Consolidated Results of Operations
Comparison of the three months ended March 31, 2017 and 2016
The following table sets forth key components of our results of
operations for the three months ended March 31, 2017, and 2016, in US dollars:
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Total revenue
|
$
|
13,592,863
|
|
$
|
16,051,501
|
|
$
|
(2,458,638
|
)
|
|
(15
|
)%
|
Total cost of revenue
|
|
12,125,038
|
|
|
16,967,271
|
|
|
(4,842,233
|
)
|
|
(29
|
)%
|
Gross profit (loss)
|
|
1,467,825
|
|
|
(915,770
|
)
|
|
2,383,595
|
|
|
260%
|
|
Recovery for doubtful accounts
|
|
761,482
|
|
|
1,270,395
|
|
|
(508,913
|
)
|
|
(40
|
)%
|
Selling, general and
administrative expenses
|
|
(1,548,566
|
)
|
|
(1,847,205
|
)
|
|
298,639
|
|
|
(16
|
)%
|
Research and development expenses
|
|
(99,049
|
)
|
|
(340,229
|
)
|
|
241,180
|
|
|
(71
|
)%
|
Loss from termination of
lease
|
|
-
|
|
|
(388,899
|
)
|
|
388,899
|
|
|
(100
|
)%
|
Income (loss) from operations
|
|
581,692
|
|
|
(2,221,708
|
)
|
|
2,803,400
|
|
|
126%
|
|
Other expense, net
|
|
(213,207
|
)
|
|
(406,159
|
)
|
|
192,952
|
|
|
(48
|
)%
|
Income (loss) before provision for income
taxes
|
|
368,485
|
|
|
(2,627,867
|
)
|
|
2,996,352
|
|
|
114%
|
|
Provision for income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-%
|
|
Net income (loss)
|
$
|
368,485
|
|
$
|
(2,627,867
|
)
|
$
|
2,996,352
|
|
|
114%
|
|
23
Revenue
. Our revenue is primarily generated from
sales of our advanced ready-mix concrete products. For the three months ended
March 31, 2017, we generated total revenue of approximately $13.6 million, as
compared to approximately $16.1 million during the three months ended March 31,
2016, a decrease of approximately $2.5 million, or 15%. The decrease in revenue
was principally due to decreased sales volume by 14%, because of the
strengthened result of the PRC governments increased inspections of overloaded
transportation vehicles, which also affected our sales of our concrete truck
transportation services. The decrease in revenue was offset by the increase in
our selling price of concrete by 4% during the three months ended March 31,
2017, as compared to the same period in 2016. The decrease was also attributable
to the 5% depreciation of the Chinese Renminbi against the U.S. Dollar during
the three months ended March 31, 2017, as compared to the same period in 2016.
Cost of Revenue
.
Total cost of revenue,
which consists of direct labor, rentals, depreciation, other overhead and raw
materials, including inbound freight charges, was approximately $12.1 million
for the three months ended March 31, 2017, as compared to approximately $17.0
million for the three months ended March 31, 2016, a decrease of approximately
$4.8 million, or 29%. The decrease in cost of revenue was primarily associated
with the decrease of production volume and the decrease of unit production costs
mainly caused by the decrease of concrete truck rental expenses after the
termination of our operating lease for our concrete plant in the eastern
suburban area of Beijing and because we had fewer repair expenses for our own
trucks in our manufacturing overhead cost during the three months ended March
31, 2017, as compared to the same period in 2016. As a result, our cost of
revenue decreased by 29% during the three months ended March 31, 2017, as
compared to the same period in 2016.
Gross Profit (Loss)
. Total gross profit was
approximately $1.5 million for the three months ended March 31, 2017, as
compared to approximately $0.9 million in gross loss for the three months ended
March 31, 2016, an increase of approximately $2.4 million, which was primarily a
result of increases in unit selling prices and decreases in unit production
costs during the three months ended March 31, 2017, as compared to the same
period in 2016.
Recovery for Doubtful Accounts
. We had recovery
for doubtful accounts charges of approximately $0.8 million for the three months
ended March 31, 2017, as compared to approximately $1.3 million during the three
months ended March 31, 2016, a decrease of approximately $0.5 million, or 40%.
