UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended December 31, 2016

 

or

 

   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to_______________

 

Commission File Number: 001-37459

 

YULONG ECO-MATERIALS LIMITED

(Exact name of registrant as specified in its charter)

 

Cayman Islands   N/A
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
     

Eastern End of Xiwuzhuang Village

Jiaodian Town, Xinhua Area

Pingdingshan, Henan Province

People’s Republic of China

 

 

 

 

 

 (Address of principal executive offices)   (Zip Code)

 

+86-375-8888988
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ      No ☐

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company þ
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐     No þ

 

As of August 31, 2017, the registrant had 12,055,324 shares of ordinary shares outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

   

Page
Number

PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements (unaudited) 1
  Condensed Consolidated Balance Sheets 1
  Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income 2
  Condensed Consolidated Statements of Cash Flows 3
  Notes to Condensed Consolidated Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk 51
Item 4. Controls and Procedures 51
     
PART II. OTHER INFORMATION 52
Item 1. Legal Proceedings 52
Item 1A. Risk Factors 53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
Item 3. Defaults Upon Senior Securities 54
Item 4. Mine Safety Disclosures 54
Item 5. Other Information 54
Item 6. Exhibits 54
     
SIGNATURES 55

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

All statements contained in this report, other than statements of historical facts, that address future activities, events or developments, are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect,” “project,” “may,” “might,” “will,” the negative forms thereof, and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control. Actual results, performance or achievements may differ materially from those expressed or implied by forward-looking statements depending on a variety of important factors, including, but not limited to, weather, local, regional, national and global coke and coal price fluctuations, levels of coal and coke production in the region, the demand for raw materials such as iron and steel which require coke to produce, availability of financing and interest rates, competition, changes in, or failure to comply with, government regulations, costs, uncertainties and other effects of legal and other administrative proceedings, and other risks and uncertainties. Such risks and uncertainties are described in greater details in the “ Risk Factors ” section beginning on page 16 of the registrant’s annual report on Form 10-K for the year ended June 30, 2016 filed with the Securities and Exchange Commission (the “SEC”) on August 25, 2017 (the “Annual Report”).

 

Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the registrant’s business operations. The registrant is not undertaking to update or revise any forward-looking statement, whether as a result of new information, future events or circumstances or otherwise.

 

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    December 31,     June 30,  
    2016     2016  
ASSETS            
CURRENT ASSETS            
Cash and cash equivalents   $ 2,477,713     $ 2,734,540  
Restricted cash     500,000       500,000  
Accounts receivable, net     4,534,312       5,728,334  
Deposits and other receivables     1,108,500       1,002,713  
Inventories     304,472       364,891  
Advances to suppliers     247,093       222,239  
Prepaid expenses and other     108,027       108,716  
Total current assets     9,280,117       10,661,433  
                 
PROPERTY, PLANT AND EQUIPMENT, net     6,855,376       7,425,445  
                 
OTHER ASSETS                
Other receivables, non-current     15,051,131       15,727,696  
Prepayments, net     3,575       15,050  
Prepaid expenses, non-current     50,000       50,000  
Intangible assets, net     2,046,314       2,163,791  
Deferred tax asset, net     638,113       388,970  
Long-term deposit     10,255       10,716  
Total other assets     17,799,388       18,356,223  
Total assets   $ 33,934,881     $ 36,443,101  
LIABILITIES AND EQUITY                
                 
CURRENT LIABILITIES                
Short-term loan - bank   $ 5,429,929     $ 5,674,011  
Accounts payable, trade     1,372,238       1,710,881  
Other payables and accrued liabilities     8,975,467       7,601,354  
Other payables - related parties     1,814,727       1,965,237  
Customer deposits     4,947,579       2,571,846  
Taxes payable     1,438,392       1,498,083  
Capital lease obligations     3,915,152       4,062,291  
Dividends payable     -       -  
Warrant liabilities     15,364       65,605  
Total current liabilities     27,908,848       25,149,308  
                 
NON-CURRENT LIABILITIES                
Capital lease obligations - non-current     -       28,852  
Total liabilities     27,908,848       25,178,160  
                 
COMMITMENTS AND CONTINGENCIES                
                 
EQUITY                
Common stock, $0.00125 par value, 100,000,000 shares authorized, 12,055,324 and 11,997,184 shares issued and outstanding at December 31, 2016 and June 30, 2016, respectively     15,070       14,997  
Subscription receivable     (10,000 )     (10,000 )
Additional paid-in capital     40,635,090       40,497,594  
Stock to be issued     -       37,500  
Statutory reserves     3,922,228       3,922,228  
Retained earnings     (37,055,501 )     (31,978,194 )
Accumulated other comprehensive loss     (1,480,854 )     (1,219,184 )
Total equity     6,026,033       11,264,941  
Total liabilities and equity   $ 33,934,881     $ 36,443,101  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  1  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

 

    For the Three Months Ended
December 31,
    For the Six Months Ended
December 31,
 
    2016     2015     2016     2015  
REVENUES                        
Bricks   $ 666,261     $ 3,431,281     $ 1,251,731     $ 7,466,382  
Concrete     1,104,960       7,241,359       2,833,931       14,579,688  
Recycling     12,169       1,919,020       501,758       3,896,458  
TOTAL REVENUES     1,783,390       12,591,660       4,587,420       25,942,528  
                                 
COST OF REVENUES                                
Bricks     535,768       1,533,857       947,459       3,319,481  
Concrete     938,847       5,429,785       2,266,849       10,825,943  
Recycling     15,845       838,435       168,953       1,561,760  
TOTAL COST OF REVENUES     1,490,460       7,802,077       3,383,261       15,707,184  
                                 
GROSS PROFIT     292,930       4,789,583       1,204,159       10,235,344  
                                 
OPERATING EXPENSES:                                
Selling     62,643       106,262       142,464       250,910  
Impairment loss on fixed assets and intangible assets     426,525       -       1,927,157       -  
General and administrative     2,152,677       1,363,588       4,059,397       2,142,213  
Total operating expenses     2,641,845       1,469,850       6,129,018       2,393,123  
                                 
(LOSS) INCOME FROM OPERATIONS     (2,348,915 )     3,319,733       (4,924,859 )     7,842,221  
                                 
OTHER INCOME (EXPENSE), net                                
Bank charges     (533 )     -       (985 )     -  
Interest income     -       26,134       2,941       46,037  
Interest expense     (159,800 )     (217,505 )     (355,910 )     (485,670 )
Change in fair value of warrant liabilities     76,306       (205,425 )     50,241       142,774  
Foreign exchange transaction gain(loss)     -       3,699       -       (2,235 )
Other finance expense     -       (341 )     -       (16,851 )
Penalty     (116 )     -       (326 )     -  
Other income, net     753       155,842       75,608       205,176  
Total other income (expense), net     (83,390 )     (237,596 )     (228,431 )     (110,769 )
                                 
(LOSS) INCOME BEFORE INCOME TAXES     (2,432,305 )     3,082,137       (5,153,290 )     7,731,452  
                                 
PROVISION FOR INCOME TAXES     (193,774 )     985,888       (75,983 )     2,054,520  
                                 
NET (LOSS) INCOME     (2,238,531 )     2,096,249       (5,077,307 )     5,676,932  
                                 
OTHER COMPREHENSIVE LOSS                                
Foreign currency translation adjustments     (357,100 )     (1,384,464 )     (1,054,713 )     (4,035,966 )
                                 
COMPREHENSIVE (LOSS) INCOME   $ (2,595,631 )   $ 711,785     $ (6,132,020 )   $ 1,640,966  
                                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES                                
Basic and diluted     12,055,324       11,869,938       12,041,105       11,869,938  
                                 
(LOSSES) EARNINGS PER SHARE                                
Basic and diluted   $ (0.19 )   $ 0.18     $ (0.42 )   $ 0.48  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  2  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    For the Six Months Ended
December 31,
 
    2016     2015  
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net (loss) income   $ (5,077,307 )   $ 5,676,932  
Adjustments to reconcile net (loss) income to cash provided by operating activities:                
Depreciation     275,913       1,152,720  
Amortization     25,109       62,971  
Deferred tax benefit     (273,652 )     (110,945 )
Change in fair value of warrant liabilities     (50,241 )     (142,774 )
Stock based compensation expense     100,069       145,000  
Impairment loss on fixed assets & CIP     1,927,157       -  
Provision for doubtful     1,800,677          
Loss from disposal of equipment     -       1,909  
Change in operating assets and liabilities                
Accounts receivable     (825,357 )     (1,315,806 )
Deposits and other receivables     (153,278 )     (1,067,778 )
Inventories     46,030       (220,972 )
Advances to suppliers     (35,421 )     (9,076 )
Prepaid expense and other     -       309,588  
Accounts payable, trade     (272,798 )     (899,889 )
Other payables and accrued liabilities     1,581,080       71,201  
Payroll payable     121,931       -  
Customer deposits     2,559,094       80,110  
Taxes payable     4,892       915,968  
Net cash provided by operating activities     1,753,898       4,649,159  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Payment for equipment, construction in progress and land use rights     (1,919,080 )     (367,467 )
Prepayment for land use rights     -       (5,398 )
Proceeds from disposal of equipment     -       6,320  
Prepayments for construction-in-progress     -       (55,377 )
Repayments from related parties     -       -  
Net cash used in investing activities     (1,919,080 )     (421,922 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from short-term loans - bank     -       4,977,000  
Payments of short-term loans - bank             (5,135,000 )
Repayments to related parties     (104,656 )     (208,215 )
Principal payments on capital lease obligations             (526,964 )
Proceeds from issuance of IPO shares, net     -       11,510,157  
Net cash provided by (used in) financing activities     (104,656 )     10,616,978  
                 
EFFECT OF EXCHANGE RATE ON CASH     (486,989 )     (1,584,743 )
                 
CHANGES IN CASH AND CASH EQUIVALENTS     (756,827 )     13,259,472  
                 
CASH AND CASH EQUIVALENTS, beginning of period     3,234,540       16,470,299  
                 
CASH AND CASH EQUIVALENTS, end of period   $ 2,477,713     $ 29,729,771  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:                
Cash paid for income tax   $ 187,900     $ 1,622,865  
Cash paid for interest   $ 19,209     $ 137,426  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES                
Reclassification of construction-in-progress from prepayments-construction   $ -     $ 187,251  
Additions to property, plant and equipment, and construction-in-progress through other payables   $ -     $ 763,949  
Acquisition of machinery and equipment by capital leases   $ -     $ 309,174  
Repayments from related parties offset with other payables-related parties   $ 1,505,109     $ -  
Conversion of shareholders’ debt to 1,593,538 ordinary shares   $ -     $ 9,959,613  
Issuance of ordinary shares for deferred compensation   $ 37,500     $ 20,000  
Valuation of 112,500 warrants allocated to warrant liabilities from additional paid-in capital   $ -     $ 475,380  
Reclassification of payables for litigations from other payables-related parties   $ -     $ 205,564  
Other receivables-related parties offset with other payables-related parties   $ 1,767,144     $ -  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  3  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 – Nature of business and organization

 

Yulong Eco-Materials Limited (“Yulong Eco-Materials” or the “Company”) is a holding company incorporated on March 10, 2011, under the laws of the Cayman Islands. The Company has no substantive operations other than owning all of the outstanding share capital of China Xing De (BVI) Limited (“Yulong BVI”). In turn, Yulong BVI is a holding company that owns all of the outstanding share capital of China Xing De (Hong Kong) Limited (“Yulong HK”). Yulong HK is also a holding company that owns all of the outstanding equity capital of Zhengzhou Xing De Enterprise Management & Consulting Co., Ltd. (“Yulong WFOE”).

 

The Company is a vertically integrated manufacturer of eco-friendly building products. The Company operates principally from the city of Pingdingshan, Henan Province, in the People’s Republic of China (the “PRC” or “China”). The Company produces fly-ash bricks and ready-mixed concrete, and in April 2015, launched its construction waste management, or CWM, business which includes hauling and processing construction waste, and producing crushed construction waste or recycled aggregates, and bricks made from recycled aggregates, or recycled bricks. All of the Company’s business activities are carried out by domestic Chinese companies that the Company controls through contractual arrangements as follows: (1) Henan Jianyida Industrial Co., Ltd. (“Yulong Bricks”), which carries out the bricks business, (2) Pingdingshan Hengji Concrete Co., Ltd. (“Yulong Concrete”) and Pingdingshan Hengji Industrial Co., Ltd. (“Yulong Transport”), which carry out the concrete business, and (3) Pingdingshan Xulong Renewable Resource Co., Ltd. (“Yulong Renewable”), which carries out the CWM business. The contractual arrangements are comprised of a series of agreements entered into by each of these four companies and their shareholders, on the one hand, and Yulong WFOE on the other hand (see “Contractual Arrangements” and “Note 3 – Variable Interest Entities” below).

 

On October 30, 2015, Pingdingshan Xulong Renewable Resource Co., Ltd. Shangqiu Branch was established and incorporated in the People’s Republic of China. The entity is wholly owned by Pingdingshan Xulong Renewable Resource Co., Ltd. (“Yulong Renewable”) and engages in construction waste hauling and processing for the city center in Shangqiu district.

 

Contractual Arrangements

 

Although current PRC regulations do not restrict or prohibit foreign investment in domestic Chinese companies that engage in businesses such as those of Yulong Bricks, Yulong Concrete, Yulong Transport and Yulong Renewable (each a “Yulong operating company” and collectively the “Yulong operating companies”), there is substantial uncertainty regarding the interpretation and application of such regulations. As such, the Yulong operating companies are controlled through contractual arrangements in lieu of direct equity ownership by the Company or any of its subsidiaries. Such contractual arrangements are a series of four agreements (collectively the “Contractual Arrangements”) which significant terms are as follows:

 

Exclusive Consulting Services and Operating Agreements

 

Pursuant to the exclusive consulting and service agreement among Yulong WFOE, each Yulong operating company and its shareholders, Yulong WFOE is engaged as exclusive provider of management consulting services to such Yulong operating company. For such services, the Yulong operating company agrees to pay service fees determined based on all of its net profit after tax payments to Yulong WFOE or Yulong WFOE has obligation to absorb all of the Yulong operating companies’ losses. The agreement remains in effect until and unless all parties agree to its termination. Until such termination, the Yulong operating company may not enter into another agreement for the provision of management consulting services without the prior consent of Yulong WFOE.

 

Option Agreements

 

Pursuant to the exclusive equity option agreement between the shareholders of each Yulong operating company and Yulong WFOE, such shareholders jointly and severally grant Yulong WFOE an option to purchase their equity interests in such Yulong operating company. The purchase price shall be the lowest price then permitted under applicable PRC laws. If the purchase price is greater than the registered capital of such Yulong operating company, the shareholders are required to immediately return any amount in excess of the registered capital to Yulong WFOE or its designee. Yulong WFOE may exercise such option at any time until it has acquired all equity interests of such Yulong operating company, and freely transfer the option to any third party. The agreement will terminate at the earlier of (i) the date on which all of the equity interests of such Yulong operating company has been transferred to Yulong WFOE or its designee or (ii) the unilateral termination by Yulong WFOE.

 

  4  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Equity Pledge Agreements

 

Pursuant to the equity interest pledge agreement between the shareholders of each Yulong operating company and Yulong WFOE, such shareholders pledge all of their equity interests in such Yulong operating company to Yulong WFOE as collateral to secure the obligations of such Yulong operating company under the exclusive consulting services and operating agreement. The shareholders may not transfer or assign transfer or assign the pledged equity interests, or incur or allow any encumbrance that would jeopardize Yulong WFOE’s interests, without Yulong WFOE’s prior approval. In the event of default, Yulong WFOE as the pledgee will be entitled to certain rights and entitlements, including the priority in receiving payments by the evaluation or proceeds from the auction or sale of whole or part of the pledged equity interests of such Yulong operating company. The agreement will terminate at the earlier of (i) the date the shareholders have transferred all of their pledged equity interests pursuant to the option agreement or (ii) two years from the satisfaction by such Yulong operating company of all its obligations under the exclusive consulting and service agreement.

 

Voting Rights Proxy and Financial Supporting Agreements

 

Pursuant to the voting rights proxy and financial supporting agreement between the shareholders of each Yulong operating company and Yulong WFOE, such shareholders have given Yulong WFOE an irrevocable proxy to act on their behalf on all matters pertaining to such Yulong operating company and to exercise all of their rights as shareholders of such Yulong operating company, including the right to attend shareholders meeting, to exercise voting rights and to transfer all or a part of their equity interests in such Yulong operating company. In consideration of such granted rights, Yulong WFOE agrees to provide the necessary financial support to such Yulong operating company whether or not such Yulong operating company incurs loss, and agrees not to request repayment if such Yulong operating company is unable to do so. The agreement will terminate at the earlier of (i) the date on which all of the equity interests of such Yulong operating company have been transferred to Yulong WFOE or (ii) the unilateral termination by Yulong WFOE.

 

As a result of the foregoing contractual arrangements, which give Yulong WFOE effective control of the Yulong operating companies, obligate Yulong WFOE to absorb all of the risk of loss from their activities, and enable Yulong WFOE to receive all of their expected residual returns, the Company accounts for each Yulong operating company as a variable interest entity (“VIE”). Additionally, as the parent company of Yulong WFOE, the Company is considered the primary beneficiary of the Yulong operating companies. Accordingly, the Company consolidates the accounts of the Yulong operating companies for the three and six months ended December 31, 2016 and 2015, in accordance with Regulation S-X-3A-02 promulgated by the Securities Exchange Commission (“SEC”), and Accounting Standards Codification (“ASC”) 810-10, Consolidation .

