The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 – Organization and description of business
China Advanced Construction Materials Group,
Inc. (“CADC Delaware”) was incorporated in the State of Delaware on February 15, 2007. CADC Delaware, through its 100%
owned subsidiaries and its variable interest entities (“VIEs”), is engaged in producing general ready-mix concrete,
customized mechanical refining concrete, and other concrete-related products that are only sold in the People’s Republic
of China (the “PRC”). CADC Delaware has a wholly-owned subsidiary in the British Virgin Islands, Xin Ao Construction
Materials, Inc. (“BVI-ACM”), which is a holding company with no operations. BVI-ACM has a wholly-owned foreign subsidiary,
Beijing Ao Hang Construction Material Technology Co., Ltd. (“China-ACMH”), and China-ACMH has contractual agreements
with Beijing XinAo Concrete Group (“Xin Ao”) and therefore Xin Ao is considered to be a VIE of China- ACMH.
Xin Ao is engaged in the business of concrete
mixing services. Xin Ao had five wholly owned subsidiaries in the PRC: (1) Beijing Heng Yuan Zheng Ke Technical Consulting Co.,
Ltd, (2) Beijing Hong Sheng An Construction Materials Co., Ltd, (3) Beijing Heng Tai Hong Sheng Construction Materials Co., Ltd,
(4) Da Tong Ao Hang Wei Ye Machinery, Equipment Rental Co., Ltd, and (5) Luan Xian Heng Xin Technology Co., Ltd. Since their establishment,
none of these five entities had any operations and the Company did not plan to pursue operations for these entities. In February
2017 and prior, all five subsidiaries were dissolved.
On August 1, 2013, CADC Delaware consummated
a reincorporation merger with its newly formed wholly-owned subsidiary, China Advanced Construction Materials Group, Inc. (“China
ACM”), a Nevada corporation, with CADC Delaware merging into China ACM and China ACM being the surviving company, for the
purpose of changing CADC Delaware’s state of incorporation from Delaware to Nevada.
On August 20, 2018, CACM Group NY, Inc.
(“CACM”) was incorporated in the State of New York and is 100% owned by China ACM. The establishment of CACM is to expand the Company’s construction material business in the New York.
As of the date of the report, CACM has not commenced any operations.
Agreement and Plan of Merger
In July 2018, the Company adopted
the Agreement and Plan of Merger by and between the Company and China Advanced Construction Materials Group, Inc., an exempted
company incorporated under the laws of the Cayman Islands and a wholly owned subsidiary of the Company (“CADC Cayman”). The proposal was approved by the Company’s shareholders at its annual meeting on December
27, 2018.
China ACM, CADC Cayman, CACM, BVI-ACM, China-ACMH and Xin Ao are collectively referred to as the “Company”.
Note 2 – Summary of significant
accounting policies
Liquidity
In assessing the Company’s liquidity,
the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity
needs are to meet its working capital requirements, operating expenses and capital expenditure obligations.
The Company engages in the production of advanced construction materials for large-scale infrastructure,
commercial and residential developments. The Company’s business is capital intensive and the Company is highly leveraged.
Debt financing in the form of short term bank loans, loans from related parties and bank acceptance notes have been utilized to
finance the working capital requirements and the capital expenditures of the Company. The Company’s working capital was approximately
$7.2 million as of September 30, 2018, as compared to $7.0 million as of June 30, 2018. As of September 30, 2018, the Company had
cash on-hand of approximately $1.8 million, with remaining current assets mainly composed of accounts receivable and prepayments
and advances.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Although the Company believes that it can realize its current assets in the normal course of business,
the Company’s ability to repay its current obligations will depend on the future realization of its current assets. Management
has considered its historical experience, the economic environment, trends in the construction industry, the expected collectability
of its accounts receivable and other receivables and the realization of the prepayments on inventory, and provided for an allowance
for doubtful accounts as of September 30, 2018. The Company expects to realize the balance of its current assets net of the allowance
for doubtful accounts within the normal operating cycle of twelve months. If the Company is unable to realize its current assets
within the normal operating cycle of a twelve month period, the Company may have to consider supplementing its available sources
of funds through the following:
|
●
|
Other available sources
of financing from PRC banks and other financial institutions, given the Company’s credit history.
|
|
●
|
Financial support and
credit guarantee commitments from Mr. Xianfu Han, and Mr. Weili He, the Company’s shareholders and officers.
|
Based on the above considerations, the Company’s management is of the opinion that it has sufficient
funds to meet the Company’s working capital requirements and debt obligations as they become due. However, there is no assurance
that management will be successful in their plans. There are a number of factors that could potentially arise that could undermine
the Company’s plans, such as changes in the demand for the Company’s products, economic conditions, competitive pricing
in the concrete-mix industry, the Company’s operating results not improving, additional legal liabilities, or the inability
of the Company’s bank and shareholders to provide continued financial support.