The decrease was attributable to the fact that fewer accounts receivable became
over 720 days past due during the three months ended March 31, 2017, as compared
to the same period in 2016, and because we have correspondingly decreased our
provision for doubtful accounts in accordance with our allowance policy. At the
end of each quarter, we conduct an aging analysis of each customers arrears to
determine whether the allowance for doubtful accounts is adequate. In
establishing the allowance for doubtful accounts, we consider historical
experience, the economic environment, trends in the construction industry,
expected collectability of amounts receivable that are past due, and the
expected collectability of overdue receivables. An estimate of doubtful accounts
is recorded when collection of the full amount is no longer probable. Known bad
debts are written off against the allowance for doubtful accounts when
identified. After reviewing individual balances, we provide a provision of 15%
for accounts receivable past due more than 180 days but less than one year, 40%
for accounts receivable past due from one to two years, 75% for accounts
receivable past due beyond two years, 100% for accounts receivable past due
beyond three years, plus additional amounts as necessary.
As of March 31, 2017, our accounts and notes receivable aging
are as follows:
|
|
Balance
|
|
|
1-90
|
|
|
91-180
|
|
|
181-360
|
|
|
361-720
|
|
|
over 720
|
|
|
Over 1,080
|
|
|
|
|
|
|
days
|
|
|
days
|
|
|
days
|
|
|
days
|
|
|
days
|
|
|
Days
|
|
Accounts and notes receivable
|
$
|
59,866,000
|
|
$
|
13,336,657
|
|
$
|
11,113,597
|
|
$
|
9,851,497
|
|
$
|
18,739,007
|
|
$
|
5,187,425
|
|
$
|
1,637,817
|
|
Allowance for doubtful accounts
|
|
(15,616,949
|
)
|
|
-
|
|
|
-
|
|
|
(1,477,725
|
)
|
|
(7,387,771
|
)
|
|
(5,113,636
|
)
|
|
(1,637,817
|
)
|
Accounts and notes
receivable, net
|
$
|
44,249,051
|
|
$
|
13,336,657
|
|
$
|
11,113,597
|
|
$
|
8,373,772
|
|
$
|
11,351,236
|
|
$
|
73,789
|
|
$
|
-
|
|
Selling, General and Administrative Expenses
.
Selling, general and administrative expenses consist of sales commissions,
advertising and marketing costs, office rent and expenses, costs associated with
staff and support personnel who manage our business activities, and professional
fees paid. We incurred selling, general and administrative expenses of
approximately $1.5 million for the three months ended March 31, 2017, as
compared to approximately $1.8 million for the three months ended March 31,
2016, a decrease of approximately $0.3 million. The decrease was primarily due to a
$0.2 million decrease in professional fees, $0.2 million decrease in social
security and benefits and other various G&A expenses, which was partially
offset by a $0.2 million increase in salaries as compared to the three months
ended March 31, 2016.
24
Research and Development (R&D) Expenses
.
Research and development expenses were approximately $99,000 for the three
months ended March 31, 2017, as compared to $0.3 million for the same period in
2016. The Company decreased its research and development expenditures during
this period because the Company has determined to control its R&D expenses
with respect to revenues.
Loss from Termination of Lease.
Effective
February 29, 2016, we terminated an operating lease for our concrete plant in
the eastern suburban area of Beijing because the plant was not operating at
ideal capacity and we did not anticipate that it would in the foreseeable
future. We entered an agreement with a third party to terminate the lease of the
concrete plant. Under the agreement, the fair value of net assets of the related
operation was determined to be RMB 13.7 million (approximately $2.1 million),
and was settled for RMB 11.2 million (approximately $1.7 million). We recognized
a loss of approximately $0.4 million from the termination of the lease for the
three months ended March 31, 2016.
Income (loss) from Operations.
We had income from
operations of approximately $0.6 million and incurred a loss from operations of
approximately $2.2 million for the three months ended March 31, 2017 and 2016,
respectively. This change of approximately $2.8 million from loss to income was
primarily due to a $2.4 million increase in gross profit, a $0.2 million
decrease in research and development expenses, a $0.3 million decrease in
selling, general and administration expenses, a $0.4 million decrease in loss
from termination of lease, and was offset by a $0.5 million decrease in recovery
for doubtful accounts.