 

The accompanying condensed consolidated financial statements reflect the activities of Yulong Eco-Materials and each of the following entities:

 

Name   Background   Ownership
Yulong BVI   A British Virgin Islands company   100%
    Incorporated on June 15, 2011    
Yulong HK   A Hong Kong company   100%
    Incorporated on July 21, 2011    
Yulong WFOE   A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)   100%
    Incorporated on September 2, 2011    
    Registered capital of $9,935,303 fully funded    
Yulong Bricks   A PRC limited liability company   VIE by contractual
    Incorporated on September 20, 2006   arrangements
    Registered capital of $4,320,899 (RMB 30,000,000) fully funded    
Yulong Concrete   A PRC limited liability company   VIE by contractual
    Incorporated on December 7, 2004   arrangements
    Registered capital of $2,880,599 (RMB 20,000,000) fully funded    
Yulong Transport   A PRC limited liability company   VIE by contractual
    Incorporated on July 13, 2009   arrangements
    Registered capital of $1,441,740 (RMB 10,010,000) fully funded    
Yulong Renewable   A PRC limited liability company   VIE by contractual
    Incorporated on August 16, 2011   arrangements
    Registered capital of $8,641,797 (RMB 60,000,000) fully funded    
   

commenced operation in April 2015

   

 

  5  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 2 – Summary of significant accounting policies

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included. Interim results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the year ended June 30, 2016, that was filed with the SEC on August 25, 2017.

 

Principles of consolidation

 

The condensed consolidated financial statements include the accounts of the Company, its subsidiaries, and the VIEs. All intercompany transactions and balances between the Company, its subsidiaries and the VIEs are eliminated upon consolidation.

 

Use of estimates and assumptions

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying condensed consolidated financial statements and footnotes. Significant accounting estimates reflected in the condensed consolidated financial statements include the useful lives and impairment of property, plant and equipment, collectability of receivables, realization of deferred tax assets, inventory valuation, warrant liabilities, stock-based compensation, and the present value of the net minimum lease payments of the capital lease. Actual results could differ from these estimates.

 

Going concern consideration

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern basis. The going-concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed on the financial statements. The Company’s ability to continue as a going concern depends on the liquidation of its current assets. The Company’s operation scale particularly Yulong Renewable was significantly downsized since the first quarter of fiscal year 2017 due to Environment Protection Act passed by the central government of PRC and Blue Sky Action Plan implemented by the Henan province, PRC. The remaining business of Yulong Bricks and Yulong Concrete has not sufficiently made up the cessation of Yulong Renewable’s business which raises a substantial doubt about the Company’s ability to continue as a going concern.

 

In an effort to maintain its financial position and operations, the Company has successfully entered into a remittance agreement with one of its vendors to refund the prepayment for one of its construction projects in an amount of $15.7 million (RMB104.5 million). Moreover, the Company is working to pursue the potential acquirers for Yulong Renewable’s business. Beginning January 2017, Yulong Bricks and Yulong Concrete gradually resumed their sales revenue by 15% from the Q1 and Q2 2017 level. The Company has initiated negotiations with its financial institutions and lessors to extend the due date of the loan and lease obligations. The founder has provided approximately $1.7 million (RMB 11.6 million) to fund the Company’s operations. The Company may also continue to raise fund through private placement or issuance of shares to support the Company’s operational needs. Management believes that the foregoing actions would enable the Company to continue as a going concern.

 

Foreign currency translation

 

The reporting currency of the Company is the U.S. dollar. The Company’s Chinese subsidiary and the VIEs use the local currency, Renminbi (RMB), as their functional currency as determined based on the criteria of ASC 830, Foreign Currency Translation . Assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China (the “PBOC”) at the end of the period. Income and expense accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss) in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

Translation adjustments included in accumulated other comprehensive income (loss) amounted to a loss of $(1,480,854) and $(1,219,184) as of December 31, 2016 and June 30, 2016, respectively. The balance sheet amounts, with the exception of equity, at December 31, 2016 and June 30, 2016 were translated at 6.94 RMB and 6.64 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rate applied to statements of operations and comprehensive (loss) income accounts for the three months ended December 31, 2016 and 2015 was 6.83 RMB and 6.39 RMB, respectively. The average translation rate applied to statements of operations and comprehensive (loss) income accounts for the six months ended December 31, 2016 and 2015 was 6.75 RMB and 6.33 RMB, respectively. Cash flows are also translated at the average translation rate for the periods; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

 

  6  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand, demand deposits and time deposits placed with banks with state owned banks within the PRC and with banks in Hong Kong which are unrestricted as to withdrawal and use and have original maturities of less than three months.

 

Balances at financial institutions or state owned banks within the PRC are not covered by insurance. Balances at financial institutions in Hong Kong may, from time to time, exceed Hong Kong Deposit Protection Board’s insured limits. As of December 31 and June 30, 2016, the Company had approximately $2,477,713 (RMB17,198,363) and $2,734,015 (RMB18,165,703), respectively, of cash deposits which were not covered by insurance. The Company has not experienced any losses in such accounts.

 

Restricted cash

 

Restricted cash consists of a third-party escrow account in the United States of America. The usage of the amount in the escrow account needs approval from the underwriter.

 

Accounts and other receivables, net

 

During the normal course of business, the Company extends unsecured credit to its customers and others. Management reviews its accounts and other receivables balances each reporting period to determine if an allowance for doubtful accounts is required. Customer accounts are considered past due over 90 days. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Bad debts are written off against the allowance after all collection efforts have ceased. For the years ended December 31, 2016 and June 30, 2016, the Company recorded in the aggregate of approximately $5.5 million and $3.9 of allowances for doubtful accounts against its accounts receivable and other receivables. The current year provision is based on the past due period over 9 months of its customers.

 

Inventories

 

Inventories consist of raw materials and finished goods and are stated at the lower of cost or market, as determined using the weighted average cost method. Management compares the cost of inventories with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost. On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories equal to the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. When inventories are written-down to the lower of cost or market, it is not marked up subsequently based on changes in underlying facts and circumstances. As of December 31, 2016 and June 30, 2016, the Company determined that no reserves for obsolescence were necessary.

 

Advances to suppliers

 

The Company advances money to certain suppliers for raw material purchases. Such advances are interest-free and unsecured. Management regularly reviews the aging of such advances as well as delivery trends of purchased materials, and records an allowance when it believes that delivery of materials due is at risk. Advances aged over one year and considered uncollectible are written off after exhaustive efforts at collection. No allowance for doubtful accounts was considered necessary at the balance sheet dates.

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method over the useful lives of the assets are as follows:

 

    Useful life
Buildings and improvements   10-30 years
Machinery and equipment   5-10 years
Transportation equipment   5-10 years
Office equipment   3-5 years

 

  7  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company accounts for all significant leases as either operating or capital. At lease inception, if the lease meets any of the following four criteria, the Company will classify it as a capital lease: (a) transfer of ownership to lessee at the end of the lease term, (b) bargain purchase option, (c) lease term is equal to 75% or more of the estimated economic life of the leased property, or (d) the present value of the minimum lease payments is 90% or more of the fair value of the leased asset. Otherwise, the lease will be treated as an operating lease.

 

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the condensed consolidated statements of operations and comprehensive (loss) income.  Construction-in-progress represents labor costs, materials, and capitalized interest incurred in connection with the construction. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred. No depreciation is provided for construction in progress until it is completed and placed into service. Expenditures for maintenance and repairs are charged to earnings as incurred while additions, renewals and betterments are capitalized.

 

Prepayments

 

Prepayments represent advances made to certain suppliers for equipment purchases or advance made to contractors in connection with the Company’s construction-in-progress. Management regularly reviews aging of prepayments and records an allowance when management believes collection of equipment or services to be performed due are at risk. Advances aged over one year and considered uncollectible are written off after exhaustive efforts at collection. As December 31, 2016 and June 30, 2016, we recorded $2,650,508 (RMB 18,402,479) and $2,769,652 (RMB 18,402,479) reserve for prepayments.

 

Intangible assets

 

Intangible assets are carried at cost less accumulated amortization.

 

The Company accounts for all significant leases of land use rights for purposes of classification as either operating or capital. At lease inception, if the lease meets either of the following two criteria, the Company will classify it as a capital lease: (a) transfer of ownership to lessee at the end of the lease term, or (b) bargain purchase option. Otherwise, the lease will be treated as an operating lease.

 

Intangible assets with finite useful lives are amortized using a straight-line method of amortization that reflects the estimated pattern in which the economic benefits of the intangible asset are to be consumed. The original estimated useful life for the land use rights of the following Yulong operating companies is as follows:

 

Entity   Description of assets   Estimated useful life  
Yulong Bricks   Land use right     50  
Yulong Concrete   Land use right     50  
Yulong Renewable   Land use right     50  

 

Intangible assets are reviewed at least annually, more often when circumstances require, to determine whether their carrying values have become impaired. The Company considers an asset to be impaired if its carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.  

 

Impairment for long-lived assets

 

Long-lived assets, including buildings and improvements, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, the Company reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. Due to the Air Pollution Control Act and Air Pollution Control Action Plan passed by the central government of PRC and the Blue Sky Action Plan implemented by the Henan Province of PRC in the fourth quarter of fiscal year 2016, Yulong Renewable placed its construction projects on hold since August 2016 and suspend its operation since January 2017. For the six months ended December 31, 2016, the Company recorded approximately $1.9 million (RMB13 million) impairment loss on Yulong Renewable’s construction-in-progress. As of December 31, 2016 and June 30, 2016, the impairment reserve for the long-lived assets (including construction-in-progress) was $48.5 million (RMB336.9 million) and $50.4 million (RMB 400.18 million).

 

  8  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Fair Values of Financial Instruments

 

ASC Topic 825, Financial Instruments (“Topic 825”), requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Topic 825 excludes certain financial instruments and all non-financial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.

 

The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:

 

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 assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable, notes payable and other short-term payables, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. The Company determined that the carrying value of the non-current capital lease obligations approximated their fair value using level 2 inputs by comparing the stated loan interest rate to the rate charged by the People’s Bank of China on similar loans.

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2016:

 

    Carrying
value at
December 31,
2016
    Fair value measurement at
December 31, 2016
 
          Level 1     Level 2     Level 3  
Warrant liabilities   $ 15,364     $ -     $ -     $ 15,364  

  

Certain inputs used in the valuation of the Company’s warrants are observable and therefore considered level 2. However, as the Company is a newly listed public reporting company and thus lacks historical volatility data, management concluded that level 3 fair valuation measurement is appropriate.

 

The following is a reconciliation of the beginning and ending balances of warrant liabilities measured at fair value on a recurring basis using observable inputs as of December 31, 2016:

 

    December 31,
2016
 
Beginning fair value   $ 65,605  
Recognized gain recorded in earnings     50,241  
Ending fair value   $ 15,364  

 

  9  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Revenue recognition

 

The Company recognizes revenue in accordance with ASC 605, Revenue Recognition , regarding revenue recognition which specifies that revenue is realized or realizable and earned. Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, the Company has no other obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.

  

Revenue from the Company’s brick and concrete businesses represents the invoiced value of goods, net of a value added tax (“VAT”).

 

The Company sells concrete and bricks primarily to major local real estate development and/or construction companies. Sales agreements are signed with each customer. Each agreement has specific terms and conditions with the exception of delivery date and quantity, which are provided when the customer issues an order pursuant to the agreement. The Company does not sell products to customers on consignment basis. There is no right of return after products are delivered and accepted by the customer.

 

The Company also provides transportation services for its concrete customers. Revenue is recognized upon delivery of the concrete. Transportation services revenue is immaterial to the Company’s consolidated revenues for the periods presented in the accompanying condensed consolidated financial statements.

 

Revenue from the CWM business includes sales of recycled aggregates and recycled bricks. Sales agreements are signed with each customer. Revenue is recognized similar to sales of concrete and bricks.

 

CWM revenue also includes revenue from the following activities:

 

  Hauling construction waste. The Company operates a fleet of trucks to haul the waste, consisting primarily of bricks and concrete, from construction and demolition sites. Revenue is recognized upon completion of hauling per truckload.

 

  Processing construction waste at mobile recycling stations. Revenue is recognized either per cubic meter of waste processed or when processing at a jobsite is completed, depending on the contract terms.

 

  Subcontracting waste hauling projects. The Company occasionally subcontracts waste hauling projects, whereby the subcontractors are the primary obligors to complete these projects, and the Company does not have any general credit risk as the services are prepaid by the customers. Sales and subcontracting costs from these subcontract arrangements are recorded at the net amount in accordance with ASC 605-45. The Company started to generate such revenue subsequent to December 31, 2016 and the amount is expected to be immaterial to the Company’s consolidated revenues for the year ending June 30, 2016.

  

Shipping and handling

 

Shipping and handling costs pertaining to raw material purchases are included in cost of revenue.

 

Shipping costs incurred in the delivery of products and depreciation expenses for transportation equipment (under Yulong Transport) are included in selling expense. Shipping costs amounted to $18,739 and $58,403 for the three months ended December 31, 2016 and 2015, respectively, and $62,661 and $140,014 for the six months ended December 31, 2016 and 2015, respectively. Depreciation expense amounted to $2,052 and $3,851 for the three months ended December 31, 2016 and 2015, respectively, and $10,060 and $41,070 for the six months ended December 31, 2016 and 2015, respectively. 

 

  10  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Concentration of risk

 

Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. As of December 31, 2016 and June 30, 2016, $2,477,713 and $2,734,540 were deposited with various major financial institutions located in the PRC, respectively. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness. Historically, deposits in Chinese banks are secure due to state policy to protect depositor interests. However, China promulgated a Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures to provide for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the current Bankruptcy Law, a Chinese bank may file bankruptcy if it deems itself to be insolvent. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have intensified competition in many aspects, especially since the opening of the RMB business to foreign banks in late 2006. Therefore, the risk of bankruptcy at the institutions that the Company maintains deposits has increased. In the event of bankruptcy, the Company is unlikely to reclaim its deposits in full since it is unlikely to be classified as a secured creditor under PRC laws.

 

Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of customer creditworthiness and ongoing monitoring of outstanding balances. The Company maintains reserves for estimated credit losses if necessary, and such losses have generally been within expectations.

 

Customer and vendor concentration risk

 

For the three months ended December 31, 2016, one customer accounted for 16% of the Company’s total revenues. For the three months ended December 31, 2015, no customer accounted for more than 10% of the Company’s total revenues. For the six months ended December 31, 2016 and 2015, one customer accounted for 12% of the Company’s total revenues. For the six months ended December 31, 2015, no customer accounted for more than 10% of the Company’s total revenues. 

 

As of December 31, 2016, two customers accounted for 24% and 16% of the Company’s total accounts receivable. As of June 30, 2016, two customers accounted for 26% and 19% of the Company’s total accounts receivable, respectively.

 

For the three months ended December 31, 2016, four suppliers accounted for 43%, 22%, 13% and 13% of the Company’s total purchases, respectively. For the three months ended December 31, 2015, three suppliers accounted for 23%, 21%, 17% of the Company’s total purchases, respectively. For the six months ended December 31, 2016, four suppliers accounted for 31%, 16%, 15% and 13% of the Company’s total purchases, respectively. For the six months ended December 31, 2015, four suppliers accounted for 27%, 17%, 16% and 10% of the Company’s total purchases, respectively.

 

As of December 31, 2016, four suppliers accounted for 23%, 22%, 13% and 10% of the Company’s accounts payable balances, respectively. As of June 30, 2016, five suppliers accounted for 21%, 19%, 16%, 16% and 11% of the Company’s accounts payable balances, respectively.

 

Income taxes

 

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 

 

  11  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company applies ASC 740, Accounting for Income Taxes , to account for uncertainty in income taxes and the evaluation of a tax position is 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.

 

As of December 31, 2016, Yulong WFOE and the VIEs had each filed income tax returns in China for the years ended December 31, 2010 to 2015. All such tax returns are subject to examination by the Chinese taxing authorities.

 

Warrant liabilities

 

A contract is designated as an asset or a liability and is carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations.  The Company then determines which options, warrants and embedded features require liability accounting and records the fair value as a derivative liability. The changes in the values of these instruments are shown in the accompanying condensed consolidated statements of operations and comprehensive (loss) income as “change in fair value of warrant liabilities”.

 

The Company adopted the provisions of an accounting standard regarding instruments that are indexed to an entity’s own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s ordinary shares and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument.  It provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception within the standards. All warrants issued with the strike price denominated in US dollar were recorded as derivative liability because the strike price of the warrants is denominated in US dollar, a currency other than the Company’s functional currency RMB.

 

(Loss) earnings per share

 

(Loss) earnings per share are calculated in accordance with ASC 260-10, Earnings per Share . Basic (loss) earnings per share are computed by dividing net (loss) income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted (loss) earnings per ordinary share reflect the potential dilution that could occur if securities to issue ordinary shares were exercised. The dilutive effect of outstanding share-based awards is reflected in the diluted (loss) earnings per share by application of the treasury stock method.

 

Comprehensive (loss) income

 

Comprehensive (loss) income is defined to include all changes in shareholders’ equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10, Comprehensive Income , requires that all items that are required to be recognized under current accounting standards as components of comprehensive (loss) income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted ASU No. 2011-05 by presenting items of net (loss) income and other comprehensive (loss) income in one continuous statement, the condensed consolidated statements of operations and comprehensive (loss) income.

 

Employee benefit

 

The full-time employees of Yulong WFOE and the VIEs are entitled to staff welfare benefits including medical care, housing fund, pension benefits and unemployment insurance, which are government mandated defined contribution plans. The Company is required to accrue for these benefits based on certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC regulations, and make cash contributions to the state-sponsored plans out of the amounts accrued. Total expense for the plans was $27,762 and $41,111 for the three months ended December 31, 2016 and 2015, respectively, and $70,075 and $75,911 for the six months ended December 31, 2016 and 2015, respectively. 

