducted in one industry segment – iron ore production. With
the upgrading of DRI facilities for both China Jinxin and China Huaxin, the Company will be shifting its main product from iron
ore to DRI.
New Accounting Pronouncements
In May 2014, the FASB issued No. 2014-09,
Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification
605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity
recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB approved a one-year
deferral of the effective date of the new revenue recognition standard. Public business entities, certain not-for-profit entities,
and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December
15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual
reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. In March
2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting
Revenue versus Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying
Performance Obligations and Licensing. In May 2016, the FASB issued ASU 2016-11, Revenue from Contracts with Customers (Topic 606)
and Derivatives and Hedging (Topic 815) - Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16, and ASU 2016-12, Revenue
from Contracts with Customers (Topic 606) - Narrow Scope Improvements and Practical Expedients. These ASUs clarify the implementation
guidance on a few narrow areas and adds some practical expedients to the guidance Topic 606. The Company is evaluating the effect
that these ASUs will have on its CFS.
On March 30, 2016, the FASB issued ASU
No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which includes amendments to accounting for income taxes
at settlement, forfeitures, and net settlements to cover withholding taxes. The amendments in ASU 2016-09 are effective for public
companies for fiscal years beginning after December 31, 2016, and interim periods within those annual periods. The Company adopted
this new guidance on January 1, 2017 and this standard does not have a material impact on the Company’s CFS.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets
held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces
the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized
cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its CFS.
In August 2016, the FASB issued ASU No.
2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the presentation and classification of
certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for public business entities for
fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company
is currently assessing the potential impact of ASU 2016-15 on its CFS.
In October 2016, the FASB issued ASU No.
2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU improves the accounting
for the income tax consequences of intra-entity transfers of assets other than inventory. For public business entities, the amendments
in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods
within those annual reporting periods. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU
will have a significant impact on its CFS.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires that a statement of cash flows explain the change
during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with
cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim period within those fiscal
years. Early adoption is permitted, including adoption in an interim period. The standard should be applied using a retrospective
transition method to each period presented. The Company does not anticipate that the adoption of this ASU will have a significant
impact on its CFS.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with
the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions
or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively on or after
the effective date. The Company will evaluate the impact of adopting this standard prospectively upon any transactions of acquisitions
or disposals of assets or businesses.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical
purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds
its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual
or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact
of adopting this standard on its CFS.
3. INVENTORY
Inventory consisted of the following at June 30, 2017 and December
31, 2016:
|
|
2017
|
|
2016
|
Material
|
|
$
|
313,418
|
|
|
$
|
305,381
|
|
Finished goods
|
|
|
608,332
|
|
|
|
594,073
|
|
Less: inventory impairment allowance
|
|
|
(210,880
|
)
|
|
|
(205,936
|
)
|
Total
|
|
$
|
710,870
|
|
|
$
|
693,518
|
|
4. MINING RIGHTS
The Company is currently negotiating with
the Department of Land and Resources of Hebei Province and the local Zhuolu County government to obtain the rights to mine in Zhuolu
County where one of its production facilities is located. Pending the final contract, the Company accrued the cost of mining
rights based on the quantity of ore extracted (see Note 11). The Company used $0.68 (RMB 2.4 per ton) based on a royalty rate prescribed
by the local authority based on the purity of ore in the subject mines. If the rate per ton of ore changes when the contract is
finalized, the Company will account for the change prospectively as a change in an accounting estimate. The Company did not extract
any ore in the six and three months ended June 30, 2017 and 2016, and accordingly did not accrue the cost of mining rights
for the six and three months ended June 30, 2017 and 2016.