In addition, the Company is involved in various lawsuits, claims and disputes related to its operations
and the personal guarantees of its executives to affiliated entities. The Company is actively defending these actions and attempting
to mitigate the Company’s exposure to any liability in excess of the current provision of approximately $4.8 million, (see
Note 12 in the accompanying notes to the unaudited condensed consolidated financial statements). The ultimate outcome of these
pending actions cannot presently be determined, but currently management is of the opinion that any potential additional liability
would not have a material impact on the Company’s consolidated financial position. Nevertheless, due to the uncertainties
with litigation, the PRC legal system, claims and disputes, it is at least reasonably possible that management’s view of
the outcome could change in the near term.
Furthermore, as of September 30, 2018, the Company’s VIE, Xin Ao, was subject to several civil lawsuits
with potential judgments in the amount of approximately $13.7 million (see Note 12 in the accompanying notes to the unaudited condensed
consolidated financial statements) and the likelihood of the outcome of these lawsuits cannot presently be determined. These lawsuits
involve the Company principally due to the personal guarantees by Mr. Xianfu Han, and Mr. Weili He, the Company’s shareholders
and officers, because they are also the shareholders of Xin Ao. Because Mr. Han and Mr. He are the shareholders of Xin Ao, the
plaintiffs included Xin Ao in the joint complaints. Xin Ao was not involved in most of the lawsuits but named as a joint defendant
in the lawsuits. As a result, Xin Ao might have exposure to any judgements in the future under PRC laws. Mr. Han and Mr.
He have agreed to indemnify the Company for any amounts Xin Ao may have to pay. Should the outcome of these lawsuits require
Xin Ao to pay because the other co-defendants of the lawsuits and Mr. Han. and Mr. He were unable to liquidate their personal assets
or their ownership interest in their privately held companies timely to pay for the judgements, the Company’s working capital
as of September 30, 2018 could be reduced from approximately $7.2 million to a net working capital deficiency of approximately
$6.5 million.
The management of the Company has considered
whether there is a going concern issue due to the Company’s recurring losses from operations, the estimated claims charges
and the possible additional exposure for pending actions against Company which is presently unknown. Based upon the personal indemnifications
of Mr. Han and Mr. He and their agreement to provide the necessary funds to the Company to continue its operations should the need
arise, the management of the Company believes that it has alleviated the going concern issue.
Basis of presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
These financial statements include the accounts of all the directly and indirectly owned subsidiaries and VIEs listed below. All
intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary to give a fair presentation have been included. Interim results are
not necessarily indicative of results of a full year. The information in this Form 10-Q should be read in conjunction with information
included in the annual report for the fiscal year ended June 30, 2018 on Form 10-K filed with the SEC on December 10, 2018.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Principles of consolidation
The unaudited condensed consolidated financial
statements reflect the activities of the following subsidiaries and VIEs. All material intercompany transactions have been eliminated.
Subsidiaries and VIEs
|
|
Place incorporated
|
|
Ownership
percentage
|
|
CADC Cayman
|
|
Cayman Islands
|
|
|
100
|
%
|
CACM
|
|
New York, USA
|
|
|
100
|
%
|
BVI-ACM
|
|
British Virgin Island
|
|
|
100
|
%
|
China-ACMH
|
|
Beijing, China
|
|
|
100
|
%
|
Xin Ao
|
|
Beijing, China
|
|
|
VIE
|
|
VIEs are generally entities that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate decision-making ability. The VIE with which
the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary
beneficiary is required to consolidate the VIEs for financial reporting purposes.
Management makes ongoing assessments of
whether China ACMH is the primary beneficiary of Xin Ao. Based upon a series of contractual arrangements, the Company determined
that Xin Ao is a VIE subject to consolidation and that China ACMH is the primary beneficiary. Accordingly, the accounts of Xin
Ao are consolidated with those of China ACMH.
The carrying amount of the VIE’s
assets and liabilities are as follows:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Current assets
|
|
$
|
53,535,729
|
|
|
$
|
50,219,221
|
|
Property, plants and equipment
|
|
|
2,350,606
|
|
|
|
2,748,409
|
|
Total assets
|
|
|
55,886,335
|
|
|
|
52,967,630
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
(46,430,836
|
)
|
|
|
(43,372,069
|
)
|
Intercompany payables*
|
|
|
(7,377,238
|
)
|
|
|
(7,705,339
|
)
|
Total liabilities
|
|
|
(53,808,074
|
)
|
|
|
(51,077,408
|
)
|
Net assets
|
|
$
|
2,078,261
|
|
|
$
|
1,890,222
|
|
|
*
|
Payables to China-ACMH and BVI-ACM have been eliminated
in 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant
estimates and assumptions made in the preparation of the Company’s unaudited condensed consolidated financial statements
include the allowance for doubtful accounts, deferred income taxes, prepayments and advances, stock-based compensation, contingent
liabilities, fair value and useful lives of property, plant and equipment. Actual results could be materially different from those
estimates.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Foreign currency translation
The reporting currency of the Company is
the U.S. dollar. The functional currency of China ACM, CACM and BVI-ACM is the U.S. dollar. China-ACMH and Xin Ao use their local
currency, the Chinese Renminbi (“RMB”) as their functional currency. In accordance with U.S. GAAP guidance on Foreign
Currency Translation, the Company’s results of operations and cash flows are translated at the average exchange rates during
the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at
historical exchange rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash
flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Asset and liability accounts at September
30, 2018 and June 30, 2018 were translated at RMB 6.87 and RMB 6.62 to USD$1.00, respectively. The average translation rates applied
to the consolidated statements of operations and comprehensive loss and cash flows for the three months ended September 30, 2018
and 2017 were RMB 6.81 and RMB 6.67 to USD$1.00, respectively.