 

  12  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recent accounting pronouncements

 

Revenue Recognition: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09 (full retrospective method); or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09 (modified retrospective method). We are currently assessing the impact to our consolidated financial statements, and have not yet selected a transition approach.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The objective is to clarify the two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for these areas. The ASU affects the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year. Management is evaluating the effect, if any, on the Company’s financial position, results of operations or cash flows.

 

Going Concern Uncertainties : In August 2014, FASB issued ASU No. 2014-15, Preparation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern . Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this Accounting Standards Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We do not expect the adoption of ASU 2014-15 to have material impact on our consolidated financial position and results of operations.

 

Inventory : In July 2015, the FASB issued ASU No. 2015-11, an amendment to Topic 330 for simplifying the measurement of inventory. The update requires that inventory be measured at the lower of cost and net realizable value where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendment is intended to provide clarification on the measurement and disclosure of inventory in Topic 330 and not intended for those clarifications to result in any changes in practice. The ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted for all entities and should be applied prospectively. We do not expect the adoption of ASU 2015-11 to have a material impact on our consolidated financial position and results of operations.

 

  13  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Financial Instruments: In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The main objective in developing this ASU is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of the fiscal year of adoption for public entities if the entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company does not expect the adoption of ASU 2016-01 to have material impact on its financial position, results of operations or cash flows.

 

Leases : In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file financial statements with the SEC. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2010. Early adoption is permitted for all entities. The Company does not expect the adoption of ASU 2016-02 to have material impact on its financial position, results of operations or cash flows.

 

Stock-based Compensation : In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also requires the Company to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur.

 

Statement of Cash Flows : In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash , which require that a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a retrospective approach. As a result, the Company will no longer present transfers between cash and cash equivalents and restricted cash in the consolidated cash flow statements.

 

Business Combination: In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of 2018 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.

 

Stock-based Compensation :   In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock compensation (Topic 718): Scope of modification accounting” (“ASU 2017-09”). The purpose of the amendment is to clarify which changes to the terms or condition of a share-based payment award require an entity to apply modification accounting. For all entities that offer share based payment awards, ASU 2017-09 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU 2017-09 on its condensed consolidated financial statements.

 

Except for the ASU above, in the period from January 1, 2017 to August 2017, the FASB has issued ASU No. 2017-01 through ASU 2017-011, which are not expected to have a material impact on the consolidated financial statements upon adoption.

 

  14  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 3 – Variable interest entities

 

On September 2, 2011, Yulong WFOE entered into the Contractual Arrangements with each Yulong operating company and its shareholders. The Contractual Arrangements were subsequently amended on April 21, 2014 with respect to all of the Yulong operating companies, and again on June 24, 2015, but only with respect to Yulong Renewable. The significant terms of the Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result of the Contractual Arrangements, the Company classifies each Yulong operating company as a VIE.

 

A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Yulong WFOE is deemed to have a controlling financial interest and be the primary beneficiary of each Yulong operating company because it has both of the following characteristics:

 

  (1) The power to direct activities at each Yulong operating company that most significantly impact such entity’s economic performance, and
     
  (2) The obligation to absorb losses of, and the right to receive benefits from, each Yulong operating company that could potentially be significant to such entity.

 

Pursuant to the Contractual Arrangements, each Yulong operating company pays service fees equal to all of its net profit after tax payments to Yulong WFOE. At the same time, Yulong WFOE is obligated to absorb all of their losses. The Contractual Arrangements are designed so that the Yulong operating companies operate for the benefit of Yulong WFOE and ultimately, the Company.

 

Accordingly, the accounts of the Yulong operating companies are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation . In addition, their financial positions and results of operations are included in the Company’s financial statements.

 

The carrying amount of the VIEs’ consolidated assets and liabilities are as follows:

 

    December 31,
2016
    June 30,
2016
 
Current assets   $ 8,686,721     $ 10,068,142  
Property, plant and equipment, net     6,855,376       7,425,445  
Other non-current assets     17,749,388       18,306,223  
Total assets     33,291,485       35,799,810  
Total liabilities     35,156,028       33,130,293  
Net assets   $ (1,864,543 )   $ 2,669,517  

 

The VIEs’ liabilities consist of the following:

 

    December 31,
2016
    June 30,
2016
 
Current liabilities:            
Short-term loan - banks   $ 5,429,929     $ 5,674,011  
Accounts payable     1,372,238       1,710,881  
Other payables and accrued liabilities     7,252,781       5,973,602  
Other payables - related parties     1,395,630       1,907,458  
Payroll payable     641,926       546,990  
Customer deposits     4,947,580       2,571,846  
Taxes payable     1,437,914       1,497,583  
Capital lease obligations-current     3,915,152       4,062,291  
Dividends payable     8,762.878       9,156,779  
Total current liabilities     35,156,028       33,101,441  
Non-current liabilities:                
Capital lease obligations-non-current     -       28,852  
Total non-current liabilities     -       28,852  
Total liabilities   $ 35,156,028     $ 33,130,293  

 

  15  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The operating results of the VIEs are as follows:

 

    Three Months Ended
December 31,
 
    2016     2015  
Revenue   $ 1,783,390     $ 12,591,660  
Gross profit   $ 292,930     $ 4,789,583  

(Loss) income from operations

  $ (2,159,720 )   $ 3,757,562  

Net (loss) income

  $ (2,125,484 )   $ 2,731,710  

  

    Six Months Ended
December 31,
 
    2016     2015  
Revenue   $ 4,587,420     $ 25,942,528  
Gross profit   $ 1,204,159     $ 10,235,344  

(Loss) income from operations

  $ (4,487,642 )   $ 8,717,743  

Net (loss) income

  $ (4,689,900 )   $ 6,410,043  

 

Note 4 – Accounts receivable, net

 

Accounts receivable, net consists of the following for the years indicated:

 

    December 31,
2016
    June 30,
2016
 
Accounts receivable   $ 10,052,202     $ 9,666,112  
Less: allowance for doubtful accounts     (5,517,890 )     (3,937,778 )
Total accounts receivable, net   $ 4,534,312     $ 5,728,334  

 

Movement of allowance for doubtful accounts is as follows for the years indicated:

 

    December 31,
2016
    June 30,
2016
 
Beginning balance   $ 3,937,778     $ -  
Charge to expense (benefit)     1,800,677       4,067,144  
Exchange rate effect     (220,565 )     (129,366 )
Ending balance   $ 5,517,890     $ 3,937,778  

 

Note 5 – Deposits and other receivables

 

Deposits and other receivables consisted of the following:

  

    December 31,
2016
    June 30,
2016
 
Refundable deposits for equipment purchase   $ 516,522     $ 444,439  
Deposit for outsourcing agreement (1)     129,627       235,176  
Deposit for new project     205,027       63,739  
Advances to employees (2)     231,176       240,474  
Insurance compensation     15,336       15,874  
Deposit with government agency     2,880       3,011  
Deposits for construction in progress     7,932       -  
Total   $ 1,108,500     $ 1,002,713  

 

(1) In December 2011, Yulong Bricks agreed to outsource some brick production to Pingdingshan Hongrui New Construction Materials Co., Ltd., an unrelated third party, and paid approximately $129,627 (RMB 900,000) as security deposit, which is due on demand.
   
(2) The Company entrusts funds to its employees to pay certain of its expenses in the normal course of business, particularly for projects or jobsites beyond Pingdingshan.

 

  16  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 6 – Inventories

 

Inventories consisted of the following:

 

    December 31,
2016
    June 30,
2016
 
Raw materials   $ 235,600     $ 285,459  
Semi-finished byproduct     32,370       34,236  
Finished goods     36,502       45,196  
Total inventories   $ 304,472     $ 364,891  

 

Raw materials for bricks consist primarily of cement, gypsum, quicklime, aluminum powder and reclaimed fly-ash. Raw materials for concrete consist primarily of cement, admixture, sand and pebble. The cost of finished goods includes direct costs of raw materials as well as direct labor used in production. Indirect production costs at normal capacity such as utilities and indirect labor related to production such as assembling, shipping and handling costs for purchasing are also included in the cost of inventory.

  

Note 7 – Property, plant and equipment, net

 

Property, plant and equipment consisted of the following:

 

    December 31,
2016
    June 30,
2016
 
Building and improvements   $ 23,671,159     $ 24,735,204  
Machinery and equipment     7,020,145       7,335,708  
Machinery and equipment under capital lease     2,009,509       2,099,839  
Transportation equipment     818,793       855,598  
Transportation equipment under capital lease     2,572,005       2,687,620  
Office equipment     105,261       109,993  
Construction-in-progress     27,820,299       27,111,181  
Subtotal     64,017,171       64,935,143  
Less: impairment loss on fixed assets & CIP     (48,530,609 )     (48,755,558 )
Less: accumulated depreciation     (8,631,186 )     (8,754,140 )
Total   $ 6,855,376     $ 7,425,445  

 

As of December 31, 2016 and June 30, 2016, Yulong Renewable has impairment reserves for its building and improvements, machinery and equipment, transportation equipment and construction-in-progress of $48,530,609 and $48,755,558, respectively.

 

Construction-in-progress represents labor costs and materials incurred in connection with the construction of office building, employee facilities, equipment and machinery for Yulong Renewable, office building for Yulong Concrete, and an autoclave for Yulong Bricks. No depreciation is provided for construction-in-progress until it is completed and placed into service. Approximately in the fourth quarter of 2016, the central government of the People’s of Republic of China passed Air Pollution Control Act and enforced Air Pollution Control Action Plan. The province of Henan of People’s Republic of China implemented “Province of Henan Blue Sky Action Plan” on various industries such as construction materials, coal mining. Due to the Air Pollution Control Act and Blue Sky Action Plan, Yulong Renewable is required to comply with the new environmental regulations and its construction projects were placed on hold since August 2016. Yulong Renewable CIP primarily included the following projects:

 

Yulong Renewable commenced a construction of the waste recycling plant and brick production plant in 2015. Total budget for these constructions is approximately $44.4million, of which approximately $7.8 million (RMB 54.4 million) was transferred to fixed assets in the fiscal year ended June 30, 2016. The entity placed the plant construction on hold in August 2016 and accordingly, provided an impairment reserve for the related construction-in-progress amount, $7.4 million (RMB 51.6 million) during the fiscal year ended June 30, 2016.

 

In March 2016, the Company commenced a construction of environmental product testing and solid waste resource utilization center in Zhengzhou, PRC. Total budget for the construction of this center is approximately $43.2 million (RMB 300 million). During the fiscal year ended June 30, 2016, the Company has incurred approximately $33.4 million (RMB 231.7 million) in construction-in-progress pertinent to this construction. For the six months ended December 31, 2016, the Company paid an additional $1.8 million (RMB 13 million) related to this construction project and included such amount in the construction-in-progress. In August 2016, the Company placed this construction project on hold. In July 2017, the Company signed a cancellation agreement with the contractor by which the project prepayment, $15.0 million (RMB 104 million) will be refundable by the contractor in five (5) equal installments commencing in July 2017. The remaining construction-in-progress balance related to this construction, approximately $20.1 million (RMB139.8 million), is considered suspended and the Company provided an impairment reserve the entire amount, $20.1 million (RMB 139.8 million).

 

  17  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Construction-in-progress consisted of the following as of December 31, 2016:

 

Construction-in-progress description   Value     Estimated
completion
date
  Estimated
additional
cost to
complete
 
Office buildings, staff facilities, equipment and machinery   $ 7,049     Early 2018   $ -  
Actoclave installation   $ 6,801     Early 2018   $ -  
Total   $ 13,850         $ -  

 

Depreciation expense is $0 and $584,706 for the three months ended December 31, 2016 and 2015, respectively, and $0 and $1,152,720 for the six months ended December 31, 2016 and 2015, respectively.

 

Machinery and equipment under capital lease

 

In March 2014, the Company entered into a lease agreement with a third party to lease an excavator for two years for approximately $130,814 (RMB 908,240). The lease requires a one-time payment of $37,952 and an additional $5,828 as a security deposit paid in March 2014, monthly lease payments of approximately $5,000 from June 2014 to May 2016, with interest rate per annum of 8.8%. The ownership of the trucks will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 12). As of December 31, 2016, the outstanding balance of the capital lease obligation is $27,307 (RMB 189,591).

 

In March 2014, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $49,803 (RMB 345,780). The lease requires a one-time payment of $17,758 and an additional $5,549 as a security deposit paid in March 2014, monthly lease payments of approximately $3,000 from June 2014 to November 2015, with interest rate per annum of 8.5%. The ownership of the trucks will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 12). The Company paid off the lease in the fiscal year ended June 30, 2016 and the ownership of the machines was transferred to the Company.

 

In September 2014, the Company entered into a lease agreement with a third party to lease an excavator for two years for approximately $185,078 (RMB 1,285,000). The lease requires a one-time payment of $54,506 and an additional $8,414 as a security deposit paid in October 2014, monthly lease payments of approximately $8,000 from November 2014 to October 2016, with interest rate per annum of 8.7%. The ownership of the excavator will transfer to the Company if there is no default of the lease payments at the end of the lease term. As of December 31, 2016, the outstanding balance of the capital lease obligation is $131,108 (RMB 910,283).

 

In September 2014, the Company entered into a lease agreement with a third party to lease an excavator for two years for approximately $128,187 (RMB 890,000). The lease requires a one-time payment of $37,952 and an additional $5,828 as a security deposit paid in October 2014, monthly lease payments of approximately $5,000 from November 2014 to October 2016, with interest rate per annum of 8.7%. The ownership of the excavator will transfer to the Company if there is no default of the lease payments at the end of the lease term. As of December 31, 2016, the outstanding balance of the capital lease obligation is $90,806 (RMB 630,467).

 

In September 2014, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $48,826 (RMB 339,000). The lease requires a one-time payment of $17,758 and an additional $5,549 as a security deposit paid in October 2014, monthly lease payments of approximately $3,000 from November 2014 to April 2016, with interest rate per annum of 8.3%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term. In May 2016, the lessor verbally agreed to extend the due date to October 2016. As of December 31, 2016, the outstanding balance of the capital lease obligation is $37,067 (RMB 257,354).

 

  18  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In September 2014, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $48,682 (RMB 338,000). The lease requires a one-time payment of $17,706 and an additional $5,533 as a security deposit paid in October 2014, monthly lease payments of approximately $3,000 from November 2014 to April 2016, with interest rate per annum of 8.3%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term. As of December 31, 2016, the outstanding balance of the capital lease obligation is $36,957 (RMB 256,594).

 

In June 2015, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $47,530 (RMB 330,000). The lease requires a one-time payment of $15,210 (RMB105,600) which includes $4,753 (RMB 33,000) as a security deposit paid in June 2015, monthly lease payments of approximately $2,257 (RMB 15,673) from August 2015 to Jan 2017, with interest rate per annum of 9.525%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term.

 

In June 2015, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $48,394 (RMB 336,600). The lease requires a down payment of $15,486 (RMB107,520) which includes $4,839 (RMB 33,600) as a security deposit paid in June 2015, monthly lease payments of approximately $2,298 (RMB 15,958) from August 2015 to Jan 2017, with interest rate per annum of 9.525%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term.

 

In June 2015, the Company entered into a lease agreement with a third party to lease a digging machine for eighteen months for approximately $130,814 (RMB 908,240). The lease requires a down payment of $33,392 (RMB 231,840) which includes $5,127 (RMB 35,600) security deposit paid in June 2015, monthly lease payments of approximately $4,676 (RMB 32,462) from August 2015 to July 2017, with interest rate per annum of 9.6%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term.

 

In June 2015, the Company entered into a lease agreement with a third party to lease a digging machine for eighteen months for approximately $130,814 (RMB 908,240). The lease requires a one-time down payment of $33,392 (RMB 231,840) which includes $5,127 (RMB 35,600) security deposit paid in June 2015, monthly lease payments of approximately $4,676 ($32,462) from August 2015 to July 2017, with interest rate per annum of 9.6%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term.

 

Transportation equipment under capital leases

 

In October 2012, the Company entered into a lease agreement with a third party to lease ten waste hauling trucks for two years for approximately of $592,569 (RMB 4,114,208), including $45,802 (RMB 318,000) as security deposits and $59,772 (RMB 415,000) for insurance. The lease also requires a one-time payment of $163,701 in April 2013 and monthly lease payments of approximately $26,000 originally from June 2013 to May 2015, with interest rate at 18.2% per annum. The ownership of the trucks has been transferred to the Company with an attached lien that will be removed if there is no default of the lease payments at the end of the extended lease term. The Company placed these machines into service in June 2013, and they have accordingly been capitalized.

 

In November 2012, the Company entered into another lease agreement with a third party to lease ten waste hauling trucks for two years for approximately of $580,041 (RMB 4,027,225), including $45,802 (RMB 318,000) as security deposits and $50,122 (RMB 348,000) for insurance. The lease also requires a one-time payment of $163,704 on April 30, 2013, monthly lease payments of approximately $32,000 from July 2013 to June 2014, and monthly lease payments of approximately $16,000 originally from July 2014 to June 2015, with interest rate at 16.8 % per annum. The ownership of the trucks has been transfer to the Company with an attached lien that will be removed if there is no default of the lease payments at the end of the extended lease term. As of December 31, 2016, the amount outstanding was $117,102 (RMB 813,036).