Other Expense, Net
. Our other expense consists of
interest income (expense), finance expense and other non-operating income
(expense). We had other expense of approximately $0.2 million during the three
months ended March 31, 2017, consisting primarily of aged customer deposits that
we determined that we are no longer required to repay and recognized as other
income accordingly. We earned interest income of approximately $15,000 and
$3,000 for the three months ended March 31, 2017, and 2016, respectively.
Approximately $0.2 million of interest expense was recorded for each of the
three months ended March 31, 2017, and 2016, and approximately $0.2 million of
finance expense was recorded for each of the three months ended March 31, 2017,
and 2016, respectively.
Provision for Income Taxes.
We did not incur
provision for income taxes for the three months ended March 31, 2017, because we
had net operating losses on deferred tax assets for which we previously provided
100% allowance to be utilized during the period. We did not incur provision for
income for the three months ended March 31, 2016 as we did not generate any
income for tax provision and provided 100% allowance from net operating losses
on deferred tax assets.
Net Income (Loss).
We had net income of
approximately $0.4 million for the three months ended March 31, 2017, as
compared to a net loss of approximately $2.6 million for the three months ended
March 31, 2016, a positive change in the amount of approximately $3.0 million.
Such change was the result of the combination of the changes as discussed above.
Comparison of the nine months ended March 31, 2017 and 2016
The following table sets forth key components of our results of
operations for the nine months ended March 31, 2017 and 2016, in US dollars:
|
|
Nine
months ended
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Total revenue
|
$
|
35,782,079
|
|
$
|
46,504,087
|
|
$
|
(10,722,008
|
)
|
|
(23
|
)%
|
Total cost of revenue
|
|
36,182,821
|
|
|
43,785,327
|
|
|
(7,602,506
|
)
|
|
(17
|
)%
|
Gross profit (loss)
|
|
(400,742
|
)
|
|
2,718,760
|
|
|
(3,119,502
|
)
|
|
(115
|
)%
|
Provision for doubtful accounts
|
|
(3,600,836
|
)
|
|
(1,192,128
|
)
|
|
(2,408,708
|
)
|
|
202%
|
|
Selling, general and
administrative expenses
|
|
(4,626,043
|
)
|
|
(5,110,846
|
)
|
|
484,803
|
|
|
(9
|
)%
|
Research and development expenses
|
|
(788,492
|
)
|
|
(626,958
|
)
|
|
(161,534
|
)
|
|
26%
|
|
Loss from termination of
lease
|
|
-
|
|
|
(388,899
|
)
|
|
388,899
|
|
|
(100
|
)%
|
Loss from operations
|
|
(9,416,113
|
)
|
|
(4,600,071
|
)
|
|
(4,816,042
|
)
|
|
105%
|
|
Other expense, net
|
|
(688,312
|
)
|
|
(871,584
|
)
|
|
183,272
|
|
|
(21
|
)%
|
Loss before provision for income taxes
|
|
(10,104,425
|
)
|
|
(5,471,655
|
)
|
|
(4,632,770
|
)
|
|
85%
|
|
Provision for income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-%
|
|
Net loss
|
$
|
(10,104,425
|
)
|
$
|
(5,471,655
|
)
|
$
|
(4,632,770
|
)
|
|
85%
|
|
25
Revenue
. Our revenue is primarily generated from
sales of our advanced ready-mix concrete products. For the nine months ended
March 31, 2017, we generated total revenue of approximately $35.8 million, as
compared to approximately $46.5 million during the nine months ended March 31,
2016, a decrease of approximately $10.7 million, or 23%. The decrease in revenue
was principally due to decreased sales volume by 17% resulting from the PRC
governments increased inspections of overloaded transportation vehicles, which
also affected sales of our concrete truck transportation services. In addition,
because of increasing competition in the concrete industry in Beijing, our
revenue decrease was also attributable to a decrease in our selling price by 2%
for concrete during the nine months ended March 31, 2017, as compared to the
same period in 2016. The decrease was also attributable to the 6% depreciation
of the Chinese Renminbi against the U.S. Dollar during the nine months ended
March 31, 2017, as compared to the same period in 2016.