Translation gains (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. There were no foreign currency transaction gains or losses for the three months ended September 30, 2018 and 2017.
The effects of foreign currency translation adjustments are included in shareholders’ equity as a component of accumulated
other comprehensive income (loss).
Revenue recognition
On July 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from
Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of July 1,
2018. The core principle underlying revenue recognition is that the Company recognizes its revenue to represent the transfer of
goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such
exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized
at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s
revenue streams are primarily recognized at a point in time, principally upon delivery.
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step
model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract,
(iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future
reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v)
recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the
revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon
adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous
standards and using the five-step model under the new guidance and confirmed that there were no material differences in the pattern
of revenue recognition.
Sales of concrete products
The Company continues to derive its revenues
from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement
is demonstrated via sales contract and invoice; and the sales price to the customer is fixed upon acceptance of the sales contract
and there is no separate sales rebate, discount, or other incentive. Such revenues are recognized at a point in time after
all performance obligations are satisfied and based on when control of goods transfer to a customer, which is generally similar
to when its delivery has occurred prior to July 1, 2018.
Financial instruments
US GAAP, regarding fair value of financial
instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The three levels of inputs are defined
as follows:
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;
Level 3 inputs to the valuation
methodology are unobservable.
Financial instruments included in current
assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value
because of the short period of time between the origination of such instruments and their expected realization and their current
market rates of interest.
Cash and cash equivalents
The Company considers all highly liquid investments with the original maturity of three months or less
at the date of purchase to be cash equivalents.
Accounts and notes receivable, net
The Company extends unsecured credit to
its customers in the normal course of business. Accounts are considered past due after 30 days. In establishing the required allowance
for doubtful accounts, management considers historical experience, the economic environment, trends in the construction industry
and the expected collectability of the overdue receivables. Management reviews its accounts receivable each reporting period to
determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of
the full amount is no longer probable. Account balances are charged off against the allowance after all means of collection have
been exhausted and the potential for recovering is considered remote. The Company provides an allowance for doubtful accounts provision
of 15% for accounts receivable balances that are past due more than 180 days but less than one year, an allowance for doubtful
accounts provision of 40% of for accounts receivable past due from one to two years, an allowance for doubtful accounts provision
of 75% for accounts receivable past due beyond two years, an allowance for doubtful accounts provision of 100% for accounts receivable
past due beyond three years, plus additional amounts as necessary when the Company’s collection department determines the
collection of the full amount is remote and the Company’s management approves 100% of the allowance for doubtful accounts.
The Company’s management has continued to evaluate the reasonableness of its valuation allowance policy and will update it
if necessary.
Notes receivable represents commercial notes due from various customers where the customers’ banks
have guaranteed the payments. The notes are noninterest bearing and normally paid within three to six months. The Company has the
ability to submit requests for payments to the customer’s banks earlier than the scheduled payments date, but will incur
an interest charge and a processing fee.
Inventories
Inventories consist of raw materials and are stated at the lower of cost or market, as determined using
the weighted average cost method. Management compares the cost of inventories with the net realizable value and an allowance is
made for writing down the inventory to its net realizable value, if lower than cost. As of September 30, 2018 and June 30, 2018,
the Company determined that no allowance was necessary.
Other receivables
Other receivables primarily include prepayments to be refunded by our suppliers if the supplies do not
meet the Company’s specification needs, advances to employees, amounts due from unrelated entities refundable, VAT tax and
other deposits. Management regularly reviews the aging of these receivables and changes in payment trends and records an allowance
when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off against the allowance
after exhaustive efforts at collection are made. The Company provides an allowance for doubtful accounts of 5% for other receivables
balances that are aged within one year, an allowance for doubtful accounts of 50% for other receivables aged from one to two years,
and an allowance for doubtful accounts of 100% for other receivables aged beyond two years.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Prepayments and advances
Prepayments are funds deposited or advanced
to outside vendors for future inventory purchases. As is standard practice in the PRC, many of the Company’s vendors require
a certain amount to be deposited with them as a guarantee that the Company will complete its purchases on a timely basis. This
amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require any outstanding
prepayments to be returned to the Company when such contracts end. The Company provides a provision of 5% of the allowance for
doubtful accounts for prepayments and advances that are aged from six months to one year and 10% of the allowance for doubtful
accounts for prepayments and advances aged beyond one year.
The Company reversed an allowance of approximately $0.3 million and provided an allowance of approximately
$0.8 million for the three months ended September 30, 2018 and 2017, respectively. The Company did not write off any unrealizable
prepayments for the three months ended September 30, 2018 and 2017, respectively.