 

  19  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In January 2014, the Company entered into a memorandum of understanding to lease 100 waste hauling trucks with a third party for approximately $60,205 (RMB 418,000) per truck. In July 2014, the Company entered into a binding agreement with the same party to lease the first 30 trucks for two years for approximately $1,600,893 (RMB 11,115,000), or approximately $53,363 (RMB 370,500) per truck. The lease also requires a one-time payment of $337,030 (RMB 2,340,000) as security deposit paid in July 2014 and monthly lease payments of approximately $89,000 from August 2014 to July 2016, with interest rate at 15.6% per annum. The Company has an option to purchase the vehicles for $491 if there is no default of the lease payments at the end of the lease term.

 

The Company recognized approximately $0 and $195,000 of depreciation expense related to the above capital lease equipment for the years ended December 31, 2016 and 2015, respectively, and $0 and $383,000 for the six months ended December 31, 2016 and 2015, respectively.

 

The carrying value of assets under capital leases consisted of the following:

 

    December 31,
2016
    June 30,
2016
 
Machinery and equipment   $ 2,009,509     $ 2,099,839  
Transportation equipment     2,572,005       2,687,620  
Subtotal     4,581,514       4,787,459  
Less: accumulated depreciation     (1,618,837 )     (1,691,606 )
Less: impairment reserve     (2,962,677 )     (3,095,853 )
Total   $ -     $ -  

 

Note 8 – Prepayments

 

Prepayments consisted of the following:  

 

    December 31,
2016
    June 30,
2016
 
Prepayment for equipment purchase   $ 14,403     $ 15,050  
Prepayment for construction (1)     2,639,680       2,769,652  
Subtotal     2,654,083       2,784,702  
Reserve for prepayment     (2,650,508 )     (2,769,652 )
Prepayment, net   $ 3,575     $ 15,050  

 

(1) (a) Prepayment for construction in advance was made in connection with the construction factory of Yulong Renewable. We had prepaid the construction fees in advance approximately $2,650,508 (RMB18,402,479) and $2,769,652 (RMB18,402,479) as of December 31 and June 30, 2016, respectively, to our construction vendors, Henan Sanjian and Henan Guangshen. Due to the new environmental regulations and policies implemented by the central government of PRC and the Environmental Protection Bureau of Henan Province (see Note 7), the factory construction project was placed on hold since August 2016.  We placed a reserve for the entire amount of the prepaid construction fee, $2,650,508 (RMB18,402,479) and $2,769,652 (RMB 18,402,479) as of December 31 and June 30, 2016, respectively, as there is an uncertainty in the refundable status of the construction vendors.

 

  20  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 9 – Intangibles, net

 

Intangible assets consisted of the following:

 

    December 31,
2016
    June 30,
2016
 
Land use rights   $ 4,635,105     $ 4,843,458  
Less: accumulated amortization     (431,785 )     (425,701 )
Less: impairment reserve     (2,157,006 )     (2,253,966 )
Total   $ 2,046,314     $ 2,163,791  

 

Land use rights

 

All land in the PRC is state-owned, but the government can grant “land use rights”. The Company acquired three land use rights in 2007, 2009 and 2015 for a total of $4,376,869 (RMB 30,388,600) and incurred $257,977 (RMB 1,791,136) of associated costs. The Company has not completed the ownership transfer registration for such rights. Pursuant to supplement land usage reimbursement agreements between Yulong Bricks and the Villagers’ Committee of Xiwuzhuang Village dated February 12, 2014, between Yulong Concrete and the Villagers’ Committee of Gaozhuang Village dated February 12, 2014, and between Yulong Renewable and the Villagers’ Committee of Lvzhuang Village dated September 6, 2015, the purchase price of each land use right will be accounted for as lease expense over 50 years, which will expire in December 2058 with respect to Yulong Bricks’ and Yulong Concrete’s rights, and in March 2065 with respect to Yulong Renewable’s right, until the Company can complete their transfer registrations.

 

Amortization expense for the three months ended December 31, 2016 and 2015 amounted to $12,400 and $25,070 respectively, and $25,109 and $62,971 for the six months ended December 31, 2016 and 2015, respectively.

 

The estimated amortization expenses for each of the five succeeding years is as follows:

 

Year ending December 31,   Estimated
amortization
expense
 
       
2017   $ 50,220  
2018     50,220  
2019     50,220  
2020     50,220  
2021     50,220  
Thereafter     1,795,214  
Total   $ 2,046,314  

 

  21  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 10 – Short-term loans

 

Short-term loans represented amounts due to various banks, normally due within one year. The principal of the loans are due at maturity but can be renewed at the bank’s option. Interest is due monthly.

 

Short-term loans due to banks consisted of the following:

 

    December 31,
2016
    June 30,
2016
 
             
Loan from Pingdingshan Bank, which was originally due in April 2015, with loan amount $576,120 (RMB 4,000,000) and annual interest of 12%. The Company repaid $259,254 (RMB 1,800,000) in April 2015 and obtained the Bank’s approval to extend the remaining $316,866 (RMB 2,200,000) until April 2016. Interest rate is 11.5% per annum.  The loan is guaranteed by Yulong Bricks, the executive director of Yulong Bricks, a third party, the Company founder and his relatives. The company is settling with the bank on loan extension subsequently.   $ 316,866     $ 331,109  
                 
Loan from Pingdingshan Rural Credit Cooperative Union, matures in July 2016. Interest rate is 12.1% per annum. The loan is guaranteed by Yulong Bricks, Yulong Renewable, the founder and a company that he owns. The company repaid the loan by the new loan in January, 2017 and the interest rate is 10.8% per annum.     2,088,433       2,182,313  
                 
Loan from Pingdingshan Bank, orginal loan amount $648,135 (RMB 4,500,000), at an interest rate 8.73% per annum, matures in August 2016. The loan is guaranteed by Yulong Bricks, the executive director of Yulong bricks, his relative and a third party. The Company is settling with the bank on loan extension subsequently.     648,135       677,269  
                 
Loan from Pingdingshan rural credit cooperative union, original loan amount $648,135 (RMB 4,500,000) at an interest rate 9%, matures in August 2017. The loan is guaranteed by Yulong Concrete, Yulong Bricks and the company’s founder. The Company is settling with the bank on loan extension subsequently.     648,135       677,269  
                 
Loan from China Construction Bank, original loan amount $576,120 (RMB4,000,000), matures in June 2016. Interest rate is 6.4% and 9.6% per annum as of June 30, 2016 and December 31, 2016, respectively.  Guaranteed by Yulong Concrete and a third party. The company is settling with the bank on loan extension subsequently.     576,120       602,017  
                 
Loan from Pingdingshan Bank, original loan amount $576,120 (RMB4,000,000), matures in September 2016. Interest rate is 8.3% per annum. Guaranteed by Yulong Concrete, Yulong Industry and Yulong Renewable. The Company is settling with the bank on loan extension subsequently.     576,120       602,017  
                 
Loan from Pingdingshan Bank, original loan amount $576,120 (RMB4,000,000), matures in March 2017. Interest rate is 8.7% per annum. Guaranteed by Yulong Renewable, Yulong Industry and Yulong Concrete. The company is settling with the bank on loan extension subsequently.     576,120       602,017  
                 
Total short-term loans - bank   $ 5,429,929     $ 5,674,011  

 

Interest expense on debts for the three months ended December 31, 2016 and 2015 amounted to $156,789 and $180,560, respectively, and $347,175 and $405,271 for the six months ended December 31, 2016 and 2015, respectively. No interest expense has been capitalized into construction-in-progress due to all borrowings were for working capital purposes.

 

  22  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 11 – Related party transactions  

 

Other payables - related parties

 

Other payables – related parties are nontrade payables arising from transactions between the Company and certain related parties, such as loans from such related parties. The loans are unsecured and non-interest bearing. Current payables are due on demand.

 

Other payables - related parties consisted of the following:

 

Name of related parties   Relationship   Nature of
transactions
  December 31,
2016
    June 30,
2016
 
Yulong Zhu   Founder   Loan for operating cash flows   $ 1,688,383     $ 1,488,794 (1)
Henan Yuliang Hotel Co., Ltd.   Owned by founder   Loan for operating cash flows     -       15,050  
Lei Zhu   Relative of founder   Loan for operating cash flow     -       461,393 (2)
Total other payables           $ 1,688,383     $

1,965,237

 

   

(1) Converted approximately $1.5 million into the Company’s ordinary shares concurrently with the closing of the Company’s initial public offering of its ordinary shares on July 1, 2015 (the “IPO”), at the IPO price per share of $6.25 (the “IPO Price”).
   
(2) Fully converted into shares of the Company’s ordinary shares concurrently with the closing of the IPO at the IPO Price.

 

Note 12 – Capital lease obligations

 

Capital lease obligations consisted of the following:

 

    December 31,
2016
    June 30,
2016
 
Lease obligations for ten waste hauling trucks expired May 2015, lease payment at $23,167 (RMB160,847) per month with interest at 18.2% per annum. The lease obligation was extended to December 2015 and paid off.   $ -     $ -  
Lease obligations for ten waste hauling trucks expired June 2015, lease payment at $28,183 (RMB195,676) and $14,500 (RMB100,676) per month from July 2013 to June 2014 and from July 2014 to June 2015, respectively, with interest at 16.8% per annum. In June 2015, lessor verbally agreed to extend due date for the unpaid balance to June 2016. The Company is arranging repayment plan with the lessor subsequently.     117,102       122,366  
Lease obligations for a loader expired in November 2015, lease payment at $2,319 (RMB16,101) per month with interest at 8.5% per annum. The lease obligation was paid off.     -       -  
Lease obligations for an excavator expiring in May 2016, lease payment at $4,676 (RMB32,462) per month with interest at 8.8% per annum. The Company is arranging repayment plan with the lessor subsequently.     27,307       28,535  
Lease obligations for thirty waste hauling trucks expiring in July 2016, lease payment at $78,359 (RMB544,050) per month with interest at 15.6% per annum. The Company is arranging repayment plan with the lessor.     1,385,920       1,449,258  
Lease obligation for a loader expired in April 2016, lease payment at $2,319 (RMB16,101) per month with interest at 8.3% per annum. In May 2016, the lessor verbally agreed to extend the due date for the unpaid balance to October 2016. The Company is arranging repayment plan with the lessor subsequently.     37,067       38,733  
Lease obligation for a loader expired in April 2016, lease payment at $2,312 (RMB16,053) per month with interest at 8.3% per annum. In May 2016, the lessor verbally agreed to extend the due date for the unpaid balance to October 2016. The Company is arranging repayment plan with the lessor subsequently.     36,957       38,619  
Lease obligation for an excavator expiring in October 2016, lease payment at $6,751 (RMB46,870) per month with interest at 8.7% per annum. The Company is arranging repayment plan with the lessor subsequently.     131,108       137,504  
Lease obligation for an excavator expiring in October 2016, lease payment at $4,676 (RMB32,462) per month with interest at 8.7% per annum. The Company is arranging repayment plan with the lessor subsequently.     90,806       95,236  
Lease obligation for a land use right which the Company expects to pay in full by June 30, 2017.     1,844,586       1,927,500  
Lease obligation for an excavator commenced on August 1, 2015 expiring on July 1, 2017, total obligation is approximately $145,604 (RMB1,010,928), lease payment at $4,676 (RMB32,462) per month with interest at 9.593%. The Company is arranging repayment plan with the lessor subsequently.     91,690       98,587  
Lease obligation for an excavator commenced on August 1, 2015 expiring on July 1, 2017, total obligation is approximately $145,604 (RMB1,010,928), lease payment at $4,676 (RMB32,462) per month with interest at 9.593%. The Company is arranging repayment plan with the lessor subsequently.     91,690       98,587  
Lease obligation for a loader commenced on August 1, 2015 expiring on January 1, 2017, total obligation is approximately $56,858 (RMB394,764), lease payment at $2,298 (RMB15,958) per month with interest at 9.525% The Company is arranging repayment plan with the lessor subsequently.     32,491       34,672  
Lease obligation for a loader commenced on August 1, 2015 expiring on July 1, 2017, total obligation is approximately $55,842 (RMB387,714), lease payment at $2,257 (RMB15,673) per month with interest at 9.525%.  The Company is arranging repayment plan with the lessor subsequently.     31,910       34,052  
Subtotal     3,918,634       4,103,649  
Less: deferred interest     (3,482 )     (12,506 )
Capital lease obligations, net     3,915,152       4,091,143  
Less: capital lease obligations - current     (3,915,152 )     (4,062,291 )
Capital lease obligations – non-current   $ -     $ 28,852  

 

  23  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

“As of December 31, 2016 and June 30, 2016, the Company has accrued interest of $72,017 and $66,388, respectively, in connection with the capital lease obligations, and were classified in the Company’s consolidated balance sheets under the caption “Other payables and accrued liabilities”. Interest expenses on capital lease obligations for the six months ended December 31, 2016 and 2015 amounted to $8,735 and $80,399, respectively”.

 

Future annual capital lease payments approximately consist of the following:

 

Twelve months ending December 31,   December 31     June 30  
2017   $ 3,915,152     $ 4,062,291  
2018     -       28,852  
Total   $ 3,915,152     $ 4,091,143  

 

Note 13 – Taxes

 

Income taxes

 

Cayman Islands

 

Yulong Eco-Materials is incorporated in the Cayman Islands and is not subject to tax on income or capital gains under current Cayman Islands law. In addition, upon payments of dividends by these entities to their shareholders, no Cayman Islands withholding tax will be imposed.

 

British Virgin Islands

 

Yulong BVI is incorporated in the British Virgin Islands and is not subject to tax on income or capital gains under current British Virgin Islands law. In addition, upon payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.

 

Hong Kong

 

Yulong HK is incorporated in Hong Kong and is subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law, Yulong HK is exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

 

  24  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

PRC

 

Yulong WFOE and the VIEs are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises are subject to income tax at a rate of 25% after appropriate tax adjustments.

 

Yulong Bricks utilizes recycled raw materials to produce bricks and is qualified for preferential income tax granted by the State Administration of Taxation: only 90% of revenue attributable to utilization of recycled materials counts for taxable revenue.

 

Under the EIT Laws, dividends paid by PRC enterprises out of profits earned post-2007 to non-PRC tax resident investors are subject to PRC withholding tax of 10%. A lower withholding tax rate may be applied based on applicable tax treaty with certain countries.

 

The EIT Laws also provide that enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC are considered PRC tax resident enterprises and subject to PRC income tax at the rate of 25% on worldwide income. The definition of “place of effective management” refers to an establishment that exercises, in substance, overall management and control over the production and business, personnel, accounting, properties, and other aspects of an enterprise. No detailed interpretation or guidance has been issued to define “place of effective management”. Furthermore, the administrative practice associated with interpreting and applying the concept of “place of effective management” is unclear. If the Company is deemed a PRC tax resident, it would be subject to PRC tax under the EIT Law. The Company has analyzed the applicability of this law, and for each of the periods presented, the Company has not accrued for PRC tax on such basis. The Company will continue to monitor changes in the interpretation and/or guidance of this law.

 

Provision (benefit) for income taxes is comprised of the following:

 

    For the three months ended
December 31,
 
    2016     2015  
             
Current   $ (20,978 )   $ 1,039,903  
Deferred     (172,795 )     (54,015 )
Total provision for income taxes   $ (193,773 )   $ 985,888  

  

    For the six months ended
December 31,
 
    2016     2015  
             
Current   $ 197,669     $ 2,165,465  
Deferred     (273,651 )     (110,945 )
Total provision for income taxes   $ (75,982 )   $ 2,054,520  

 

  25  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Effective Tax Rate

 

The Company’s effective tax rate was 1.5% and 23.0% for the six months ended December 31, 2016 and 2015, respectively. The Company’s effective tax rate was 8.0% and 32.0% for the three months ended December 31, 2016 and 2015, respectively. The decrease in our effective tax rate is primarily attributable to the pre-tax loss, change in valuation allowance related to deductible temporary differences and net operating loss and increase in non-deductible items.

 

Deferred taxes

 

Significant components of deferred tax assets and liabilities are as follows:

 

    December 31,
2016
    December 31,
2015
 
             
Deferred tax assets            
Startup cost   $ 192,562     $ 206,026  
Property, plant and equipment     95,415       414,902  
Intangible assets     (56,538 )     (42,138 )
Staff Education     1,429       -  
Provision for doubtful accounts     1,379,472       -  
Others     -       19,060  
Impairment reserve for long-lived assets, CIP and prepayment     13,334,531       -  
Net operating loss carryforward in China     442,310       45,674  
Total deferred tax assets     15,389,181       643,524  
Valuation allowance     (14,751,068 )     (45,674 )
Total deferred tax assets, net   $ 638,113     $ 597,850  

 

Uncertain tax positions  

 

Aggregate undistributed earnings of Yulong WFOE and the VIEs that are available for distribution to the Company are approximately $0 and $29.5 million as of December 31, 2016 and 2015 respectively. Such undistributed earnings are considered to be indefinitely reinvested, because the Company does not have any present plan to pay any cash dividends on its ordinary shares in the foreseeable future and intends to retain most of its available funds and any future earnings for use in the operation and expansion of its business. Accordingly, no deferred tax liability has been accrued for the Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to the Company as of December 31, 2016 and 2015.

 

In addition, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial reporting amounts over tax basis amount in the PRC subsidiary. However, recognition is not required in situations where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the enterprise expects that it will ultimately use that means. The Company has not recorded any such deferred tax liability attributable to the undistributed earnings of its financial interest in the VIEs because it believes such excess earnings can be distributed in a manner that would not be subject to income tax.

 

  26  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

There were no unrecognized tax benefits as of December 31, 2016 and June 30, 2016. Management does not anticipate any potential future adjustments in the next twelve months which would result in a material change to its tax positions.