Cost of Revenue
.
Total cost of revenue,
which consists of direct labor, rentals, depreciation, other overhead and raw
materials, including inbound freight charges, was approximately $36.2 million
for the nine months ended March 31, 2017, as compared to approximately $43.8
million for the nine months ended March 31, 2016, a decrease of approximately
$7.6 million, or 17%. The decrease in cost of revenue was primarily associated
with the decrease in our sales volume. The decrease in our cost of revenue was
offset by the increase of the purchase unit price of cement for our production
use during the nine months ended March 31, 2017 as compared to the same period
in 2016. As a result, our cost of revenue has decreased by 17% during the nine
months ended March 31, 2017, as compared to the same period in 2016.
Gross Profit (Loss)
. Total gross loss was
approximately $0.4 million for the nine months ended March 31, 2017, as compared
to approximately $2.7 million of gross profit for the nine months ended March
31, 2016, a decrease of approximately $3.1 million, which was primarily due to
the decrease of sales volume, the decrease of our selling price of concrete, and
the increase of the purchase unit price of cement for production use during the
nine months ended March 31, 2017 as compared to the same period in 2016.
Provision for Doubtful Accounts
. We incurred a
provision for doubtful accounts charges of approximately $3.6 million for the
nine months ended March 31, 2017, as compared to approximately $1.2 million
during the nine months ended March 31, 2016, an increase of approximately $2.4
million, or 202%. The increase was attributable to the fact that more accounts
receivable have become over 720 days past due during the nine months ended March
31, 2017 as compared to the same period in 2016 and we have correspondingly
increased our provision for doubtful accounts in accordance with our allowance
policy. At the end of each quarter, we conduct an aging analysis of each
customers arrears to determine whether the allowance for doubtful accounts is
adequate. In establishing the allowance for doubtful accounts, we consider the
historical experience, the economy, trends in the construction industry,
expected collectability of amounts receivable that are past due and the expected
collectability of overdue receivables. An estimate of doubtful accounts is
recorded when collection of the full amount is no longer probable. Known bad
debts are written off against allowance for doubtful accounts when identified.
After reviewing individual balances, we provide a provision of 15% for accounts
receivable past due more than 180 days but less than one year, 40% for accounts
receivable past due from one to two years, 75% for accounts receivable past due
beyond two years, 100% for accounts receivable past due beyond three years, plus
additional amounts as necessary.
Selling, General and Administrative Expenses
.
Selling, general and administrative expenses consist of sales commissions,
advertising and marketing costs, office rent and expenses, costs associated with
staff and support personnel who manage our business activities, and professional
fees paid to third parties. We incurred selling, general and administrative
expenses of approximately $4.6 million for the nine months ended March 31, 2017,
as compared to approximately $5.1 million for the nine months ended March 31,
2016, a decrease of approximately $0.5 million. The decrease was primarily due
to a $0.2 million decrease in stock compensation expense, $0.3 million decrease
in professional fees, $0.2 million decrease in depreciation expenses on
administrative equipment, $0.2 million decrease in social security and benefits
and $0.3 million increase in other various G&A expenses, which was partially
offset by a $0.7 million increase in salaries as compared to the nine months
ended March 31, 2016.
Research and Development Expenses
. Research and
development expenses were approximately $0.8 million for the nine months ended
March 31, 2017, as compared to $0.6 million for the same period in 2016. The
Company increased its research and development expenditures during this period
as the Company determined to improve its competitive advantage with respect to
its products.
Loss from Termination of Lease.
Effective
February 29, 2016, we terminated an operating lease for our concrete plant in
the eastern suburban area of Beijing due to the fact that the plant was not
operating at ideal capacity and we did not anticipate that it would in the
foreseeable future. We entered an agreement with a third party to terminate the
lease of the concrete plant. Under the agreement, the fair value of net assets
of the related operation was determined to be RMB 13.7 million (approximately
$2.1 million), and was settled for RMB 11.2 million (approximately $1.7
million). We recognized a loss of approximately $0.4 million from the
termination of lease for the three months ended March 31, 2016.