5. VALUE-ADDED TAX RECEIVABLE
At June 30, 2017 and December 31, 2016,
the Company had VAT receivable of $2,721,849 and $2,651,258, respectively. It was the VAT paid on purchases, and it
can be carried forward indefinitely for offsetting against future VAT payable.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at June 30,
2017 and December 31, 2016:
|
|
2017
|
|
2016
|
Building
|
|
$
|
20,890,680
|
|
|
$
|
20,401,012
|
|
Production equipment
|
|
|
15,426,837
|
|
|
|
16,030,128
|
|
Transportation equipment
|
|
|
1,198,291
|
|
|
|
1,170,203
|
|
Office equipment
|
|
|
245,571
|
|
|
|
238,822
|
|
Total
|
|
|
37,761,379
|
|
|
|
37,840,165
|
|
Less: Accumulated depreciation
|
|
|
(13,268,597
|
)
|
|
|
(12,197,221
|
)
|
Less: impairment allowance
|
|
|
(769,431
|
)
|
|
|
(1,066,905
|
)
|
Net
|
|
$
|
23,723,351
|
|
|
$
|
24,576,039
|
|
Depreciation for the six months ended June 30, 2017 and 2016
was $1,363,691 and $1,385,998, respectively. Depreciation for the three months ended June 30, 2017 and 2016 was $699,812 and $680,200,
respectively.
7. RELATED PARTIES TRANSACTIONS
Advance from related parties
At June 30, 2017 and December 31, 2016, China Jinxin owed one of its shareholders $10,417,693 and $10,039,155, respectively,
for the purchase of equipment used in construction in progress and for working capital needs. This advance from this shareholders
will not bear interest prior to the commencement of the Company's production pursuant to an amended loan agreement entered
on January 16, 2013. Commencing on the production date, interest will begin to accrue at the bank's annual interest rate on
certificates of deposit at that time on the amount outstanding from time to time and all amounts inclusive of accrued interest
is to be repaid within three years of commencement of production at the Zhuolu Mine. China Jinxin had not commenced production
as of June 30, 2017.
At June 30, 2017, China Huaxin owed three shareholders, two of whom are also the Company's management, $24.70 million used
to construct its DRI facility. Of the $24.70 million, $7.04 million had interest of 10% and a due date of six months from
the start date of official production. The remaining payable bear no interest, and is payable upon demand. China Huaxin
also borrowed $5.11 million from certain companies owned by its major shareholder, which bear no interest and is payable
upon demand. At June 30, 2017, China Huaxin also owed one related party who is the brother of the Company's major shareholder
the amount of $73,807, this loan bear interest of 10% and is payable upon demand.
At December 31, 2016, China Huaxin
owed three shareholders, two of whom are also the Company’s management, $23.88 million used to construct
its DRI facility. Of the $23.88 million, $6.88 million had interest of 10% and a due date of six months from the start date of
official production. The remaining payable bore no interest, and is payable upon demand. China Huaxin also borrowed
$4.99 million from certain companies owned by its major shareholder, which bore no interest and is payable upon demand. At December
31, 2016, China Huaxin also owed one related party who is the brother of the Company’s major shareholder the amount
of $72,077, this loan bore interest of 10% and is payable upon demand.
At June 30, 2017 and December 31, 2016,
Real Fortune HK owed one shareholder $1.20 million for advances to meet operating needs. This advance bears no interest and is
payable upon demand.
Below is the summary of advances from related
parties at June 30, 2017 and December 31, 2016, respectively.
|
|
2017
|
|
2016
|
Advance from shareholders (also management)
|
|
$
|
36,345,222
|
|
|
$
|
35,145,896
|
|
Advance from a related party individual
|
|
|
73,807
|
|
|
|
72,077
|
|
Advance from related party companies
|
|
|
5,107,715
|
|
|
|
4,987,993
|
|
Total
|
|
|
41,526,744
|
|
|
|
40,205,966
|
|
Less: Advance to related parties’ companies
|
|
|
(4,401
|
)
|
|
|
(4,299
|
)
|
Advance from related parties, net
|
|
$
|
41,522,343
|
|
|
$
|
40,201,667
|
|
8. INTANGIBLE ASSETS, NET
Intangible assets consisted solely of land
use rights. All land in the PRC is government-owned and cannot be sold to any individual or company. However, the government grants
the user a “land use right” to use the land. China Jinxin acquired land use rights during 2006 for $0.75 million (RMB
5 million). China Huaxin acquired land use rights for $2.96 million (RMB 18.24 million) in November 2012 with FV of $5.04 million
(RMB 31 million) at acquisition date. China Jinxin and China Huaxin have the right to use their land for 20 and 49 years, respectively,
and are amortizing such rights on a straight-line basis for 20 and 49 years, respectively.