Property, plant and equipment
Property, plant and equipment are stated
at cost. Expenditures for maintenance and repairs are charged to operations as incurred while additions, renewals and improvements
are capitalized. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using
the straight-line method with a 5% residual value. Leasehold improvements are amortized over the lesser of estimated useful lives
or remaining lease terms, as appropriate.
The estimated useful lives of assets are
as follows:
|
|
Useful life
|
Transportation equipment
|
|
7-10 years
|
Plants and machinery
|
|
10 years
|
Office equipment
|
|
5 years
|
Buildings and improvements
|
|
3-20 years
|
Accounting for long-lived assets
The Company classifies its long-lived assets
into: (i) transportation equipment; (ii) plants and machinery; (iii) office equipment; and (iv) buildings and improvements.
Long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets
may not be fully recoverable. It is possible that these assets could become impaired as a result of technological or other industry
changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the
long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent
that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted
cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
If the value of an asset is determined
to be impaired, the impairment to be recognized is measured in the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition
costs.
There were no impairment charges for the
three months ended September 30, 2018 and 2017.
Competitive pricing pressures and changes
in interest rates could materially and adversely affect the Company’s estimates of future net cash flows to be generated
by the long-lived assets, and thus could result in future impairment losses.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Stock-based compensation
The Company records stock-based compensation expense for employees at fair value on the grant date and
recognizes the expense over the employee’s requisite service period. The Company’s expected volatility assumption is
based on the historical volatility of Company’s stock. The expected life assumption is primarily based on historical exercise
patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of an option is based
on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on the Company’s current
and expected dividend policy.
The Company records stock-based compensation expense for non-employees at fair value on the grant date
and recognizes the expense over the service provider’s requisite service period.
Income taxes
The Company accounts for income taxes in
accordance with ASC 740, “Income Taxes,” which requires the Company to use the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying
amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under this accounting
standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax
asset will not be realized.
ASC 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes
and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that
a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical
merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine
the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first
subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment
of income tax are classified as income tax expense in the period incurred. United States federal, state and local income tax returns
prior to 2015 are not subject to examination by any applicable tax authorities. PRC tax returns filed for calendar years ended
December 31, 2015 to 2017 are subject to examination by any applicable tax authorities.
Value Added Tax
Enterprises or individuals who sell commodities,
engage in repair and maintenance, or import and export goods in the PRC are subject to a value added tax. The standard VAT rate
for the Company’s industry is 3% of gross sales, and revenues are presented net of VAT.
Research and development
Research and development costs are expensed
as incurred. The cost of materials and equipment that are acquired or constructed for research and development activities, and
have alternative future uses, either in research and development, marketing, or sales, are classified as property and equipment,
and depreciated over their estimated useful lives.
Earnings (loss) per share
The Company reports earnings (loss) per
share in accordance with U.S. GAAP, which requires presentation of basic and diluted earnings (loss) per share in conjunction with
the disclosure of the methodology used in computing such earnings per share. Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants,
options, restricted stock based grants and convertible preferred stock, to issue common stock were exercised and converted into
common stock. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of
diluted earnings per share.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Dilution is computed by applying the treasury
stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time
of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during
the period. When the Company has a loss, no potential dilutive items are included since they would be antidilutive.
Stock dividends or stock splits are accounted for retroactively if the stock dividends or stock splits
occur during the period, or retroactively if the stock dividends or stock splits occur after the end of the period but before the
release of the financial statements, by considering it effective as of the beginning of each period presented.
Comprehensive income (loss)
Comprehensive income (loss) consists of
net income (loss) and foreign currency translation adjustments.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842). This update will require the recognition of a right-of-use asset and a corresponding lease liability,
initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases,
the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating
section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from
the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion
of the lease liability will be classified as a financing activity while the interest component will be included in the operating
section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December
15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period
presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02
on its unaudited condensed consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No.
2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured
at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its unaudited
condensed consolidated financial statements and related disclosures.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The
amendments in Part I of the Update change the reclassification analysis of certain equity-lined financial instruments (or embedded
features) with down round features. The amendments in Part II of this Update re-characterize the indefinite deferral of certain
provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. For public business
entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years
beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is
permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in
Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. Management
plans to adopt this ASU during the quarter ending September 2019. The Company does not believe the adoption of this ASU would have
a material effect on the Company’s unaudited condensed consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1)
Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon
Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration
Payments Made after a Business Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement
of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from
Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application
of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply
the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the
earliest date practicable. The Company adopted this ASU during the quarter ending September 2018. The adoption of this ASU did
not have a material effect on the Company’s unaudited condensed consolidated financial statements.
In October 2017, the FASB issued ASU No. 2017-17, Consolidation (Topic 810): Interests held through related
parties that are under common control. The amendments in this ASU require that the reporting entity, in determining whether it
satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a VIE and, on
a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are
under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. For all other entities, the amendments in this ASU
are effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December
15, 2017. Early adoption is permitted, including adoption in an interim period. The Company adopted this ASU during the quarter
ending September 2018. The adoption of this ASU did not have a material effect on the Company’s unaudited condensed consolidated
financial statements.