Loss from Operations.
We incurred a loss from
operations of approximately $9.4 million and $4.6 million for the nine months
ended March 31, 2017 and 2016, respectively. This increase of approximately
$4.8 million in loss from operations was primarily due to a $3.1 million
decrease in gross profit, a $2.4 million increase in provision of doubtful
accounts, a $0.2 million increase in research and development expenses, and was
offset by $0.5 million decrease in selling, general and administration expenses
and by $0.4 million decrease in loss from termination of lease.
26
Other Expense, Net
. Our other expense consists of
interest income (expense), finance expense and other non-operating income
(expense). We had other income of approximately $0.4 million during the nine
months ended March 31, 2017 consisting primarily of aged payables and aged
customer deposits that we determined that we are no longer required to pay and
recognized as other income accordingly. We earned interest income of
approximately $27,000 and $0.3 million for the nine months ended March 31, 2017,
and 2016, respectively. The decrease in interest income was mainly due to a very
minimal average outstanding balance of short term investment held in a financial
investment company during the nine months ended March 31, 2017, as opposed to
$2.7 million average outstanding balance during the same period in 2016.
Approximately $0.6 million of interest expense was recorded for each of the nine
months ended March 31, 2017 and 2016, and approximately $0.5 million of finance
expense was recorded for each of the nine months ended March 31, 2017 and 2016.
Provision for Income Taxes.
We did not incur
provision for income tax for the nine months ended March 31, 2017, and 2016,
because we did not generate any income for tax provision and provided a 100%
allowance from net operating losses on deferred tax assets.
Net Loss.
We incurred net loss of approximately
$10.1 million for the nine months ended March 31, 2017, as compared to a net
loss of approximately $5.5 million for the nine months ended March 31, 2016, a
negative change in the amount of $4.6 million. Such change was the result of the
combination of the changes as discussed above.
Liquidity and Capital Resources
As of March 31, 2017, we had cash and cash equivalents of
approximately $1.4 million and restricted cash of approximately $3.9 million,
which was held by subsidiaries located outside the U.S. We would be required to
accrue and pay U.S. taxes if we were to repatriate these funds. Any company
which is registered in mainland PRC must apply to the State Foreign Exchange
Administration for approval in order to remit foreign currency to any foreign
country. We currently do not intend to repatriate to the U.S. the cash and
short-term investments held by our foreign subsidiaries. However, if we were to
repatriate funds to the U.S., we would assess the feasibility and plan any
transfer in accordance with foreign exchange regulations, taking into account
tax consequences. As we conduct all of our operations in the PRC, the
restriction on the conversion of cash and short-term investments held in RMB to
other currencies should not affect our liquidity.
In assessing our liquidity, we monitor and analyze our cash
on-hand and our operating and capital expenditure commitments. Our liquidity
needs are to meet our working capital requirements, operating expenses and
capital expenditure obligations.
We engage in the production of advanced construction materials
for large scale infrastructure, commercial and residential developments. Our
business is capital intensive and we are 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 our working capital requirements and
capital expenditures. Because of recurring losses, working capital was
approximately $6.9 million as of March 31, 2017, as compared to $16.4 million as
of June 30, 2016. As of March 31, 2017, in additional to cash on-hand and
restricted cash, we also have other current assets mainly composed of accounts
receivables and prepayments and advances to suppliers.
Although we believe that we can realize our current assets, our
ability to repay our current obligations will depend on the future realization
of our current assets. Management has considered historical experience, the
economic environment, trends in the construction industry, the expected
collectability of accounts receivable and the realization of the prepayments on
inventory, and provided for an allowance for doubtful accounts as of March 31,
2017. We expect to realize balances net of allowance within the normal operating
cycle of a twelve-month period. If we are unable to realize our current assets
within the normal twelve-month operating cycle, we may have to consider
supplementing our available sources of funds through the following:
|
|
Financial support and credit guarantee commitments from
our shareholders.
|
|
|
|
|
|
Other available sources of financing from PRC banks and
other financial institutions, given our credit history.
|
Based on the above considerations, management is of the opinion
that we have sufficient funds to meet our working capital requirements and debt
obligations as they become due. However, there is no assurance that management
will be successful in their plans. There are a number of factors that could
potentially arise that could undermine the Companys plans, such as changes in
the demand for our products, economic conditions, competitive pricing in the
concrete-mix industry, our operating results not continuing to deteriorate and
our bank and shareholders being able to provide continued financial support.