Intangible assets consisted of the following
at June 30, 2017 and December 31, 2016:
|
|
2017
|
|
2016
|
Land use rights
|
|
$
|
3,737,695
|
|
|
$
|
3,541,654
|
|
Less: Accumulated amortization
|
|
|
(699,812
|
)
|
|
|
(527,533
|
)
|
Net
|
|
$
|
3,037,883
|
|
|
$
|
3,014,121
|
|
Amortization
of intangible assets for the six months ended June 30, 2017 and 2016 was $47,909 and $50,399, respectively. Amortization of intangible
assets for the three months ended June 30, 2017 and 2016 was $24,011 and $25,194, respectively.
Annual
amortization for the next five years from July 1, 2017, is expected to be $97,165, $97,165, $97,165, $97,165 and $97,165.
9. CONSTRUCTION IN PROGRESS
Construction in progress is for the purchase and installation of equipment for future iron ore refining for China Jinxin.
China Jinxin had construction in progress of $6,037,559 and $6,036,736 at June 30, 2017 and December 31, 2016, respectively.
China Jinxin completed most of the construction for iron ore refining; however, the management plans to further upgrade the
facility for DRI production due to increased demand for DRI products in China. The construction for China Jinxin's DRI facility
upgrade was almost completed as of the date of this report date and the Company is currently in the final stage of adjusting
the equipment and making certain modification to the facility after the relevant authority's inspection and testing.
10. DEFERRED TAX LIABILITY
At June 30, 2017, deferred tax liability
was $0.
At December 31, 2016, deferred tax liability
of $2,485 arose from the differences between the tax bases and book bases of property and equipment and intangible assets
arising from the acquisition of China Huaxin.
11. ACCRUED LIABILITIES AND OTHER PAYABLES
CURRENT
Accrued liabilities and other payables consisted of the following
at June 30, 2017 and December 31, 2016:
|
|
2017
|
|
2016
|
Accrued payroll
|
|
$
|
147,250
|
|
|
$
|
150,960
|
|
Accrued mining rights (see note 4)
|
|
|
65,302
|
|
|
|
63,771
|
|
Accrued interest
|
|
|
5,253,914
|
|
|
|
4,639,453
|
|
Due to unrelated parties
|
|
|
6,281,248
|
|
|
|
6,134,019
|
|
Payable for social insurance
|
|
|
51,907
|
|
|
|
45,022
|
|
Payable for construction
|
|
|
98,010
|
|
|
|
138,959
|
|
Other
|
|
|
106,058
|
|
|
|
108,230
|
|
Total
|
|
$
|
12,003,689
|
|
|
$
|
11,280,414
|
|
As of June 30, 2017, the $6,281,248 due
to unrelated parties were short-term advances from unrelated companies or individuals for the Company’s construction
and working capital needs, of which, $2,591,890 bore interest of 10% and is due 6 months after the commencement of China Huaxin’s
official production. The remaining amount of short-term advances bore no interest, and is payable upon demand.
As of December 31, 2016, the $6,134,019 due
to unrelated parties were short-term advances from unrelated companies or individuals for the Company’s construction
and working capital needs, of which, $2,629,384 bore interest of 10% and is due 6 months after the commencement of China Huaxin’s
official production. The remaining amount of short-term advances bore no interest, and is payable upon demand.
NONCURRENT
Under local environmental regulations,
the Company is obligated at the end of the mine’s useful life to restore and rehabilitate the land that is used in its
mining operations. The Company estimates it would cost $560,000 (RMB 3.5 million) to restore the entire Zhuolu mine after
extracting all the economical ore for such efforts.
The Company accrued certain mine restoration
expenses based on the actual production volume during the period it extracted ore. As of June 30, 2017 and December 31, 2016, the
long term accrued mine restoration cost was $12,083 and $11,800, respectively. There was no production during the six months ended
June 30, 2017 and 2016.
12. SHORT TERM LOAN
At June 30, 2017 and December 31, 2016,
China Jinxin had a short-term bank loan of $191,899 and $187,401, respectively. This loan was entered in June 2013 for
one year, and renewed on June 27, 2014 to June 26, 2015, with monthly interest of 0.9%. This loan was renewed on June
30, 2015, for a one-year term to June 29, 2016, and was further renewed to June 26, 2017, with monthly interest of 0.83375%. The
loan was secured by a lien on a fixed asset of China Jinxin. As of this report date, China Jinxin is in the process of extending
the loan.