In November 2017, the FASB issued ASU No. 2017-18, “Statement of Cash Flows: Restricted Cash”.
The amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash on
the statement of cash flows. The amendment is effective for public companies for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company adopted this ASU during the quarter ending September 2018. The
adoption of this ASU did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement
– Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented
in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update
is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial
statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not
yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively
to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and
Jobs Act is recognized. The Company does not believe the adoption of this ASU would have a material effect on the Company’s
unaudited condensed consolidated financial statements.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In March 2018, the FASB issued ASU 2018-05
- Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”),
which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the “Act”)
that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by
the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related
exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate
internationally. The Company does not believe the adoption of this ASU would have a material effect on the Company’s unaudited
condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 – Compensation – Stock Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting, which to include share-based payment transactions for acquiring goods
and services from non-employees, which nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date
fair value of the equity instruments that an entity is obligated to issue when the goods have been delivered or the service has
been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The definition
of the term grant date is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of
the key terms and conditions of a share based payment award. The amendments are effective for public business entities for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the amendments
in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted, including adoption in an interim period. Management plans to adopt this ASU
during the quarter ending September 2019. Management does not believe the adoption of this ASU would have a material effect on
the Company’s unaudited condensed consolidated financial statements.
The Company does not believe other recently
issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited
condensed consolidated financial statements.
Note 3 – Accounts and notes receivable,
net
Accounts and notes receivable, net consisted
of the following:
|
|
September 30,
2018
|
|
|
June 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts receivable
|
|
$
|
59,330,806
|
|
|
$
|
62,610,943
|
|
Notes receivable
|
|
|
669,675
|
|
|
|
3,292
|
|
Less: Allowance for doubtful accounts
|
|
|
(18,565,666
|
)
|
|
|
(19,291,772
|
)
|
Total accounts and notes receivable, net
|
|
$
|
41,434,815
|
|
|
$
|
43,322,463
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
Three months ended
September 30,
2018
|
|
|
Year ended
June 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
19,291,772
|
|
|
$
|
15,827,349
|
|
(Recovery of) provision for doubtful accounts
|
|
|
(34,083
|
)
|
|
|
3,145,087
|
|
Less: write-off
|
|
|
-
|
|
|
|
-
|
|
Exchange rate effect
|
|
|
(692,023
|
)
|
|
|
319,336
|
)
|
Ending balance
|
|
$
|
18,565,666
|
|
|
$
|
19,291,772
|
|
During the three months ended September
30, 2018 and 2017, the Company offset approximately $2.1 million and $1.5 million of accounts receivable and accounts payable pursuant
to certain three-party settlement agreements, respectively.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 4 – Other receivables, net
Other receivables
Other receivables consisted of the following:
|
|
September 30,
2018
|
|
|
June 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Other receivables
|
|
$
|
1,941,930
|
|
|
$
|
279,339
|
|
Less: Allowance for doubtful accounts
|
|
|
(291,387
|
)
|
|
|
(208,097
|
)
|
Total other receivables, net
|
|
$
|
1,650,543
|
|
|
$
|
71,242
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
Three months ended
September 30,
2018
|
|
|
Year ended
June 30,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
208,097
|
|
|
$
|
1,432,095
|
|
Provision for (recovery of) doubtful accounts
|
|
|
91,507
|
|
|
|
(1,280,566
|
)
|
Exchange rate effect
|
|
|
(8,217
|
)
|
|
|
56,568
|
)
|
Ending balance
|
|
$
|
291,387
|
|
|
$
|
208,097
|
|
Note 5 – Property, plant and equipment,
net
Property, plants and equipment consist
of the following:
|
|
September 30,
2018
|
|
|
June 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Machinery and equipment
|
|
$
|
884,109
|
|
|
$
|
917,017
|
|
Transportation equipment
|
|
|
4,241,481
|
|
|
|
4,399,356
|
|
Office equipment
|
|
|
1,177,863
|
|
|
|
1,221,704
|
|
Buildings and improvements
|
|
|
442,257
|
|
|
|
458,718
|
|
Total
|
|
|
6,745,710
|
|
|
|
6,996,795
|
|
Less: Accumulated depreciation and amortization
|
|
|
(4,395,104
|
)
|
|
|
(4,248,386
|
)
|
Plants and equipment, net
|
|
$
|
2,350,606
|
|
|
$
|
2,748,409
|
|
Depreciation expense amounted to approximately $0.3 million for each of the three months ended September
30, 2018 and 2017.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 6 – Credit Facilities
Short term loans - banks:
Outstanding balances on short-term bank
loans consisted of the following:
|
|
September 30,
2018
|
|
|
June 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Loans from China Construction Bank, each with an interest rate of 5.66% to 6.09% per annum, due between July 2018 and January 2019, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Xianfu Han, Ms. Chunying Wang, Mr. Weili He, and Ms. Junkun Chen.
|
|
$
|
24,678,993
|
(1)
|
|
$
|
26,062,665
|
|
(1)
|
As of the date of this report, approximately $19.7 million of the outstanding balance is
past due and in default due to nonpayment. The Company is in the process of negotiating a renewal of the loans with the
bank and the Company did not receive any demand notice from the bank to pay off the loans
immediately.
|
Beijing Jinshengding Mineral Products Co.,
LTD is a supplier to the Company. Mr. Xianfu Han is the Company’s Chief Executive Officer. Chunying Wang is the spouse of
Mr. Xianfu Han. Mr. Weili He is the Company’s Interim Chief Financial Officer. Ms. Junkun Chen is the spouse of Mr. Weili
He. Also see Note 7 – Related party transactions.