The following table provides summary information about our net
cash flow for financial statement periods presented in this report:
|
|
For the nine months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by
operating activities
|
$
|
5,448,523
|
|
$
|
3,670,686
|
|
Net cash (used in) provided by investing
activities
|
|
(52,532
|
)
|
|
5,156,812
|
|
Net cash used in financing
activities
|
|
(4,976,764
|
)
|
|
(10,712,557
|
)
|
Effect of foreign currency translation on
cash and cash equivalents
|
|
(42,997
|
)
|
|
(127,550
|
)
|
Net change in cash and cash
equivalents
|
$
|
376,230
|
|
$
|
(2,012,609
|
)
|
27
Principal demands for liquidity are for working capital and
general corporate purposes.
Operating Activities.
Net cash provided by
operating activities totaled approximately $5.4 million for the nine months
ended March 31, 2017, which was primarily attributable to net loss of $10.1
million, which was offset by the net loss adjusted to reconcile to net cash
provided by operating activities of $4.8 million, including adjustments for $0.9
million of depreciation, $0.3 million of stock-based compensation expense, and
$3.6 million provision for doubtful accounts as well as $10.8 million cash
inflow from a change in operating assets and liabilities. Net cash from changes
in operating assets and liabilities resulted in a net cash inflow, which mainly
included cash inflow for reduction in inventories of $0.3 million, collection of
other receivables of $7.4 million as we increased our efforts on other
receivables collections, reduction of prepayments and advances of $2.9 million
as we have already secured enough materials for production, additional accounts
payable of $8.7 million, excluding non-cash offset of $10.3 million, as we were
in waiting for our accounts receivable collection and maturities of notes
receivable to repay our vendors, and additional other payables, including
related party payables, of $5.7 million, due to accrued research and development
expenses, accrued salary and rental expense payable to our related parties, and
was primarily offset by additional accounts and notes receivable of $9.6
million, excluding a non-cash offset of $10.3 million, due to delays in the
receipt of customer payments, a reduction of customer deposits of approximately
$3.9 million and a reduction of accrued liabilities of $0.8 million.
Investing Activities
. Net cash used in investing
activities was approximately $53,000 for the nine months ended March 31, 2017,
which was primarily attributable to the purchase of equipment.
Financing Activities
. Net cash used in financing
activities totaled approximately $5.0 million for the nine months ended March
31, 2017, which was primarily attributable to $18.5 million in cash proceeds
from bank loans and bank guarantees, $24.6 million in proceeds from notes
payable and $0.1 million in borrowing from shareholders, which was offset by
$19.3 million for the repayment of bank loans and bank guarantees, and $29.0
million for the repayment of notes payable.
Cash and cash equivalents
.
As of March 31,
2017, we had cash and cash equivalents of approximately $1.4 million as compared
to approximately $1.0 million as of June 30, 2016. We believe that our cash and
revenues from ongoing operations, in addition to the close management of our
accounts payable and accounts receivable and our ability to obtain loan
financing, will be sufficient to meet our liquidity and capital requirements for
all of our ongoing operations. However, we may need to raise additional capital
if we undertake any plans for expansion.
Loan Facilities
. We had a total of approximately
$15.2 million and $16.6 million outstanding on loans and credit facilities as of
March 31, 2017, and June 30, 2016, respectively. See Note 6 to our unaudited
condensed consolidated financial statements included elsewhere in this
report.
Critical Accounting Policies and Estimates
While our significant accounting policies are more fully
described in Note 2 to our unaudited condensed consolidated financial statements
included elsewhere in this report, we believe that the following accounting
policies are the most critical to aid you in fully understanding and evaluating
this management discussion and analysis:
Principles of consolidation
The accompanying unaudited condensed consolidated financial
statements include the financial statements of China ACM and its wholly owned
subsidiaries, BVI-ACM, China-ACMH, and its variable interest entity Xin Ao
(collectively, the Company). All significant inter-company transactions and
balances have been eliminated in consolidation. In accordance with FASB ASC 810,
Consolidation of Variable Interest Entities, variable interest entities, or
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 VIE. The primary beneficiary is required to
consolidate the VIE for financial reporting purposes. In connection with the
adoption of this ASC810, the Company concludes that Xin Ao is a VIE and China
ACM is the primary beneficiary. The financial statements of Xin Ao is
consolidated with China ACMs financial statements.