13. PAYABLE TO CONTRACTORS
In 2007 and 2008, the Company entered into
contracts with an equipment supplier and a construction company for equipment and construction of a water pipeline for $5.75 million
(RMB 38 million). The Company recorded the payable in 2009. In 2010, the Company amended the payment terms and paid $2.2 million
(RMB 14.5 million) and agreed to pay the remaining balance as follows: $2.08 million (RMB 13.5 million) on December 31, 2011, and
$1.47 million (RMB 10 million) on December 31, 2012. During 2011, the Company paid $2.86 million (RMB 18.0 million). During 2012,
the Company did not make any payment on this payable. On March 20, 2013, the Company amended the payment terms and agreed to pay
the remaining balance of $902,098 (RMB 5,500,000) on December 31, 2014. Based on the amended agreement, if the Company paid in
full by December 31, 2014, no interest would be charged. The Company agreed that if it defaulted it would pay interest starting
on January 1, 2015 based on the current bank interest rate for the remaining balance at that time. Starting from January 1, 2015,
the Company agreed to pay interest based on the current bank interest rate of 5.35% for the outstanding balance at December
31, 2014. As of June 30, 2017 and December 31, 2016, the Company has $811,880 and $792,850 of payable to contractors,
respectively.
The Company recorded the restructuring
of this payable in accordance with ASC 470-60-35-5, as it was a modification of its terms, it did not involve a transfer of assets
or grant of an equity interest. Accordingly, the Company accounted for the effects of the restructuring prospectively from the
time of restructuring, and did not change the carrying amount of the payable at the time of the restructuring as the carrying amount
did not exceed the total future cash payments specified by the new terms.
14. STOCKHOLDERS’ EQUITY
Shares issued to consulting firm
On November 15, 2016, the Company entered into a consulting agreement with a consulting firm. The Company issued 3,000,000
shares of the Company's common stock to the firm for 24 months of consulting services including financial analysis, business
plan advisory services, due diligence assistance for financing and IR services. The shares were issued in January 2017; and
the FV was $1,050,000, which was recorded as prepaid expense; the FV was calculated based on the stock price of $0.35 per
share on November 15, 2016, and amortized over the service term. At June 30, 2017, the Company had prepaid expense of $721,875.
During the six months ended June 30, 2017, the Company amortized $262,250 as stock compensation expense. During the three
months ended June 30, 2017, the Company amortized $131,250 as stock compensation expense. In addition to the 3,000,000 shares,
the Company also agreed to pay the consultant $4,000 cash per month on or before the 5th day of each calendar month.
15. INCOME TAXES
The Company’s operating subsidiary
is governed by the Income Tax Laws of the PRC and various local tax laws. Effective January 1, 2008, China adopted a uniform tax
rate of 25% for all enterprises (including foreign-invested enterprises).
The following table reconciles the statutory
rates to the Company’s effective tax rate for the six months ended June 30, 2017 and 2016:
|
|
2017
|
|
2016
|
US statutory rates (benefit)
|
|
|
(33.5
|
)%
|
|
|
(34.0
|
)%
|
Tax rate difference
|
|
|
9.1
|
%
|
|
|
9.2
|
%
|
Valuation allowance on NOL
|
|
|
24.3
|
%
|
|
|
24.1
|
%
|
Tax per financial statements
|
|
|
(0.1
|
)%
|
|
|
(0.7
|
)%
|
The following table reconciles the statutory rates
to the Company’s effective tax rate for the three months ended June 30, 2017 and 2016:
|
|
2017
|
|
2016
|
US statutory rates (benefit)
|
|
|
(33.0
|
)%
|
|
|
(34.0
|
)%
|
Tax rate difference
|
|
|
9.1
|
%
|
|
|
9.2
|
%
|
Valuation allowance on NOL
|
|
|
23.9
|
%
|
|
|
24.0
|
%
|
Tax per financial statements
|
|
|
(0.00
|
)%
|
|
|
(0.8
|
)%
|
The income tax for the six months ended June 30, 2017 and 2016,
consisted of the following:
|
|
2017
|
|
2016
|
Income tax (benefit) expense – current
|
|
$
|
—
|
|
|
$
|
—
|
|
Income tax (benefit) expense – deferred
|
|
|
(2,243
|
)
|
|
|
(17,328
|
)
|
Total income tax benefit
|
|
$
|
(2,243
|
)
|
|
$
|
(17,328
|
)
|
The income tax for the three months ended June 30, 2017 and
2016, consisted of the following:
|
|
2017
|
|
2016
|
Income tax (benefit) expense — current
|
|
$
|
—
|
|
|
$
|
—
|
|
Income tax (benefit)
expense — deferred
|
|
|
256
|
|
|
|
(9,116
|
)
|
Total income tax expense
|
|
$
|
256
|
|
|
$
|
(9,116
|
)
|
16. MAJOR CUSTOMER AND VENDORS
Sales for the six and three months ended
June 30, 2017 and 2016 were $0, respectively.