Interest expense was approximately $0.3
million for each of the three months ended September 30, 2018 and 2017.
The Company has an approximate $30.6 million
(RMB210, 000,000) credit facility from China Construction Bank (the “CCB Credit Facility”), which was extended through
August 2018. The Company
has completed the application for extension as of the report date and is waiting for the approval.
Note 7 – Related party transactions
Rent expense - related party
The Company leases office space from Mr. Weili He, the Company’s Interim Chief Financial Officer,
through October 31, 2023, with annual payments of approximately $24,000.
Prepayment - related party
Mr. Xianfu Han, and Mr. Weili He, the Company’s
shareholders and officers, are holding positions as president and director of Ningbo Lianlv Investment Ltd., respectively. This
company owns 99% of the shares of Beijing Lianlv Technical Group Ltd. (“Beijing Lianlv”), the Company’s supplier.
As of September 30 and June 30, 2018, the Company prepaid $2,475,790 and $3,027,409 to Beijing Lianlv for inventory purchases,
respectively.
Due to Beijing Lianlv being named as a
joint defendant in one of the civil lawsuits of the Company, the Company provided a provision of 5% of an allowance for doubtful
accounts for Beijing Lianlv’s prepayment that are aged from six months to one year and 10% for the balance beyond one year.
As of September 30 and June 30, 2018, the Company made an allowance approximately $0.2 million and $0.3 million, respectively,
for prepayment – related party.
Other receivable - related party
This balance represents litigation related to a related party, whose shareholders are Mr. Han and Mr.
He. The litigation is due to the fact that Xin Ao signed a capital lease agreement on behalf of Bejing Lianlv. The balance has
been indemnified by Mr. Han and Mr. He in September 2018. As of September 30, 2018 and June 30, 2018, other receivable –
related party is from Beijing Lianlv was $1,346,908 and $1,397,042, respectively. Should the entity not repay the Company, the
major shareholders have agreed to indemnify the Company for any unpaid amounts.
Other payables – shareholders
Mr. Xiaofu Han and Mr. Weili He have advanced funds to BVI-ACM for working capital purposes. The advances
are non-interest bearing, unsecured, and are payable in cash on demand. They and their spouses have also guaranteed certain short-term
loans payable and notes payable of the Company (see Note 6).
Other payables - shareholders consisted
of the following:
|
|
September 30,
2018
|
|
|
June 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Xianfu Han
|
|
$
|
181,336
|
|
|
$
|
91,336
|
|
Weili He
|
|
|
198,590
|
|
|
|
104,428
|
|
|
|
$
|
379,926
|
|
|
$
|
195,763
|
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 8 – Income taxes
China ACM and CACM were incorporated in the United States. China ACM and CACM had no taxable income for
United States income tax purposes for the three months ended September 30, 2018 and 2017, respectively. As of September 30, 2018,
China ACM and CACM’s net operating loss carry forward for United States income taxes was approximately $0.5 million. The
net operating loss carry forwards are available to reduce future years’ taxable income through year 2038. Management believes
that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued
losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on the net deferred tax asset to
reduce the asset to zero. Management reviews this valuation allowance periodically and makes changes accordingly.
On December 22, 2017, the “Tax Cuts and Jobs Act” (“The Act”) was enacted. Under
the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21%. As the Company has a June 30 fiscal year-end,
the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for our
fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. Accordingly, we have adjusted our deferred tax assets on
net operating loss carryforwards in the U.S at the lower enacted tax rate of 21%. However, this adjustment has no effect on the
Company’s income tax expense as the Company has provided a 100% valuation allowance on its net deferred tax assets previously.
Additionally, the Tax Act imposes a one-time
transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to
U.S. taxation. However, this one-time transition tax had no effect on the Company’s income tax expense as the Company has
no undistributed foreign earnings prior to December 31, 2017 because the Company has had foreign losses through the quarter ended
December 31, 2017.
BVI-ACM was incorporated in the British
Virgin Islands (“BVI”), where its income tax rate is 0% under current BVI law.
China-ACMH and VIE-Chinese operations
China-ACMH and Xin Ao are governed by the income tax laws of the PRC. Income tax provisions with respect
to operations in the PRC are calculated at the applicable tax rates on the taxable income for the periods based on existing legislation,
interpretations and practices in respect thereof. Under the Chinese Enterprise Income Tax (“EIT”) law, the statutory
corporate income tax rate applicable to most companies is 25%. In 2009, Xin Ao applied and received an Enterprise High-Tech Certificate.