  

Value added tax

 

Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax (“VAT”) in accordance with PRC laws. The standard VAT rates range from 13% to 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product.

 

Yulong Bricks’ products were eligible for VAT tax exemption under the PRC law of [2008] No. 156. The new PRC law of [2015] No. 78, however, replaced [2008] No. 156 and Yulong Bricks’ products are now subject to a VAT rate of 17%, with 70% of the tax being refundable. Under the same law, Yulong Renewable is required to pay VAT rate of 17% for its recycled bricks and recycled aggregates, and 11% for its hauling services. 70% of the tax on recycled bricks and hauling services, and 50% of the tax on recycled aggregates, are refundable. Yulong Concrete’s products are mainly produced with cement and are eligible for a VAT at the rate of 6% of the gross sale prices under the PRC law of [2009] No. 9. Yulong Concrete’s VAT rate decreased to 3% since November 2014 because under the PRC law of [2014] No. 57, concrete products that use cement as raw material are eligible for a reduced VAT rate of 3%.

 

Taxes payable

 

Taxes payable consisted of the following:

 

    December 31,
2016
    June 30,
2016
 
             
Income taxes payable   $ 1,086,986     $ 1,126,157  
VAT taxes payable     201,191       223,307  
Other taxes payable     150,215       148,619  
Total   $ 1,438,392     $ 1,498,083  

 

Note 14 – Equity

 

Restricted net assets

 

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by Yulong WFOE and the VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the accompanying condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of Yulong WFOE and the VIEs.

 

Yulong WFOE and the VIEs are each required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, Yulong WFOE may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. The VIEs may each allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by the State Administration of Foreign Exchange.

 

  27  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As of December 31, 2016 and June 30, 2016, Yulong WFOE and the VIEs collectively appropriated $3,922,228 and $3,922,228 of retained earnings for their statutory reserves.

 

As a result of the foregoing restrictions, Yulong WFOE and the VIEs are restricted in their ability to transfer their net assets to the Company.

  

Foreign exchange and other regulation in the PRC may further restrict Yulong WFOE and the VIEs from transferring funds to the Company in the form of dividends, loans and advances. As of December 31, 2016 and June 30, 2016, the aggregate net liabilities of Yulong WFOE and the VIEs amounted to $1,251,609 and the aggregate net assets is $3,453,575, respectively.

 

Initial Public Offering

 

On July 1, 2015, the Company completed the IPO of 2,250,000 shares of its ordinary shares for gross proceeds of $14,062,500 and, less costs of $2,552,343, for net proceeds of $11,510,157.

 

In connection with the closing of the IPO, the Company:

 

  granted a 45-days option to its underwriters to purchase up to 337,500 shares of ordinary shares, to cover over-allotments, which expired on August 15, 2015 without being exercised;

 

  granted warrants to purchase up to 112,500 shares of ordinary shares in the aggregate, or 5% of the ordinary shares sold in the IPO, to the representative of its underwriters and an independent financial adviser for the IPO (the “warrants”);

 

  granted 26,400 shares of ordinary shares in the aggregate to its CFO (20,000 shares vested concurrently with the closing of IPO) and two non-executive board members (3,200 shares each vesting quarterly from the closing of IPO) at $6.25 per share and valued at $165,000 in total; and

 

  converted $9,959,613 in indebtedness to five shareholders, including its founder, into 1,593,538 shares of ordinary shares.

 

Stock-based compensation expenses amounted pertinent to the initial public offering to $0 and $10,000 for the three months ended December 31, 2016 and 2015, and $0 and $145,000 for the six months ended December 31, 2016 and 2015. 

 

Conversion in related party indebtedness

 

On February 27, 2015, five shareholders of the Yulong operating companies, including the Company’s founder, agreed to convert the RMB equivalent of $9,892,692, including dividends payable and due to related parties, due to them in the aggregate from the Yulong operating companies into the Company’s ordinary shares concurrently with the closing of the IPO at the IPO Price.

 

Warrants

 

The Company follows the provisions of the accounting standard relating to instruments that are indexed to an entity’s own securities.  This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s ordinary shares and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. The Company determined its warrants would be recorded as derivative instruments on the issuance dates because the strike price of the warrants is denominated in US dollars, a currency other than the Company’s functional currency RMB. Therefore the warrants are not considered indexed to the Company’s ordinary shares, and as such, all changes in the fair value of these warrants are recognized currently in earnings from the issuances date until such time as the warrants are exercised or expire.

 

The value of the warrant liabilities was $15,364 at December 31, 2016 and $475,380 at the issuance date on July 1, 2015. The decrease resulted in a $50,241 gain on change in fair value of warrants for the six months ended December 31, 2016.

 

  28  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Because the warrants are not traded on an active securities market, the Company estimates their fair value using the Cox-Ross-Rubinstein binomial model on December 31, 2016 and on July 1, 2016 as follows:

 

    December 31,
2016
    July 1,
2015
 
Number of shares exercisable     112,500       112,500  
Exercise price   $ 6.25     $ 6.25  
Stock price   $ 0.88     $ 6  
Expected term (years)     3.50       5.00  
Risk-free interest rate     1.76 %     1.63 %
Expected volatility     80.63 %     92 %

  

Due to the short trading history of the Company’s ordinary shares, the expected volatility is based primarily on other similar public companies’ historical volatilities, which are traded on United States stock markets. Historical volatility was computed using daily pricing observations for recent periods that correspond to the term of the warrants. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of the warrants. The Company currently has no reason to believe future volatility over the expected remaining life of the warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the warrants.

 

A summary of changes in warrant activity is presented as follows:

 

    Six Months Ended
December 31, 2016
    Weighted
Average
Exercise
Price
    Average
Remaining
Contractual
Life
 
                   
Outstanding, beginning balance     -       -       -  
Granted     112,500     $ 6.25       5.00  
Forfeited     -       -       -  
Exercised     -       -       -  
Outstanding, ending balance     112,500     $ 6.25       3.50  

 

Stock-based compensation – consulting services

 

On January 19, 2016, the Company’s board of directors approved the following issuances of restricted shares of the Company’s ordinary shares:

 

  31,279 shares to a consultant for services pertaining to business growth and strategies for the calendar years ending December 31, 2017 and 2016; and

 

  95,967 shares to a consultant for services rendered previously and for the fiscal quarter ended March 31, 2016 pertaining to financial reporting and internal control over financial reporting.

 

The shares were valued at $3.20 per share, based on the average closing price of the ordinary shares for the three months immediately preceding the board’s approval.

 

On July 6, 2016, the Company entered into a consulting agreement for services in conjunction with the pre-audit and consulting services for the periods ended June 30, 2016, September 30, 2016, December 31, 2016 and March 31, 2017. Total service fee is $150,000 or $37,500 per quarter and will be settled in a form of stock-based payment equivalent to 58,140 shares of the Company’s common stock. The shares were valued at $2.58 per share based on the average closing price of the ordinary shares on the date the service agreement was entered. On August 15, 2016, an aggregate of 58,140 shares of our ordinary shares were issued in reliance upon the exemption from securities registration under Section 4(a)(2) of Securities Act of 1933 to this financial consultant.

 

Stock-based compensation expenses for consulting services amounted to $50,103 and $0 for the three months ended December 31, 2016 and 2015, and $100,069 and $0 six months ended December 31, 2016 and 2015.

 

  29  

 

  

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 15 – (Loss) earnings per share

 

The basic and diluted (loss) earnings per share are as follows:

 

    For the
three months
ended
December 31,
2016
    For the
three months
ended
December 31,
2015
 
             
Net (loss) income   $ (2,238,531 )   $ 2,096,249.00  
Weighted average shares outstanding - basic and diluted     12,041,105       11,869,938.00  
(Loss) earnings per share - basic and diluted   $ (0.19 )   $ 0.18  

 

    For the
six months
ended
December 31,
2016
    For the
six months
ended
December 31,
2015
 
             
Net (loss) income   $ (5,077,307 )   $ 5,676,932.00  
Weighted average shares outstanding - basic and diluted     12,041,105       11,869,938.00  
(Loss) earnings per share - basic and diluted   $ (0.42 )   $ 0.48  

 

Warrants outstanding for the three months and six months ended December 31, 2016 and 2015 were not included in the dilutive shares calculation because the average per share price of the Company’s ordinary shares for the three months and six months ended December 31, 2016, was below the exercise price of the warrants.

 

Note 16 – Commitments and contingencies

 

Contingencies
 

From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.

 

As of December 31, 2016, three of the four Yulong operating companies were parties to 32 civil lawsuits with judgment amounts of approximately $3,722,230 (RMB 25,843,441) in the aggregate, of which unpaid amounts of approximately $103,878 (RMB 721,225) has already been included in capital lease obligations regarding lease agreement for purchasing 10 vehicles from Xuchang Tongli, and approximately $24,309 (RMB168,780) already included in violation of laws and regulations, approximately $332,850 (RMB2,310,979) already included in bank loans, and approximately $402,177 (RMB 2,792,317) already included in other payables as of December 31,2016. The remaining balances included $1,743,388 (RMB 12,104,346) related to the guarantee with details disclosed in notes ‘Guarantees’, and $991,371 (RMB 6,883,086) was pertinent to legal actions filed by various individuals.

 

Subsequent to December 31, 2016, three of four Yulong operating companies were prone to 4 civil lawsuits with judgment amounts of approximately $51,906 (RMB 360,381) in the aggregate, of which unpaid amounts of approximately $51,906 (RMB 360,381) was pertinent to legal actions filed by various individuals.

 

  30  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Illegal occupation of land

 

On October 18, 2016, Pingdingshan Land Resources Bureau filed a legal action with the district court to enforce the execution of Ping Guo Tu Zi Fa Zi (2016) no.65 Administrative Penalty Decision that the Company shall:

 

  (1) return 7,137.26 square meters of land which the Company occupied illegally;
     
  (2) dismantle the new buildings and other facilities on the 7,137.26 square meters of land which the Company occupied illegally, and restore the original appearance of the land;
     
  (3) pay a fine on the basis that illegal occupation of 5,951.4 square meters of general cultivated land at a fine of RMB 16.00 per square meter, i.e. $13,714.88 (RMB 95,222.40), and 1,185.86 square meters of other land fines per square meter RMB 3.00, i.e. $512.40 (RMB 3,557.58), resulting in a total of $14,227.28 (RMB 98,779.98).

 

On November 29, 2016, Pingdingshan Environmental Protection Bureau applied to the court to enfore the execution of Ping Huan Fa Zi (2015) no.26 Administrative Penalty Decision that the Company shall:

 

  (1) cease its trial production;
     
  (2) pay a fine of $10,082.10 (RMB 70,000).

 

Total unpaid amounts related to illegal occupation of land were therefore $24,309 (RMB 168,780).

 

Purchase commitment

 

On November 10, 2012, the Company entered into a sales and purchase contract with an unrelated third party, Xian Oriental Fuxing Machinery Co., Ltd (“Xian Oriental Fuxing”) with a contract amount of $410,844 (RMB 2,790,000). As of June 30, 2016, the Company already paid $280,858 (RMB 1,950,000) to Xian Oriental Fuxing. According to the result of the judgment published on September 24, 2016, the court ruled that the Company lost the case and was required to pay the remaining amount of $120,985 (RMB 840,000) and litigation costs of $3,271 (RMB 22,708).

 

Guarantees

 

As of December 31, 2016, the Company guaranteed approximately $2.9 million for a bank loan of an unrelated third-party as follows:

 

Name   Guaranteed
amount
    Guarantee expiration date
Pingdingshan Yushi Automobile Accessory Sales Co., Ltd (1)   $ 1,204,034     December 29, 2016
Pingdingshan Orr Business Co., Ltd (2)     1,743,388     January 5, 2018
Total   $ 2,947,422      

 

(1) The Company did not, however, accrue any liability in connection with such guarantee because the borrower has been current in its repayment obligations and the Company has not experienced any loss from providing such guarantees in the past. The Company has evaluated the guarantee and has concluded that the likelihood of it having to make payments under the guarantee is remote and that the fair value of the stand-ready obligation under such commitment is not material.

 

(2) According to the result of the judgment published on March 16, 2017, the court ruled that the borrower lost the case and was required to return the borrowings of $1,728,359 (RMB 12 million) and the payment of $15,029 (RMB 104,346) in litigation costs. As the loan term being from January 5, 2015 to January 6, 2016, and the guarantee expires on January 5, 2018, the Company has accrued a liability in connection with such guarantee.

 

  31  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Variable interest entity structure

 

In the opinion of management, (i) the corporate structure of the Company is in compliance with existing PRC laws and regulations; (ii) the Contractual Arrangements are valid and binding, and do not result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of Yulong WFOE and the VIEs are in compliance with existing PRC laws and regulations in all material respects.

 

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion of its management. If the current corporate structure of the Company or the Contractual Arrangements is found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s current corporate structure or the Contractual Arrangements is remote based on current facts and circumstances.

   

Note 17 – Segments

 

The Company follows ASC 280, Segment Reporting , which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance. The Company’s chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income from operations of the Yulong operating companies.

 

The Company’s operations currently include three business segments encompassing three different divisions. Such reportable divisions are consistent with the way the Company manages its business, with each division operating under separate management and producing discrete financial information. The accounting principles applied at the operating division level in determining income from operations is generally the same as those applied at the consolidated financial statement level. 

 

The operation and products of the three divisions are as follow:

 

  1. Yulong Bricks: production and sales of fly-ash bricks;

 

  2. Yulong Concrete and Yulong Transport: production and sales of ready-mixed concrete; and

 

  3. Yulong Renewable: hauling and processing of construction waste, and production and sales of recycled aggregates and recycled bricks.

 

The following represents results of divisional operations for the following three months ended December 31:

 

Revenues:   2016     2015  
Yulong Bricks   $ 666,261     $ 3,431,281  
Yulong Concrete and Yulong Transport     1,104,960       7,241,359  
Yulong Renewable     12,169       1,919,020  
Consolidated revenues   $ 1,783,390     $ 12,591,660  

 

Gross profit:   2016     2015  
Yulong Bricks   $ 130,493     $ 1,897,424  
Yulong Concrete and Yulong Transport     166,113       1,811,574  
Yulong Renewable     (3,676 )     1,080,585  
Consolidated gross profit   $ 292,930     $ 4,789,583  

 

Income (loss) from operations:   2016     2015  
Yulong Bricks   $ (468,032 )   $ 1,797,110  
Yulong Concrete and Yulong Transport     (751,326 )     1,634,509  
Yulong Renewable     (940,362 )     325,943  
Subtotal     (2,159,720 )     3,757,562  
Yulong WFOE     -       (9,171 )
Yulong HK     (139,093 )     (234,658 )
Yulong Eco-Materials     (50,102 )     (194,000 )
Consolidated income from operations   $ (2,348,915 )   $ 3,319,733  

 

  32  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Net (loss) income:   2016     2015  
Yulong Bricks   $ (489,289 )   $ 1,403,882  
Yulong Concrete and Yulong Transport     (701,582 )     1,153,125  
Yulong Renewable     (934,613 )     178,923  
Subtotal     (2,125,484 )     2,735,930  
Yulong WFOE     -       (9,192 )
Yulong HK     (139,249 )     (234,767 )
Yulong Eco-Materials     26,202       (395,722 )
Consolidated net (loss) income   $ (2,238,531 )   $ 2,096,249  

 

Depreciation and amortization:   2016     2015  
Yulong Bricks   $ 119,547     $ 132,786  
Yulong Concrete and Yulong Transport     22,763       49,550  
Yulong Renewable     -       427,440  
Consolidated depreciation and amortization   $ 142,310     $ 609,776  

 

Interest expenses:   2016     2015  
Yulong Bricks   $ 100,802     $ 78,385  
Yulong Concrete and Yulong Transport     55,987       102,176  
Yulong Renewable     2,981       36,944  
Consolidated interest expenses   $ 159,770     $ 271,505  

 

Capital expenditures:   2016     2015  
Yulong Bricks   $     -     $ 42,659  
Yulong Concrete and Yulong Transport     -       7,784  
Yulong Renewable     -       159,744  
Consolidated capital expenditures   $ -     $ 210,187  

 

The following represents results of divisional operations for the following six months ended December 31:

 

Revenues:   2016     2015  
Yulong Bricks   $ 1,251,731     $ 7,466,382  
Yulong Concrete and Yulong Transport     2,833,931       14,579,688  
Yulong Renewable     501,758       3,896,458  
Consolidated revenues   $ 4,587,420     $ 25,942,528  

 

Gross profit:   2016     2015  
Yulong Bricks   $ 304,272     $ 4,146,901  
Yulong Concrete and Yulong Transport     567,082       3,753,745  
Yulong Renewable     332,805       2,334,698  
Consolidated gross profit   $ 1,204,159     $ 10,235,344  

 

  33  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Income (loss) from operations:   2016     2015  
Yulong Bricks   $ (777,816 )   $ 3,965,387  
Yulong Concrete and Yulong Transport     (883,307 )     3,363,058  
Yulong Renewable     (2,826,519 )     1,389,298  
Subtotal     (4,487,642 )     8,717,743  
Yulong WFOE     -       (9,171 )
Yulong HK     (337,149 )     (302,351 )
Yulong Eco-Materials     (100,068 )     (564,000 )
Consolidated income from operations   $ (4,924,859 )   $ 7,842,221  

 

Net (loss) income:   2016     2015  
Yulong Bricks   $ (780,594 )   $ 3,044,627  
Yulong Concrete and Yulong Transport     (979,394 )     2,375,533  
Yulong Renewable     (2,929,912 )     989,883  
Subtotal     (4,689,900 )     6,410,043  
Yulong WFOE     -       (7,082 )
Yulong HK     (337,578 )     (308,506 )
Yulong Eco-Materials     (49,829 )     (417,523 )
Consolidated net (loss) income   $ (5,077,307 )   $ 5,676,932  

 

Depreciation and amortization:   2016     2015  
Yulong Bricks   $ 242,149     $ 260,116  
Yulong Concrete and Yulong Transport     58,873       131,571  
Yulong Renewable     -       824,004  
Consolidated depreciation and amortization   $ 301,022     $ 1,215,691  

 

Interest expenses:   2016     2015  
Yulong Bricks   $ 139,376     $ 194,782  
Yulong Concrete and Yulong Transport     207,799       210,489  
Yulong Renewable     8,735       80,399  
Consolidated interest expenses   $ 355,910     $ 485,670  

 

Capital expenditures:   2016     2015  
Yulong Bricks   $         -     $ 62,942  
Yulong Concrete and Yulong Transport     -       35,387  
Yulong Renewable     -       329,913  
Consolidated capital expenditures   $ -     $ 428,242  

 

The following represents assets of division as of December 31, 2016 and June 30, 2016:

 

Total Assets as of:   December 31,
2016
    June 30,
2016
 
Yulong Bricks   $ 10,684,532     $ 11,131,177  
Yulong Concrete and Yulong Transport     2,734,012       4,416,866  
Yulong Renewable     19,872,941       20,251,768  
Interdivision assets     696       590  
Yulong WFOE     -       -  
Yulong HK     -       -  
Yulong Eco-Materials     642,700       642,700  
Total Assets   $ 33,934,881     $ 36,443,101  

 

  34  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 18 – Subsequent events

 

In late March 2016, the central government of the People’s of Republic of China passed Air Pollution Control Act and enforced Air Pollution Control Action Plan. The province of Henan of People’s Republic of China implemented “Province of Henan Blue Sky Action Plan” on various industries such as construction materials, coal mining. Due to the Air Pollution Control Act and Blue Sky Action Plan, Yulong Renewable is required to comply with the new environmental regulations. It placed its construction projects on hold and downsized its production since August 2016.