China Jinxin made a 10-year contract with
Handan Steel Group Company (“HSG”) a state-owned enterprise, and agreed to sell all of its output from its Zhuolu production
facility to HSG. The selling price was to be based on the market price. HSG agreed to purchase all the Company’s products
from its Zhuolu production facility regardless of changes in the market. China Jinxin is economically dependent on HSG. However,
as of today, China Jinxin has refused to sell its iron ore concentrate to its sole customer because of the low price offered.
17. LITIGATION
On September 4, 2012, Shijiazhuang City
QiaoXi District People’s Court ruled China Huaxin had to repay a loan of RMB 49,067 ($7,073) plus court fees of RMB 510 ($74)
to a plaintiff within 10 days of the judgment. China Huaxin paid RMB 10,216 ($1,481) in January 2017.
On April 7, 2013, the Zhulu County Labor
Dispute Arbitration Committee ruled that China Jinxin had to pay RMB 654,300 ($94,320) to an employee as a result of her death
in a traffic accident in 2010 when she was on the way to China Jinxin. China Jinxin denied it had an employment relationship with
the plaintiff and appealed to Hebei Province Zhulu County People’s Court; on August 3, 2015, Hebei Province Zhulu County
People’s Court confirmed there was an employment relationship and affirmed the original judgement in favor of the plaintiff.
The Court froze the Company’s bank account in October 2016. This liability was accrued as of December 31, 2016. As of this
report date, the Company has not yet paid this liability due to its lack of cash.
On December 30, 2016, Hebei Province Haixing
County People’s Court ruled that China Huaxin had to pay the outstanding balance of RMB 410,537 ($59,181) electricity fee
plus RMB 3,288 ($474) in court fees that it owed to GuoWang Hebei Province Electric Company Haixing County branch before January
9
th
, 2017. China Huaxin accrued this liability in 2016 and paid the balance in full in March 2017.
On August 13, 2014, Heibei Province Haixing
County People’s Court ruled that China Huaxin had to repay a loan of RMB 60,000 ($8,697) plus applicable interest which is
calculated based on the Bank of China’s interest rate for the loan with the same term to a plaintiff within 10 days of the
judgment. At June 30, 2017, China Huaxin had outstanding balance of RMB 39,502 ($5,726).
18. STATUTORY RESERVES
Pursuant to the corporate law of the PRC
effective January 1, 2006, the Company is now only required to maintain one statutory reserve by appropriating money from its after-tax
profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.
19. OPERATING RISKS
The Company’s operations in the PRC
are subject to specific considerations and significant risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency
exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company’s sales, purchases and
expenses are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not
freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to
be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting
documentation in order to effect the remittance.
All mineral resources in China are owned
by the state. Thus, the Company’s ability to obtain iron ore is dependent upon its ability to obtain mineral rights
from the relevant state authorities, purchase ore from another party that has mining rights from the state or import ore from outside
the PRC. It is generally not feasible to transport iron ore any significant distance before processing. The Company has yet to
obtain long term rights to any iron mine and there is no assurance the Company will be able to do so. Although the Company has
extracted iron ore from the Zhuolu Mine on which the Company’s production facilities are located, the Company does not have
the right to do so and can be subjected to various fines and penalties. The Company is not able to determine the amount of fines
and penalties at the current stage; however, the Company believes the fines and penalties are negotiable with the authorities.
If the Company is not able to obtain mining rights to the Zhuolu Mine in the future, the Company will have to cease mining operations
at the Zhuolu Mine and the Company will seek to acquire iron ore from third parties. The failure to obtain iron ore reserves for
processing at all or on reasonably acceptable terms would have a material adverse impact on our business and financial results.