The High-Tech Certificate is required to be renewed every 3 years. The certificate was awarded based on Xin Ao’s involvement
in producing high-tech products, its research and development, as well as its technical services. As granted by the State Administration
of Taxation of the PRC, Xin Ao was entitled to a reduction in its income tax rate from 25% to 15% until July 21, 2018. The Company
has completed the application for the updated certificate as of the report date and obtained the approval notice and is waiting
for the official certificate.
The EIT Law imposes a 10% withholding income
tax, subject to reduction based on tax treaties where applicable, for dividends distributed by a foreign invested enterprise to
its immediate holding company outside China. Such dividends were exempted from PRC tax under the previous income tax laws and regulations.
The Company intends to permanently reinvest undistributed earnings of its Chinese operations located in the PRC. As a result, there
is no deferred tax expense related to withholding tax on the future repatriation of these earnings.
Loss before provision for income taxes
consisted of:
|
|
Three months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
USA and BVI
|
|
$
|
(1,179,240
|
)
|
|
$
|
(309,083
|
)
|
PRC
|
|
|
252,012
|
|
|
|
(2,681,505
|
)
|
|
|
$
|
(927,228
|
)
|
|
$
|
(2,990,588
|
)
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Significant components of deferred tax
assets were as follows:
|
|
September 30,
2018
|
|
|
June 30,
2018
|
|
Deferred tax assets
|
|
(unaudited)
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,870,345
|
|
|
$
|
2,972,087
|
|
Accrued claims charges
|
|
|
696,488
|
|
|
|
611,363
|
|
Impairment loss of long-lived assets
|
|
|
393,673
|
|
|
|
393,673
|
|
Net operating loss carryforward in China
|
|
|
149,301
|
|
|
|
145,641
|
|
Net operating loss carryforward in the U.S.
|
|
|
94,413
|
|
|
|
62,852
|
|
Valuation allowance
|
|
|
(4,204,220
|
)
|
|
|
(4,185,616
|
)
|
Total net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of September 30, 2018 and June 30, 2018,
the Company believes it is more likely than not that its PRC operations will be unable to fully utilize its deferred tax assets
related to its allowance for doubtful accounts, impairment loss of long-lived assets and the net operating loss carryforwards in
the PRC. If the Company is unable to generate taxable income in its PRC operations, it is more likely than not that it will not
have sufficient income to utilize its deferred tax assets. As of September 30, 2018, the Company has a net operating loss carry
forward in the PRC that expires in 2022. As a result, the Company provided a 100% allowance on all deferred tax assets of approximately
$4.1 million and $4.1 million related to its operations in the PRC as of September 30, 2018 and June 30, 2018, respectively.
The Company has incurred losses from its
United States operations during all periods presented. Accordingly, management provided approximately $0.1 million and $0.1 million
of valuation allowance against the deferred tax assets related to the Company’s United States operations as of September
30, 2018 and June 30, 2018, respectively, because the deferred tax benefits of the net operating loss carry forward in the United
States might not be utilized.
As of September 30, 2018 and June 30, 2018, the Company had $136,969 and $178,190 of other business taxes
(principally VAT) payable, respectively.
|
(b)
|
Uncertain tax positions
|
There were no uncertain tax positions as
of September 30, 2018 and June 30, 2018. Management does not anticipate any potential future adjustments which would result in
a material change to its tax positions. For the three months ended September 30, 2018 and 2017, the Company did not incur any tax
related interest or penalties.
Note 9 – Shareholders’ equity
Restricted Stock Grants
Restricted stock grants are measured based
on the market price on the grant date. The Company has granted restricted shares of common stock to the members of the board of
directors (the “Board”), senior management and consultants.
In August 2016, the Board granted an aggregate
of 106,859 shares of restricted common stock, which were issued with a fair value of $308,823 to a consultant under the 2009 Plan.
These shares were to vest in two tranches upon achieving certain performance-based milestones. On January 15, 2018, 50,000 shares
vested on the first tranche and the remaining 56,859 shares have been forfeited and cancelled.
In January 2018, the Board granted an aggregate
of 56,859 shares of restricted common stock, which were issued with a fair value of $244,494 to one employee under the 2009 Plan.
These shares vested immediately upon grant. As of September 30, 2018, there was no shares available under the 2009 Plan.
For the three months ended September 30,
2018 and 2017, the Company recognized $0 compensation expense related to restricted stock grants.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Following is a summary of the restricted
stock grants:
Restricted stock grants
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
Per Share
|
|
|
Aggregate
Intrinsic
Value
|
|
Unvested as of June 30, 2017
|
|
|
106,859
|
|
|
$
|
2.89
|
|
|
$
|
308,823
|
|
Forfeited
|
|
|
(56,859
|
)
|
|
$
|
2.89
|
|
|
$
|
(164,323
|
)
|
Granted
|
|
|
56,859
|
|
|
$
|
4.30
|
|
|
$
|
244,494
|
|
Vested
|
|
|
(106,859
|
)
|
|
$
|
3.64
|
|
|
$
|
(388,994
|
)
|
Unvested as of June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Vested
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Unvested as of September 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Common Stock Issued for Debt Settlement
In April 2018, the Board granted an aggregate
of 985,889 shares of restricted common stock, which were issued on May 4, 2018 with a fair value of $2,021,073, determined using
the closing price of $2.05 on April 3, 2018, to Mr. Xianfu Han, the Chief Executive Officer (“CEO”) of the Company,
to repay the debt the Company owed to the CEO.