 

On February 11, 2017, three of the board of directors, Ms. Alice Io Wai Wu, Mr. Michael W. Harlan and Mr. Guosheng Liu (together the “Former Directors”) resigned as directors of the Company. The Company elected Ms. Junfeng Ma, Ms. Yang Li and Mr. Qingsheng Liu to replace the Former Directors. There is nonfamily relationship among any of the New Directors and any of the Company’s other directors or executive officers. In addition, the Board has approved the appointment of Ms. Junfeng Ma as Company’s interim chairperson of the Audit Committee. While Company believe Ms. Ma’s accounting experience qualifies her to be the chairperson of the audit committee, the Company is actively searching for a candidate who is an expert with U.S. GAAP rules to chair the Audit Committee. Ms. Ma will serve as the chairperson of the Audit Committee during the Company’s search.

 

On March 15, 2017, Yulong Eco-Materials Limited (the “Company”) received a deficiency letter (the “Letter”) from the NASDAQ Stock Market LLC (the “Nasdaq”) regarding the Company’s failure to comply with NASDAQ List Rule 5605(c)(2), pursuant to which an audit committee must have at least three members and be comprised only of independent directors. Due to the resignation of Alice Io Wai Wu, and Michael W. Harlan on February 11, 2017, the Company failed to meet the aforesaid requirement.

 

Under Rule 5605(c)(4) and 5810(c)(3)(E), the Company has been provided a cure period to regain compliance as follow (the “Cure Period”): 

 

  until the earlier of the Company’s next annual shareholders’ meeting or February 11, 2018; or
     
  if the next annual shareholders’ meeting is held before August 10, 2017, then the Company must evidence compliance no later than August 10, 2017.

 

The Company addressed this deficiency by providing a notice of annual general meeting of shareholders to be held on June 29, 2017. The Company has announced the results of its annual general meeting for the fiscal year ended June 30, 2017 on June 30, 2017.

 

On March 31, 2017, Yulong Eco-Materials Limited (the “Company”) received a determination letter (the “Letter”) from the NASDAQ Stock Market LLC (the “NASDAQ”) notifying the Company of the NASDAQ Staff’s determination (the “Determination”) to delist the Company’s securities from The NASDAQ Capital Market due to its failure to regain compliance with Listing Rule 5250(c)(1) (the “Rule”) because it had not filed its Annual Report on Form 10-K for the period ended June 30, and Quarterly Reports on Forms 10-Q for the periods ended September 30, and December 31, 2016, respectively (the “Delinquent Reports”). Pursuant to the Letter, unless the Company requests an appeal of the Determination by 4:00 Eastern Time on April 7, 2017, trading of the Company’s common stock will be suspended at the opening of business on April 11, 2017, and a Form 25-NSE will be filed with the Securities and Exchange Commission (the “SEC”), causing the Company’s securities to be removed from listing and registration on The NASDAQ Stock Market.

 

As previously reported, on October 14 and November 22, 2016, the Company received two notification letters (the “Notice”) from NASDAQ advising the Company that it did not comply with the “Rule” because it had not filed its Annual Report on Form 10-K for the period ended June 30, and Quarterly Reports on Forms 10-Q for the periods ended September 30, and December 31, 2016, respectively. The Company was provided an exception until April 12, 2017, to regain compliance with the Rule. On March 24, 2017, the Company advised that it would be unable to regain compliance with the Rule by April 12, 2017. As of the date of this report, the Company has not regained compliance with the Rule though it is in the process of preparing its annual report.

 

On April 6, 2017, Yulong Eco-Materials Limited received a notification letter from the Listing Qualifications Department of The NASDAQ Stock Market LLC (“NASDAQ”) indicating that the Company is not in compliance with NASDAQ Listing Rule 5550(a)(2) (the “Rule”) because the closing bid price of the Company’s common stock on The Nasdaq Capital Market has been below $1.00 per share for 30 consecutive business days. The Nasdaq notification has no immediate effect on the listing or trading of the Company’s common stock, which will continue to trade on The Nasdaq Capital Market under the symbol “YECO”.

 

The Company has 180 calendar days, or until October 3, 2017, to regain compliance. If, at any time before that date, the closing bid price of the Company’s common stock is at least $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will notify the Company that it has achieved compliance with the Rule.

 

If the Company does not regain compliance by October 3, 2017, the Company may be eligible for a second compliance period of 180 calendar days. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide NASDAQ written notice of its intention to cure the deficiency during the second compliance period.

 

  35  

 

 

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

If it appears to the NASDAQ staff that the Company will not be able to cure the deficiency, or if the Company does not cure the deficiency following the additional time, NASDAQ will notify the Company that its common stock will be subject to delisting. At that time, the Company may appeal the Staff’s delisting determination to a Hearings Panel. If the Company timely appeals, it would remain listed pending the Hearing Panel’s decision.

 

The Company intends to monitor the closing bid price of its common stock and may consider implementing available options to regain compliance with the Rule. This information is being provided to comply with NASDAQ Listing Rules requiring public announcement of the Company’s receipt of the notification letter from NASDAQ.

 

On May 15, 2017, Yulong Eco-Materials Limited determines that it qualifies as a “foreign private issuer” as defined under Rule 3b-4 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, effective immediately after the filing of this Form 8-K, the Company will begin reporting under the Exchange Act as a foreign private issuer, including the filing of annual reports on Form 20-F and current reports on Form 6-K.

 

On June 12, 2017, Yulong Eco-Materials Limited - (Nasdaq: YECO) announced that following a hearing before the Nasdaq Hearings Panel (the “Panel”) on May 25, 2017, the Panel granted the Company’s request for continued listing on Nasdaq, subject to the Company’s timely compliance with a number of interim milestones and, ultimately, the Company’s full compliance with all applicable requirements for continued listing on Nasdaq, including the filing of annual report for fiscal year ended June 30, 2016 and quarterly reports for fiscal periods ended September 30, 2016 and December 31, 2016, by no later than August 31, 2017. 

 

The Company is diligently working to timely evidence compliance with the terms of the Panel’s decision; however, there can be no assurance that the Company will be able to do so. 

 

On July 7, 2017, the Company received a notice from the Nasdaq Hearings Panel (the “Panel”) indicating that it has determined to suspend the Company’s ordinary shares, from trading on The Nasdaq Stock Market, effective at the open of business on July 11, 2017. As a result of the notice, the Company’s ordinary shares are currently trading on the OTC Pink marketplace under the symbol “YECOF.” For quotes or additional information on the OTC Pink market, visit http://www.otcmarkets.com .

 

The Company has a right to appeal the Panel’s determination. The Company has not yet decided whether to request a review of the decision by the Nasdaq Listing and Hearing Review Council. The right to request the review expires on July 24, 2017. In the event the Company does not appeal or the appeal is unsuccessful, Nasdaq will effect the delisting of the Company’s securities by filing a Form 25-NSE (Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act of 1934) after applicable appeal periods have lapsed. 

 

As previously reported, the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the Securities and Exchange Commission. Notwithstanding the Panel’s determination, the Company expects to file its annual report for the fiscal year ended June 30, 2016 and quarterly reports for fiscal periods ended September 30, 2016 and December 31, 2016 as soon as possible and apply to be quoted on the OTCQB market after these delinquent filings are completed.

 

On July 21, 2017, the Company submitted an appeal request requesting the Nasdaq Listing and Hearing Review Council to review the Panel’s determination and stay any Panel action to suspend the Company’s listing. In addition, the Company intends to submit an updated plan to regain compliance (“Updated Plan”) with Nasdaq’s Listing Rules. The Company is working diligently on its Updated Plan and plans to submit it to the Panel by August 4, 2017.

 

  36  

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of our operations and financial condition for the three and nine months ended December 31 , 2016 and 2015, should be read in conjunction with our financial statements and the notes thereto that are included elsewhere in this report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.

 

Overview

 

We are a vertically integrated manufacturer of eco-friendly building products located in the city of Pingdingshan, Henan Province, China. We produce fly-ash bricks and ready-mixed concrete, and in April 2015, we launched our construction waste management, or CWM, business which includes hauling and processing construction waste, and producing and selling crushed construction waste or recycled aggregates, and bricks made from recycled aggregates, or recycled bricks. We are a holding company and our primary business operations are conducted through our consolidated affiliated entities, which are variable interest entities, or VIEs, that we control. These VIEs include Henan Jianyida Industrial Co., Ltd. (“Yulong Bricks”), which operates our fly-ash bricks business, Pingdingshan Hengji Concrete Co., Ltd. (“Yulong Concrete”) and Pingdingshan Hengji Industrial Co., Ltd. (“Yulong Transport”), which operate our concrete business, and Pingdingshan Hengji Industrial Co., Ltd. (“Yulong Renewable”), which operates our CWM business (each a “Yulong operating company” and collectively the “Yulong operating companies”).

 

We do not have any equity interest in our VIEs, although we have been and are expected to continue to be dependent on our VIEs to operate our business. Instead, we control these entities through a series of contractual arrangements among our PRC subsidiary Zhengzhou Xing De Enterprise Management & Consulting Co., Ltd. (“Yulong WFOE”), our VIEs and their shareholders. While we believe that we have substantial control over our VIEs and their shareholders through the contractual arrangements, such control may not be as effective as direct ownership. Our VIEs and their shareholders may breach their obligations to us under the contractual arrangements, especially if they have a conflict of interest with us. In addition, the PRC government may determine that the contractual arrangements do not comply with applicable PRC regulations. Through the contractual arrangements, each VIE is obligated to pay a service fee in an amount equal to its net profit each fiscal quarter to Yulong WFOE. Such fee can be remitted to us as dividend by Yulong WFOE to our Hong Kong subsidiary China Xing De (Hong Kong) Limited, then to our British Virgin Islands subsidiary China Xing De (BVI) Limited, and finally us. Yulong WFOE, however, is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital.

 

On October 30, 2015, Pingdingshan Xulong Renewable Resource Co., Ltd. Shangqiu Branch was established and incorporated in the People’s Republic of China. The entity is wholly owned by Pingdingshan Xulong Renewable Resource Co., Ltd. (“Yulong Renewable”) and engages in construction waste hauling and processing for the city center in Shangqiu district.

 

Recent Developments

 

In late March 2016, the central government of the People’s of Republic of China passed Air Pollution Control Act and enforced Air Pollution Control Action Plan. The province of Henan of People’s Republic of China implemented “Province of Henan Blue Sky Action Plan” on various industries such as construction materials, coal mining. Due to this regulation and action plan, Yulong Renewable placed its construction projects on hold since August 2016 and suspended its CWM operation since January 2017 to further upgrade its equipment and facility to comply with the stricter environmental regulations. Simultaneously, Yulong Bricks and Concrete also reduce their production and clean up the job sites and further enhance its facilities to comply with the new environmental requirements. Management believes that Yulong Bricks and Concrete gradually recover their operations subsequent to June 2017.

 

  37  

 

 

Trends in Our Business

 

On a macro level, the Chinese government announced a series of new policies at controlling production and development of various industries in China for the purpose of enhancing environmental quality in the territory. The province of Henan implemented the Blue Sky Action Plan in late March 2016 and enforced stricter environmental requirements on industries that conduct business in Henan province including construction materials. Additionally, Yulong Renewable received a notice from the Environmental Protection Bureau of the city of Pingdingshan that the Company is required to clean up its job sites and install environmental protection infrastructure and equipment. The environmental policies and action notice has significantly limited the Company’s capacity to maintain the production of its bricks, concrete and recycled construction materials. Subsequent to the fiscal year ended June 30, 2016, Yulong Bricks, Yulong Concrete and Yulong Renewable have been focusing on upgrading the facilities of their job sites to further comply with the stringent environmental requirements. Sales revenue of Yulong Bricks and Yulong Concrete has been significantly impacted since the first quarter of the fiscal year 2017. Both entities have resumed and gradually increased their productions beginning late April 2017. Three major construction projects of Yulong Renewable have been halted since August 2016 and Yulong Renewable’s operation has been suspended since January 2017. Yulong Renewable is still upgrading its job site and infrastructures and plans to offer for sale or transfer its renewable’s business in fiscal year 2018.

 

Results of Operations

 

The tables in the following discussion summarize our consolidated statements of operations for the periods by amount and as a percentage of our total net revenue. This information should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

Three months ended December 31, 2016 and 2015

 

Revenue

 

Our revenue decreased by $10,808,270 or 85.8% to $1,783,390, as compared to a year ago. Revenue attributable to bricks or brick revenue, revenue attributable to concrete or concrete revenue, and revenue attributable to CWM or CWM revenue, are as follows for the periods indicated:

 

    Revenue        
    Bricks     Concrete     CWM     Total  
                Hauling     Recycled Aggregates     Recycled
Bricks
    Waste Processing Services        
Revenue                                          
Three months ended December 31, 2015   $ 3,431,281     $ 7,241,359     $ 537,883     $ 3,775     $ 30,941     $ 1,346,421     $ 12,591,660  
Three months ended December 31, 2016     666,262       1,104,960       -       1,290       10,879       -       1,783,390  
(Decrease) increase in $   $ (2,765,019 )   $ (6,136,399 )   $ (537,883 )   $ (2,485 )   $ (20,062 )   $ (1,346,421 )   $ (10,808,270 )
(Decrease) increase in %     (80.6 )%     (84.7 )%     (100.0 )%     (65.8 )%     (64.8 )%     (100.0 )%     (85.8 )%

  

  38  

 

 

Overall revenue was reduced by 10,808,270 or 85.8%. Brick and concrete sales dropped by 2,765,020 or 80.6% and 6,136,399 or 84.7%, respectively while construction waste management sales dropped by $1,906,851 or 99.4%. The change was primarily triggered by the depreciation of the Chinese currency against the United States dollars as compared to a year ago, the decline in sales volume, as well as the Air Pollution Control Act passed by the central government of the People’s Republic of China and “Province of Henan Blue Sky Action Plan” enforced by the province of Henan of the People’s Republic of China. Due to the Act and Action Plan, the Company was required to clean up its job sites and upgrade environmental protection infrastructure and equipment. Yulong Bricks and Concrete reduced their production of bricks and concrete gradually since the first quarter of the fiscal year 2017. Additionally, Yulong Renewable was required to suspend its production until it upgrades the required environmental protection infrastructure to satisfy the stricter environmental regulations.

 

The following tables present the average selling prices and quantities sold of our products and services for the periods indicated:

 

    Bricks     Concrete  
Average selling price per m 3            
Three months ended December 31, 2015   $ 25.6     $ 43.8  
Three months ended December 31, 2016     24.7       39.9  
Decrease in $   $ (0.9 )   $ (3.9 )
Decrease in %     (3.7 )%     (8.9 )%
                 
Quantity sold (m 3 )                
Three months ended December 31, 2015     133,906       165,214  
Three months ended December 31, 2016     27,025       27,677  
Decrease     (106,881 )     (137,537 )
Decrease in %     (79.8 )%     (83.2 )%

 

    CWM  
    Hauling     Recycled
Aggregates
    Recycled Bricks     Waste
Processing
Services
    Waste
Processing
Services
 
Average selling price   Truckload     m 3     m 3     Jobsite     m 3  
Three months ended December 31, 2015   $ 44.9     $ 2.4     $ 12.1     $ 667.0     $ 2.4  
Three months ended December 31, 2016     -       2.5       39.3       -       -  
Increase (decrease) in $   $ (44.89 )   $ 0.1     $ 27.2     $ (667.0 )   $ (2.4 )
Increase (decrease) in %     (100.0 )%     4.2 %     224.8 %     (100.0 )%     (100.0 )%
                                         
Quantity sold                                        
Three months ended December 31, 2015     11,982       1,548       2,552       366       485,550  
Three months ended December 31, 2016     -       512       277       -       -  
Decrease     (11,982 )     (1,036 )     (2,275 )     (366 )     (485,550 )
Decrease in %     (100.0 )%     (66.9 )%     (89.1 )%     (100.0 )%     (100.0 )%

 

The change of average selling price of recycled bricks from $12.1 per cubic meter for the three months ended December 31, 2015 to $39.3 per cubic meter for the three months ended December 31, 2016 is mainly resulted from the sales of different types of recycled bricks (e.g. dyed and recycled bricks vs. plain recycled bricks) with higher unit selling price during the three months ended December 31, 2016.

