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.
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
|
|
|
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.
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
|
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).
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
|
|
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.
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.
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.
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.
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.
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
|
|
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.
|
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).
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).
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).
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.
|
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
|
|
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.
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
|
|
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.
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
|
|
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.
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.
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.
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.
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.
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.
|
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
|
|
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
|
|
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
|
|
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.
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.