Use of estimates and assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (US
GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. The significant
estimates and assumptions made in the preparation of the Companys unaudited
condensed consolidated financial statements include allowance
for doubtful accounts, deferred taxes, and prepayments and advances, stock-based
compensation, and fair value and useful lives of property, plant and equipment.
Actual results could be materially different from those estimates.
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Revenue recognition
Revenue is realized or realizable and earned when four criteria
are met:
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Persuasive evidence of an arrangement exists (the Company
considers its sales contracts to be pervasive evidence of an arrangement);
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Delivery has occurred;
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The sellers price to the buyer is fixed or determinable;
and
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Collectability of payment is reasonably assured.
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The Company sells its concrete products primarily to major
local construction companies. Sales agreements are signed with each customer.
The agreements list all terms and conditions with the exception of delivery date
and quantity, which are evidenced separately in purchase orders. The purchase
price of products is fixed in the agreement and customers are not permitted to
renegotiate after the contracts have been signed. Each agreement includes a
cancellation clause if the Company or the customers breach the contract terms
specified in the agreement.
The Company recognizes revenue when title and ownership of the
goods are transferred upon shipment to the customer by the Company and
collectability of payment is reasonably assured.
The Company includes the shipping and handling fee in both
revenue and cost of revenue.
Financial instruments
US GAAP regarding fair value of financial instruments and
related fair value measurements define fair value, establish a three-level
valuation hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value.
The three levels of inputs are defined as follows:
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities
in active markets;
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial
instrument;
Level 3 inputs to the valuation
methodology are unobservable.
Financial instruments included in current assets and current
liabilities are reported in the unaudited condensed consolidated balance sheets
at face value or cost, which approximate fair value because of the short period
of time between the origination of such instruments and their expected
realization and their current market rates of interest.
Accounts and notes receivable
We extend unsecured credit to our customers in the normal
course of business,. Accounts are considered past due after 30 days. In
establishing the required allowance for doubtful accounts, management considers
historical experience, the economic environment, trends in the construction
industry, and the expected collectability of the overdue receivable. 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. We
provide a provision of 15% of the allowance for doubtful accounts for accounts
receivable balance that are past due more than 180 days but less than one year,
40% of the allowance for doubtful accounts for accounts receivable past due from
one to two years, 75% of the allowance for doubtful accounts for accounts
receivable past due beyond two years, 100% of the allowance for doubtful
accounts for accounts receivable past due beyond three years, plus additional
amount as necessary, which our collection department had determined the
collection of the full amount is remote with the approval from our management to
provide a 100% provision allowance for doubtful accounts. Our management have
continued to evaluate the reasonableness of the valuation allowance policy and
update it if necessary.
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Notes receivable represent trade accounts receivable from
various customers where the customers' banks have guaranteed such customers
obligation. The notes are non-interest bearing and typically have a three or six
month maturity date. The notes are generally charged with a transaction fee of
0.1% of the notes amount. The Company has the ability to submit requests for
payment to a customer's bank earlier than the scheduled maturity date, subject
to a discount on interest charged and a processing fee.
Accounting for long-lived assets
We classify our long-lived assets into: (i) machinery and
equipment; (ii) transportation equipment; (iii) office and equipment; and (iv)
buildings and improvements.
Long-lived assets held and used by us are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be fully recoverable. It is possible that
these assets could become impaired as a result of technological or other
industry changes. If circumstances require a long-lived asset or asset group to
be tested for possible impairment, we first compare undiscounted cash flows
expected to be generated by that asset or asset group to its carrying value. If
the carrying value of the long-lived asset or asset group is not recoverable on
an undiscounted cash flow basis, an impairment is recognized to the extent that
the carrying value exceeds its fair value. Fair value is determined through
various valuation techniques, including discounted cash flow models, quoted
market values and third-party independent appraisals, as considered
necessary.