 

Under a tax regulation that went into effect in July 2015, bricks that Yulong Bricks produces, which were previously exempted from VAT, are now subject to a VAT rate of 17% which is payable by customers, although the regulation states that 70% of the tax is refundable by the government. Because we chose not pass on the tax increase to our customers in order to remain competitive, our average selling price decreased by approximately the same percentage as the VAT rate.

 

  39  

 

 

Cost of Revenue

 

Cost of revenue decreased by $6,311,617, or 80.9%, to $1,490,460, as compared to the same period last year. Such cost for each of our revenue streams is presented in the following table:

 

    Cost of Revenue        
    Bricks     Concrete     CWM     Total  
                Hauling    

Recycled

Aggregates

   

Recycled

Bricks

   

Waste

Processing

Services

       
Cost of Revenue                                          
Three months ended December 31, 2015   $ 1,533,857     $ 5,429,785     $ 388,615     $ 6,689     $ 87,049     $ 356,082     $ 7,802,077  
Three months ended December 31, 2016     535,768       938,847       -       3,315       12,530       -       1,490,460  
Decrease in $   $ (998,089 )   $ (4,490,938 )   $ (388,615 )   $ (3,374 )   $ (74,519 )   $ (356,082 )   $ (6,311,617 )
Decrease in %     (65.1 )%     (82.7 )%     (100.0 )%     (50.4 )%     (85.6 )%     (100.0 )%     (80.9 )%

 

The average unit cost per cubic meter of bricks and concrete fluctuated as follows: 

 

    Average unit cost  
    Bricks     Concrete  
Three months ended December 31, 2015   $ 11.5     $ 32.9  
Three months ended December 31, 2016     19.8       33.9  
Increase (decrease) in $   $ 8.3     $ (1.0 )
Increase (decrease) in %     72.4 %     (3.1 )%

 

We used third-party manufacturers generally when orders exceed our production capacities in the past, but we have ceased outsourcing to the third-party manufacturers since the first quarter of the fiscal year 2017. 

 

The major component for the cost of CWM revenue is the depreciation of our hauling trucks and plant equipment. The following table presents the average unit cost for the components of our CWM revenue:

 

    Average unit cost  
    CWM  
    Hauling     Recycled
Aggregates
    Recycled Bricks     Waste
Processing
Services
    Waste
Processing
Services
 
    Truckload     m 3     m 3     Jobsite     m 3  
Three months ended December 31, 2015   $ 32.4     $ 4.3     $ 34.1     $ 170.8     $ 0.6  
Three months ended December 31, 2016     -       6.5       45.2       -       -  
Increase (decrease) in $   $ (32.4 )   $ 2.2     $ 11.1     $ (107.8 )   $ (0.6 )
Increase (decrease) in %     (100.0 )%     51.1 %     32.6 %     (100.0 )%     (100.0 )%

 

  40  

 

 

Gross Profit

 

Gross profit was $292,930, a decrease of $4,496,653 or 93.9% from a year ago. Gross profit margin decreased to approximately 16.4% from 38.0% for the three months ended December 31, 2016.

 

Gross profit attributable to bricks was $130,493, a decrease of $1,766,931 or 93.1%, from a year ago. Gross profit margin was 19.6%, a decrease of 35.7%, from 55.3% a year ago. The reduced margin is primarily caused by higher unit cost of goods sold, lower sales volume and depreciation of Chinese currency.

 

Gross profit attributable to concrete was $166,113, a decrease of $1,645,461 or 90.8%, from a year ago. Gross profit margin was 15.0%, a decrease of 10.0%, from 25.0% from a year ago. The lower gross profit amount is primarily due to lower sales volume in the three months ended December 31, 2016 compared to the same period in prior year. The lower gross profit margin is caused by the depreciation of Chinese currency.

 

Gross loss attributable to CWM for the three months ended December 31, 2016 compared to gross profit, $1,080,585 for the same period in prior year, was $3,676, a decrease of $1,084,261 or 100.34%, from a year ago. Gross loss margin was 30.2%, a decrease of 86.52%, from 56.31% a year ago. The significant decrease in gross profit amount and gross margin is mainly resulted from the significant reduction of CWM operation, decrease of sales volume in the three months ended December 31, 2016 compared to the same period in prior year as well as depreciation of Chinese currency. 

 

Operating Expenses

 

Operating expenses, which consist of selling expense and general and administrative (“G&A”) expenses, were $2.6 million, a increase of $1.1 million or 79.7% as compared to a year ago. G&A expenses, which increased by $789,089 or 57.9%, were $2,152,677, including increase in bad debt allowance of $904,492, litigation of $717,307, offset by decrease of $366,818 million in business development expenses, $161,136 in traveling expense and $128,606 in staff salary and benefit. Selling expense decreased by $43,619 or 41.1%, to $62,643, mainly due to a $39,378 decrease in gasoline and a $1,799 or 46.7% decrease in depreciation expense which is consistent with the reduction of CWM operation and the impairment of long-lived assets of Yulong Renewable. Impairment loss on fixed assets and intangible assets was $426,525 and nil for the three months ended December 31, 2016 and 2015.

 

Other Expense, Net

 

We had other expense of $83,390, which decreased by $154,206 or 64.9% a year ago. Other expense consisted of $533 in bank charges, $159,770 in interest expense and $116 in penalty, offset by $753 in other income and $76,306 gain on change in fair value of warrant liabilities.

 

Provision for Income Taxes

 

Provision for PRC income taxes decreased by $1,179,662 to income tax benefit of $193,774, as compared to a year ago, due to higher book and tax loss and increase in deferred tax assets in the three months ended December 31, 2016 compared to the same period in prior year.

 

  41  

 

 

Net (Loss) Income

 

Net loss for the three months ended December 31, 2016 was $2,238,531, as compared to net income of $2,096,249 for the same period last year.

 

Six months ended December 31, 2016 and 2015

 

Revenue

 

Our revenue decreased by $21,355,108 or 82% to $4,587,420, as compared to a year ago. Brick revenue, concrete revenue and CWM revenue are as follows for the periods indicated:

 

    Revenue        
    Bricks     Concrete     CWM     Total  
                Hauling     Recycled Aggregates     Recycled
Bricks
    Waste Processing Services        
Revenue                                          
Six months ended December 31, 2015   $ 7,466,382     $ 14,579,688     $ 1,129,913     $ 31,494     $ 194,761     $ 2,540,290     $ 25,942,528  
Six months ended December 31, 2016     1,251,731       2,833,931       104,184       1,964       36,821       358,788       4,587,420  
Decrease in $   $ (6,214,651 )   $ (11,745,757 )   $ (1,025,729 )   $ (29,530 )   $ (157,940 )   $ (2,181,502 )   $ (21,355,108  
Decrease in %     (83.2 %)     (80.6 %)     (90.8 )%     (93.8 )%     (81.1 )%     (85.9 )%     (82.3 )%

 

Overall revenue was reduced by 21,355,108 or 82%. Brick and concrete sales dropped by 6,214,651 or 83% and 11,745,756 or 81%, respectively and construction waste management sales reduced by $3,394,700. The change was primarily triggered by the depreciation of the RMB against the United States dollars as compared to a year ago, the decline in sales volume, as well as the Air Pollution Control Act passed by the central government and implemented “Province of Henan Blue Sky Action Plan” by the province of Henan of People’s Republic of China . Due to the Act and Action Plan, the Company was required to clean up its job sites and upgrade environmental protection infrastructure and equipment. Yulong Bricks and Concrete reduced their production of bricks and concrete gradually since the first quarter of the fiscal year 2017. Additionally, Yulong Renewable was required to suspend its production until it upgrades the required environmental protection infrastructure to satisfy the stricter environmental regulations.

 

The following tables present the average selling prices and quantities sold of our products and services for the periods indicated:

 

    Bricks     Concrete  
Average selling price per m 3            
Six months ended December 31, 2015   $ 25.9     $ 44.1  
Six months ended December 31, 2016     24.9       24.6  
Decrease in $   $ (1.0 )   $ (19.5 )
Decrease in %     (4.0 )%     (44.2 )%
                 
Quantity sold (m 3 )                
Six months ended December 31, 2015     288,185       330,613  
Six months ended December 31, 2016     50,326       115,145  

Decrease in $

    (237,859 )     (215,468 )

Decrease in %

    (82.5 )%     (65.2 )%

 

  42  

 

 

    CWM  
    Hauling     Recycled
Aggregates
    Recycled Bricks     Waste
Processing
Services
    Waste
Processing
Services
 
Average selling price   Truckload     m 3     m 3     Jobsite     m 3  
Six months ended December 31, 2015   $ 39.4     $ 2.5     $ 25.1     $ 621.33     $ 2.4  
Six months ended December 31, 2016     64.2       2.5       27.7       -       2.0  

Increase (decrease) in $

  $ 24.8     $ 0     $ 2.71     $ (612.33 )   $ (0.4 )

Increase (decrease) in %

    (62.8 )%     3.4 %     11 %     (100.0 )%     (15.1 )%
                                         
Quantities sold                                        
Six months ended December 31, 2015     28,646       12,856       7,770       1,123       805,550  
Six months ended December 31, 2016     1,623       775       1,327       -       179,100  

Decrease

    (27,023 )     (12,081 )     (6,443 )     (1,123 )     (626,450 )

Decrease in %

    (94.3 )%     (94.0 )%     (82.9 )%     (100.0 )%     (77.8 )%

 

Cost of Revenue

 

Cost of revenue increased by $12,323,923, or 78.5%, to $3,383,261, as compared to the same period last year. Such cost for each of our revenue streams is presented in the following table:

 

    Cost of Revenue        
    Bricks     Concrete     CWM     Total  
                Hauling    

Recycled

Aggregates

   

Recycled

Bricks

   

Waste

Processing

Services

       
Cost of Revenue                                          
Six months ended December 31, 2015   $ 3,319,481     $ 10,825,943     $ 821,563     $ 24,955     $ 214,044     $ 501,198     $ 15,707,184  
Six months ended December 31, 2016     947,459       2,266,849       89,008       4,680       41,467       33,798       3,383,261  
Decrease in $   $ (2,372,022 )   $ (8,559,094 )   $ (732,555 )   $ (20,275 )   $ (172,577 )   $ (467,400 )   $ (12,323,923 )
Decrease in %     (71.4 )%     (79.1 )%     (89.2 )%     (81.2 )%     (80.6 )%     (93.3 )%     (78.4 )%

 

The average unit cost per cubic meter of bricks and concrete slightly decreased as follows:

 

    Average unit cost  
    Bricks     Concrete  
Six months ended December 31, 2015   $ 11.5     $ 32.7  
Six months ended December 31, 2016     18.8       19.7  

Increase (decrease) in $

  $ 7.3     $ (13.0 )

Increase (decrease) in %

    63.7 %     (39.8 )%

  

We used third-party manufacturers generally when orders exceed our production capacities in the past, but we have ceased outsourcing to the third-party manufacturers since the first quarter of the fiscal year 2017.

 

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The following table presents the average unit cost for the components of our CWM revenue:

 

    Average unit cost  
    CWM  
    Hauling     Recycled
Aggregates
    Recycled Bricks     Waste
Processing
Services
    Waste
Processing
Services
 
    Truckload     m 3     m 3     Jobsite     m 3  
Six months ended December 31, 2015   $ 28.7     $ 1.9     $ 27.6     $ 119.8     $ 0.5  
Six months ended December 31, 2016     54.8       6.0       31.2       -       0.2  
Increase (decrease) in $   $ 26.2     $ 4.1     $ 3.7     $ (119.8 )   $ (0.3 )
Increase (decrease) in %     91.2 %     211.3 %     21.3 %     (100.0 )%     (59.0 )%

 

The higher unit cost per truckload of hauling for the six months ended December 31, 2016 compared to the same period in prior year is mainly due to the different cost level incurred from different type of customer locations and type of construction waste materials transported. It is consistent with the higher average selling price fluctuation for the six months ended December 31, 2016.

 

Gross Profit

  

Gross profit was $1,204,159, a decrease of $9,031,185 or 88.2% from a year ago. Gross profit margin decreased to approximately 26.3% from 39.5% for the six months ended December 31, 2016.

 

Gross profit attributable to bricks was $304,272, a decrease of $3,842,629 or 92.7%, from a year ago. Gross profit margin is 24.3%, a decrease of 31.2%, from 55.5% a year ago. The reduced margin is primarily caused by higher unit cost of goods sold, lower sales volume and the depreciation of Chinese currency.

 

Gross profit attributable to CWM was $332,805, a decrease of $2,001,893 or 85.8%, from a year ago. Gross profit margin was 66.3%, an increase of 6.41%, from 59.92% a year ago.

 

Operating Expenses

 

Operating expenses, which consist of selling, general and administrative (“G&A”) and impairment loss expenses, was $6.1 million, an increase of $3.7 million or 156.1% as compared to a year ago. G&A expenses, which increased by $1,917,184 or 89.5%, was $4,059,397. The rise in G&A expense primarily was attributable to additional $1,800,677 in bad debt allowance, $1,175,773 in litigation, offset by decrease of $366,818 in business development expense, $234,400 in staff salary and benefit, $165,003 in office expense, $160,987 in traveling expense, $50,507 in depreciation expense, and $44,931 in stock-based compensation related to the additional restricted shares issued to consultants incurred in the year ended June 30, 2016. Selling expense was $142,464, which reduced by $108,446 as compared to a year ago. The decline was mainly attributed to the decrease in depreciation of gasoline, $100,621 and office furniture, $31,010. Impairment loss on fixed assets and intangible assets was $1,927,157 and nil for the six months ended December 31, 2016 and 2015.

 

Other Expense, Net

 

We had other expense of $228,431, as compared to other expense of $110,769 a year ago. Other income and expense consisted of $50,241 gain on change in fair value of warrant liabilities, $75,608 in other income and $2,941 in interest income, offset by $985 in bank charges, $355,910 in interest expense and $326 in penalty.

 

Provision for Income Taxes

 

Provision for income taxes decreased by $2,130,503 to the tax benefit in an amount of $75,983 for the six months ended December 31, 2016, as compared to the same year in a year ago, due to book loss before tax and tax loss incurred in the six months ended December 31, 2016 while book income before tax and taxable income incurred for the same period in prior year.

 

Net (Loss) Income

 

Net loss for the six months ended December 31, 2016 was $5,077,307, as compared to net income of $5,676,932 for the same period last year.

 

  44  

 

 

Liquidity and Capital Resources

 

Capital Resources

 

We will require cash of approximately $27.7 million within the next twelve months, including $5.4 million to repay outstanding short-term bank loans, $12.2 million to satisfy accounts payable and other payables, $3.9 million to satisfy capital lease obligations and the purchase of a land use right, and $5.2 million to complete the renovation of our research and development center and office building for our CWM business.

 

As of December 31, 2016, we had cash and cash equivalent approximately $2.5 million, accounts receivable (net of provision of doubtful accounts) of $4.5 million and prepayment of $15.7 million which will be refundable to us by one of our construction vendors. The founder has provided approximately $1.7 million (RMB 11.6 million) to fund the Company’s operations in the first quarter of the fiscal year 2017. The Company may also continue to raise fund through private placement or issuance of shares to support the Company’s operational needs. As a result, we believe that our current working capital is sufficient to support routine operations for the next 12 months.

 

Short-term Loans – Banks

 

We had $5,429,929 and $5,674,011 in short-term bank loans as of December 31, 2016 and June 30, 2016, respectively. Such loans mature in one year or less and must be repaid in full upon maturity. Based on our borrowing history, we believe the banks that we work with will renew our loans after they mature, as they had done in the past.

 

For additional discussion regarding our loans, please refer to Note 9 to our unaudited condensed consolidated financial statements included with this report.

 

Cash Flows

 

As of December 31, 2016, our cash was $2,477,713 as compared to $2,734,540 as of June 30, 2016. The following table presents a summary of our cash flows for the periods indicated:

 

    For the six months ended
December 31,
 
    2016     2015  
Net cash provided by operating activities   $ 1,753,898     $  4,649,159  
Net cash used in investing activities     (1,919,080 )      (421,922 )
Net cash provided by (used in) financing activities     (104,656)        10,616,978  

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities for the six months ended December 31, 2016, was attributable to $3.8 million in non-cash adjustments for depreciation of our property, plant and equipment, $1.7 million in other payables and accrued liabilities for expenses in interest on our capital leases, $2.6 million in customer deposits and a decrease of $3,426 in other receivables, an increase of $4,892 in taxes payable, a decrease of $46,030 in inventories offset by cash outflows of $0.3 million decreased in accounts payable to settle payments to our vendors, a $156,704 increase in deposits and other receivables for escrow deposits in connection with our indemnification obligations to the underwriter representative for our IPO, and increased of $35,2421 in advance to suppliers.