If the value of an asset is determined to be impaired, the
impairment to be recognized is measured by 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 Beijing, PRC and because of competitive pricing pressures, we have
performed an impairment analysis and determined our ong-lived assets are
impaired. As a result, we recorded an impairment charge of $2.6 million for the
year ended June 30, 2016. These charges were related to the impairment of our
transportation equipment,plants and machinery. The loss was determined using
Level 3 inputs. There was no impairment charge for the nine months ended March
31, 2017, and 2016.
Competitive pricing pressures and changes in interest rates
could materially and adversely affect the Companys estimates of future net cash
flows to be generated by long-lived assets, and thus could result in future
impairment losses
Income taxes
We account for income taxes in accordance with ASC 740, Income
Taxes, which requires us 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.
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to our stockholders.
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Recently issued accounting pronouncements
Refer to Note 2 of the unaudited condensed consolidated
financial statements for a discussion of recent accounting standards and
pronouncements.
Interest Rate Risk
We are exposed to interest rate risk while we have short-term
bank loans outstanding. Although interest rates for our short-term loans are
typically fixed for the terms of the loans, the terms are typically twelve
months and interest rates are subject to change upon renewal. Interest rates are
approximately 4.35% for RMB bank loans with a term of twelve months or less.
Credit Risk
The Company is exposed to credit risk from its cash in bank and
fixed deposits, and accounts and notes receivable, other receivables and
advances on equipment purchases. The credit risk on cash in bank and fixed
deposits is limited because the counterparties are recognized financial
institutions. However, the Companys cash in bank deposited in the financial
institutions in the PRC is not insured. Accounts and notes receivable, other
receivables and advances on inventory purchases are subjected to credit
evaluations. An allowance has been made for estimated unrecoverable amounts
which have been determined by reference to past default experience and the
current economic environment.
Foreign Exchange Risk
The value of the RMB against the U.S. dollar and other
currencies is affected by, among other things, changes in the PRCs political
and economic conditions. The RMB does not fluctuate with the U.S. dollar.
Although the Peoples Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, the
RMB may appreciate or depreciate significantly in value against the U.S. dollar
in the medium to long term. In August 2015, the PRCs currency dropped by a
cumulative 4.4% against the U.S. dollar on hopes of boosting the domestic
economy, making PRC exports cheaper and imports into the PRC more expensive by
that amount. The effect on trade can be substantial. The trend of depreciation
of RMB continued in the year 2016 and the three months ended March 31, 2017.
Compared with the lowest point from RMB versus U.S. dollars in 2015, the RMB has
depreciated by 5.9% compared to the exchange rate as of March 31, 2017.
Moreover, it is possible that in the future, PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
Because substantially all of our earnings and cash assets are
denominated in RMB, but our reporting currency is the U.S. dollar, fluctuations
in the exchange rate between the U.S. dollar and the RMB will affect our balance
sheet and our earnings per share in U.S. dollars. In addition, appreciation or
depreciation in the value of the RMB relative to the U.S. dollar would affect
our financial results reported in U.S. dollar terms without giving effect to any
underlying change in our business or results of operations. Fluctuations in the
exchange rate will also affect the relative value of any dividend we might issue
in the future that will be exchanged into U.S. dollars and earnings from, and
the value of, any dollar-denominated investments we make in the future.
Very limited hedging transactions are available in the PRC to
reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign
currency exchange risk. While we may enter into hedging transactions in the
future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition,
our foreign currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert RMB into foreign
currencies.
Most of the transactions of the Company are settled in RMB and
U.S. dollars. In the opinion of the directors, the Company is not exposed to
significant foreign currency risk.
Inflation
Inflationary factors, such as increases in the cost of raw
materials and overhead costs, could impair our operating results. Inflation has
had a material impact on our financial position or results of operations for the
nine months ended March 31, 2017, a high rate of inflation in the future may
have a continued adverse effect on our ability to maintain current levels of
gross margin and selling, general and administrative expenses as a percentage of
sales revenue if the selling prices of our products do not increase with these
increased costs.
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