 

Net cash provided by operating activities for the six months ended December 31, 2015, was primarily attributable to $5.7 million of net income, $1.1 million in non-cash adjustments for depreciation of our property, plant and equipment, deferred tax benefit pertaining to an increase in our deferred tax assets and change in fair value of warrant liabilities, and $0.9 million in taxes payable due to increased income before tax and the VAT imposed on our bricks, offset by cash outflows of a $1.3 million increase in accounts receivable due to slower collection when we extended credit terms for customers with long-term relationships, a $0.9 million decrease in accounts payable for payments to vendors, $0.1 million in other payables and accrued liabilities for expenses in connection with our IPO and interest on our capital leases, and a $1.1 million increase in deposits and other receivables for escrow deposits in connection with our indemnification obligations to the underwriter representative for our IPO.

 

  45  

 

 

Net Cash Used in Investing Activities

 

For the six months ended December 31, 2016, we made prepayments of approximately $1.9 million for construction-in-progress relating to Yulong Renewable’s facilities.

 

For the six months ended December 31, 2015, we made prepayments of approximately $0.1 million, and payments of approximately $0.4 million, for construction-in-progress relating to Yulong Renewable’s facilities. 

 

Net Cash Provided by (Used in) Financing Activities

 

For the six months ended December 31, 2016, net cash used in financing activities included $104,656 in repayments to related parties.

 

For the six months ended December 31, 2015, net cash provided by financing activities resulted from $5.0 million in bank loans, $5.1 million in bank loan repayments as they became due, $0.5 million in principal repayments on capital lease obligations, $11.5 million in net proceeds from our IPO, less $0.2 million in repayments to our founder for advancing certain payments on our behalf.

 

Off-balance Sheet Arrangements

 

As of December 30, 2016, we guaranteed two bank loans of unrelated third parties in the aggregate amount of $3.0 million, which guarantees are set to expire on December 29, 2016 and January 5, 2018. For the bank loan that we offered guarantee for Pingdingshan Yushi Automobile Accessory Sales Co., Ltd, we did not, however, accrue any liability in connection with such guarantee because the borrower has been current in their repayment obligations and we have not experienced any losses from providing such guarantees in the past. We have evaluated the guarantee and have concluded that the likelihood of our having to make payments under the guarantee is remote and that the fair value of the stand-ready obligation under these commitment is not material. We agreed to provide the guarantee due to our long-term relationship with and the credit worthiness of the borrower.

 

We have not entered into any derivative contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in its consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

Critical Accounting Policies

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our audited and unaudited consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

  46  

 

 

While our significant accounting policies are 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 our management’s discussion and analysis:

 

Principles of consolidation

 

Our consolidated financial statements include the accounts of our subsidiaries and VIEs. All significant intercompany transactions and balances between us, our subsidiaries and VIEs are eliminated upon consolidation. Since Yulong WFOE and our VIEs are under common control, the contractual arrangements among Yulong WFOE, our VIEs and their shareholders have been accounted for as a reorganization of entities, and the consolidation of our VIEs through the contractual arrangements has been accounted for at historical cost and prepared on the basis as if these agreements became effective as of the beginning of the first period presented in our consolidated financial statements.

 

Variable interest entities

 

A VIE is an entity that either has a total equity investment that is insufficient to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary of, and must consolidate, the VIE. Yulong WFOE is deemed to have a controlling financial interest in and be the primary beneficiary of each Yulong Group company because it has both of the following characteristics:

 

  (1) The power to direct activities at each Yulong operating company that most significantly impact such entity’s economic performance, and

 

  (2) The obligation to absorb losses of, and the right to receive benefits from, each Yulong operating company that could potentially be significant to such entity.

 

Pursuant to our contractual arrangements with VIEs, each Yulong operating company pays service fees equal to all of its net profit after tax payments to Yulong WFOE. At the same time, Yulong WFOE is obligated to absorb all of their losses. Such contractual arrangements are designed so that the Yulong operating companies operate for the benefit of Yulong WFOE and ultimately, us.

 

Accordingly, the accounts of the Yulong operating companies are consolidated in our financial statements pursuant to ASC 810-10, Consolidation . In addition, their financial positions and results of operations are included in our financial statements.

 

Revenue recognition

 

We recognize revenue in accordance with ASC 605, Revenue Recognition , regarding revenue recognition which specifies that revenue is realized or realizable and earned. Sales revenue is recognized at the date of delivery to customers when a formal arrangement exists, price is fixed or determinable, delivery is completed, we have no other significant obligations, and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are met, are recorded as customer deposits.

 

Sales revenue from our brick and concrete businesses represents the invoiced value of goods, net of a VAT.

 

We sell concrete and bricks primarily to major local real estate development and/or construction companies. Sales agreements are signed with each customer. Each agreement lists out general terms and conditions, with delivery date and quantity to be specified when a purchase order is issued under such agreement. We do not sell products to customers on a consignment basis. There is no right of return after products are delivered and accepted.

 

  47  

 

 

We also provide transportation service for our concrete customers. Revenue is recognized upon delivery of the concrete. Transportation service revenue is immaterial to our consolidated revenue for the periods presented in the accompanying financial statements

 

CWM revenue includes sales of recycled aggregates and recycled bricks. Sales agreements are signed with each customer. Revenue is recognized similar to sales of concrete and bricks.

 

CWM revenue also includes revenue from the following activities:

 

  Hauling construction waste. We operate a fleet of trucks to haul construction waste, consisting primarily of bricks and concrete, from construction and demolition sites. Revenue is recognized upon completion of hauling per truckload.

 

  Processing construction waste at our mobile recycling stations. Revenue is recognized either per cubic meter of waste processed or when processing at a jobsite is completed, depending on the contract terms.

 

  Subcontracting waste hauling projects. We occasionally subcontract waste hauling projects, whereby the subcontractors are the primary obligors to complete these projects, and we do not have any general credit risk as the services are prepaid by the customers. Sales and subcontracting costs from these subcontract arrangements are recorded at the net amount in accordance with ASC 605-45. We started generating subcontracting revenue subsequent to December 31, 2016, but the amount is expected to be immaterial to our consolidated revenue for the year ending June 30, 2016.

 

Accounts and other receivables, net

 

During the normal course of business, the Company extends unsecured credit to its customers and others. Management reviews its accounts and other receivables balances each reporting period to determine if an allowance for doubtful accounts is required. Customer accounts are considered past due over 90 days. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Bad debts are written off against the allowance after all collection efforts have ceased. For the years ended December 31, 2016 and June 30, 2016, the Company recorded in the aggregate of approximately $5.5 million and $3.9 of allowances for doubtful accounts against its accounts receivable and other receivables. The current year provision is based on the past due period over 9 months of its customers. 

 

Impairment for long-lived assets

 

Long-lived assets, including buildings and improvements, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, the Company reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. Due to the Air Pollution Control Act and Air Pollution Control Action Plan passed by the central government of PRC and the Blue Sky Action Plan implemented by the Henan Province of PRC in the fourth quarter of fiscal year 2016, Yulong Renewable placed its construction projects on hold since August 2016 and suspend its operation since January 2017. For the six months ended December 31, 2016, the Company recorded approximately $1.9 million (RMB13 million) impairment loss on Yulong Renewable’s construction-in-progress. As of December 31, 2016 and June 30, 2016, the impairment reserve for the long-lived assets (including construction-in-progress) was $48.5 million (RMB336.9 million) and $50.4 million (RMB 400.18 million).

 

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Use of estimates and assumptions

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our accompanying consolidated financial statements and footnotes included in this Report. Significant accounting estimates reflected in our consolidated financial statements include the useful lives and impairment of property, plant and equipment, collectability of receivables, realization of deferred tax assets, inventory valuation, warrant liabilities, stock-based compensation, and the present value of the net minimum lease payments of the capital lease. Actual results could differ from these estimates.

 

Going concern consideration

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern basis. The going-concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed on the financial statements. The Company’s ability to continue as a going concern depends on the liquidation of its current assets. The Company’s operation scale particularly Yulong Renewable was significantly downsized since the first quarter of fiscal year 2017 due to Environment Protection Act passed by the central government of PRC and Blue Sky Action Plan implemented by the Henan province, PRC. The remaining business of Yulong Bricks and Yulong Concrete has not sufficiently made up the cessation of Yulong Renewable’s business which raises a substantial doubt about the Company’s ability to continue as a going concern.

 

In an effort to maintain its financial position and operations, the Company has successfully entered into a remittance agreement with one of its vendors to refund the prepayment for one of its construction projects in an amount of $15.7 million (RMB104.5 million). Moreover, the Company is working to pursue the potential acquirers for Yulong Renewable’s business. Beginning January 2017, Yulong Bricks and Yulong Concrete gradually resumed their sales revenue by 15% from the Q1 and Q2 2017 level. The Company has initiated negotiations with its financial institutions and lessors to extend the due date of the loan and lease obligations. The founder has provided approximately $1.7 million (RMB 11.6 million) to fund the Company’s operations. The Company may also continue to raise fund through private placement or issuance of shares to support the Company’s operational needs. Management believes that the foregoing actions would enable the Company to continue as a going concern.

 

Recent Accounting Pronouncements

 

Revenue Recognition : In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09 (full retrospective method); or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09 (modified retrospective method). We are currently assessing the impact to our consolidated financial statements, and have not yet selected a transition approach.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The objective is to clarify the two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for these areas. The ASU affects the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year. Management is evaluating the effect, if any, on the Company’s financial position, results of operations or cash flows.

 

Going Concern Uncertainties : In August 2014, FASB issued ASU No. 2014-15, Preparation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern . Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this Accounting Standards Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We do not expect the adoption of ASU 2014-15 to have material impact on our consolidated financial position and results of operations.

 

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Inventory : In July 2015, the FASB issued ASU No. 2015-11, an amendment to Topic 330 for simplifying the measurement of inventory. The update requires that inventory be measured at the lower of cost and net realizable value where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.  The amendment is intended to provide clarification on the measurement and disclosure of inventory in Topic 330 and not intended for those clarifications to result in any changes in practice. The ASU is effective for interim and annual periods beginning after December 15, 2016.  Early application is permitted for all entities and should be applied prospectively. We do not expect the adoption of ASU 2015-11 to have a material impact on our consolidated financial position and results of operations.

 

Financial Instruments : In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The main objective in developing this ASU is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of the fiscal year of adoption for public entities if the entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company does not expect the adoption of ASU 2016-01 to have material impact on its financial position, results of operations or cash flows.

 

Leases : In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file financial statements with the SEC. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2010. Early adoption is permitted for all entities. The Company does not expect the adoption of ASU 2016-02 to have material impact on its financial position, results of operations or cash flows.

 

Stock-based Compensation : In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also requires the Company to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur.

 

Statement of Cash Flows : In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash , which require that a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a retrospective approach. As a result, the Company will no longer present transfers between cash and cash equivalents and restricted cash in the consolidated cash flow statements.

 

Business Combination : In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. This guidance will be effective for us in the first quarter of 2018 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.

 

Stock-based Compensation: In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock compensation (Topic 718): Scope of modification accounting” (“ASU 2017-09”). The purpose of the amendment is to clarify which changes to the terms or condition of a share-based payment award require an entity to apply modification accounting. For all entities that offer share based payment awards, ASU 2017-09 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU 2017-09 on its condensed consolidated financial statements.

 

Except for the ASU above, in the period from January 1, 2017 to August 2017, the FASB has issued ASU No. 2017-01 through ASU 2017-011, which are not expected to have a material impact on the consolidated financial statements upon adoption.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

During the three months ended December 31, 2016, there were no material changes to the quantitative and qualitative information about market risk that we previously disclosed in Item 7A of our Annual Report.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2016. Our disclosure controls and procedures are designed: (i) to ensure that information required to be disclosed by us in the reports that we file or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that we continue to have the following material weaknesses in its internal control over financial reporting as of December 31, 2016:

 

  Inadequate U.S. GAAP expertise. The current accounting staff is inexperienced in applying U.S. GAAP standard as they are primarily engaged in ensuring compliance with PRC accounting and reporting requirement for our consolidated operating entities, and thus require substantial training. The current staff’s accounting skills and understanding as to how to fulfill the requirements of U.S. GAAP-based reporting, including subsidiary financial statements consolidation, are inadequate and resulted in a number of adjustments identified by our independent auditors during the June 30, 2015 audit.

 

  Inadequate internal audit resources. While we have developed the scope of our internal audit function, it has not yet been fully implemented as we have not been able to hire sufficient qualified resources to do so. Due to limited availability of qualified resources in the geographical region where we operate, we may not be able to make sufficient hiring within a short period of time.

 

Based on such evaluation, and considering the material weaknesses identified and discussed above, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures at December 31, 2016 were not effective.

 

Remediation Initiatives

 

In an effort to remedy the foregoing material weaknesses in the future, we have completed the following initiatives:

 

  engaged an outside professional consulting firm to supplement our efforts to improve our internal control over financial reporting;

 

  initiated implementation of the 2013 COSO framework for internal controls, which formalized the principles embedded in the original framework more explicitly, incorporated business and operating environment changes over the past two decades, and improved the framework’s ease of use and application; and

 

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  initiated comprehensive program and development plan to provide ongoing company-wide trainings regarding internal control, with particular emphasis on our accounting staff.

  

Despite the material weaknesses and deficiencies reported above, Chief Executive Officer and Chief Financial Officer believe that our consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

As of December 31, 2016, three of the four Yulong operating companies were parties to 32 civil lawsuits with judgment amounts of approximately $3,722,230 (RMB 25,843,441) in the aggregate, of which unpaid amounts of approximately $103,878 (RMB 721,225) has already been included in capital lease obligations regarding lease agreement for purchasing 10 vehicles from Xuchang Tongli, and approximately $24,309 (RMB168,780) already included in violation of laws and regulations, approximately $332,850 (RMB2,310,979) already included in bank loans, and approximately $402,177 (RMB 2,792,317) already included in other payables as of December 31,2016. The remaining balances included $1,743,388 (RMB 12,104,346) related to the guarantee with details disclosed in notes ‘Guarantees’, and $991,371 (RMB 6,883,086) was pertinent to legal actions filed by various individuals.

 

Subsequent to December 31, 2016, three of four Yulong operating companies were prone to 4 civil lawsuits with judgment amounts of approximately $51,906 (RMB 360,381) in the aggregate, of which unpaid amounts of approximately $51,906 (RMB 360,381) was pertinent to legal actions filed by various individuals.

 

Illegal occupation of land

 

On October 18, 2016, Pingdingshan Land Resources Bureau filed a legal action with the district court to enforce the execution of Ping Guo Tu Zi Fa Zi (2016) no.65 Administrative Penalty Decision that the Company shall:

 

  (1) return 7,137.26 square meters of land which the Company occupied illegally;
     
  (2) dismantle the new buildings and other facilities on the 7,137.26 square meters of land which the Company occupied illegally, and restore the original appearance of the land;
     
  (3) pay a fine on the basis that illegal occupation of 5,951.4 square meters of general cultivated land at a fine of RMB 16.00 per square meter, i.e. $13,714.88 (RMB 95,222.40), and 1,185.86 square meters of other land fines per square meter RMB 3.00, i.e. $512.40 (RMB 3,557.58), resulting in a total of $14,227.28 (RMB 98,779.98).

 

On November 29, 2016, Pingdingshan Environmental Protection Bureau applied to the court to enfore the execution of Ping Huan Fa Zi (2015) no.26 Administrative Penalty Decision that the Company shall:

 

  (1) Cease its trial production;
     
  (2) pay a fine of $10,082.10  (RMB 70,000).

 

Total unpaid amounts related to illegal occupation of land were therefore $24,309 (RMB 168,780).

 

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Purchase commitment

 

On November 10, 2012, the Company entered into a sales and purchase contract with an unrelated third party, Xian Oriental Fuxing Machinery Co., Ltd (“Xian Oriental Fuxing”) with a contract amount of $410,844 (RMB 2,790,000). As of June 30, 2016, the Company already paid $280,858 (RMB 1,950,000) to Xian Oriental Fuxing. According to the result of the judgment published on September 24, 2016, the court ruled that the Company lost the case and was required to pay the remaining amount of $120,985 (RMB 840,000) and litigation costs of $3,271 (RMB 22,708).

 

Guarantees

 

As of December 31, 2016, the Company guaranteed approximately $2.9 million for a bank loan of an unrelated third-party as follows:

 

Name   Guaranteed
amount
    Guarantee expiration date
Pingdingshan Yushi Automobile Accessory Sales Co., Ltd (1)   $ 1,204,034     December 29, 2016
Pingdingshan Orr Business Co., Ltd (2)     1,743,388     January 5, 2018
Total   $ 2,947,422      

 

(1) The Company did not, however, accrue any liability in connection with such guarantee because the borrower has been current in its repayment obligations and the Company has not experienced any loss from providing such guarantees in the past. The Company has evaluated the guarantee and has concluded that the likelihood of it having to make payments under the guarantee is remote and that the fair value of the stand-ready obligation under such commitment is not material.

 

(2) According to the result of the judgment published on March 16, 2017, the court ruled that the borrower lost the case and was required to return the borrowings of $1,728,359 (RMB 12 million) and the payment of $15,029 (RMB 104,346) in litigation costs. As the loan term being from January 5, 2015 to January 6, 2016, and the guarantee expires on January 5, 2018, the Company has accrued a liability in connection with such guarantee.

 

ITEM 1A. RISK FACTORS.

 

There have been no material changes to the Company’s risk factors which are included and described in our Annual Report.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

The disclosures required by Item 4 are not applicable to us, as we have no mining operations in the United States.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit Number   Description
31.1*   Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*   Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*   Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101. INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  YULONG ECO-MATERIALS LIMITED
     
Dated: August 31, 2017 By: /s/ Yulong Zhu
    Yulong Zhu
    Chief Executive Officer
    (Principal Executive Officer)
     
Dated: August 31, 2017 By: /s/ Shuai Wang
    Shuai Wang
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

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