In April 2018, the Board granted an aggregate
of 896,766 shares of restricted common stock, which were issued on May 4, 2018 with a fair value of $1,838,370, determined using
the closing price of $2.05 on April 3, 2018, to Mr. Weili He, the Chief Financial Officer (“CFO”) of the Company’s,
to repay the debt the Company owes to the CFO.
Common Stock Issued for Compensation
In April 2018, the Board granted an aggregate
of 200,000 shares of common stock, which were issued with a fair value of $410,000, determined using the closing price of $2.05
on April 3, 2018, to two employees under the 2009 Plan.
In May 2018, the Board granted an aggregate
of 218,336 shares of common stock, which were issued with a fair value of $589,507, determined using the closing price of $2.70
on May 21, 2018, to five employees under the 2009 Plan.
Issuance of Common Stock
In May 2018, the Company sold 300,000 shares
of common stock at the price of $2.00 per share to certain unrelated third-party individuals. The issuances were completed pursuant
to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.
In June 2018, the Board granted an aggregate
of 500,000 shares of common stock with a fair value of $2,825,000, determined using the closing price of $5.65 on June 28, 2018,
to two service providers. These shares were issued in July 2018 and to be amortized over the service period of one year starting
from July 1, 2018. Amortization of deferred stock compensation for the three months ended September 30, 2018 was $706,250.
On July 25, 2018, the Company sold 45,977
shares of common stock at the price of $6.525 per share for total proceeds of $300,000 to certain third-party individuals. The
issuances were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities
Act of 1933, as amended.
On August 23, 2018, the Company sold 50,000 shares of common stock at the price of $3.0 per share for
total proceeds of $150,000 to a third-party individual. The issuance was completed pursuant to the exemption from registration
provided by Regulation S promulgated under the Securities Act of 1933, as amended.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 10 – Reserves and dividends
The laws and regulations of the PRC require
that before a foreign invested enterprise can legally distribute profits, it must first satisfy all its tax liabilities, provide
for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, after
setting aside the required statutory reserves. Statutory reserves include the surplus reserve fund and the common welfare fund.
The Company is required to transfer 10%
of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the Company’s registered capital. As of September 30, 2018 and June 30, 2018, the
remaining reserve to fulfill the 50% registered capital requirement amounted to approximately $0.8 million as of each of the three
months ended September 30, 2018 and 2017.
Transfers to statutory reserves must be
made before the distribution of any dividends to the Company’s shareholders. The surplus reserve fund is non-distributable
other than during liquidation. The surplus reserve fund can however be used to fund previous years’ losses, if any, and may
be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion
to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered capital.
The PRC government restricts distributions
of registered capital and the additional investment amounts required by foreign invested enterprises. Approval by the PRC government
must be obtained before distributions of these amounts can be returned to the shareholders.
Note 11 – Employee post-retirement
benefits
The Company offers a defined contribution
plan to eligible employees which consists of two parts: (i) the first part, paid by the Company, is 20% of the employee’s
compensation from the prior year and (ii) the second part, paid by the employee, is 8% of the employee’s compensation. The
Company’s contributions of employment benefits were approximately $0.5 million and $0.7 million for the three months ended
September 30, 2018 and 2017, respectively.
Note 12 – Commitments and contingencies
Lease Commitments
The Company has a lease agreement for a
concrete service plant with an unrelated party which will expire on September 30, 2022, with annual payments of approximately $409,000.
The Company has a lease agreement for roadway access to the west side entry of the concrete service plant with an unrelated party,
which will expire on June 30, 2019, with annual payment of approximately $15,000. The Company has a lease agreement for office
space from Mr. Weili He, the Company’s Interim Chief Financial Officer, through October 31, 2023, with annual payments of
approximately $24,000. The Company has a lease agreement for office space in New York through May 31, 2019, with annual payments
of $27,600.
Operating lease expenses are allocated
between the cost of revenue and selling, general, and administrative expenses. Total operating lease expenses were approximately
$0.1 million and $60,000 for the three months ended September 30, 2018 and 2017, respectively. Future annual lease payments under
non-cancelable operating leases with a term of one year or more consist of the following:
Twelve months ending September 30,
|
|
Amount
|
|
2019
|
|
$
|
462,000
|
|
2020
|
|
|
433,000
|
|
2021
|
|
|
433,000
|
|
2022
|
|
|
433,000
|
|
2023
|
|
|
24,000
|
|
Thereafter
|
|
|
2,000
|
|
Total
|
|
$
|
1,787,000
|
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Guarantee
In April 2018, the Company guaranteed approximately
$10.0 million (RMB 69,000,000) that a related-party borrowed from the bank:
Name
of party being guaranteed
|
|
Guaranteed
amount
|
|
|
Guarantee
expiration date
|
Beijing Lianlv (borrower)
|
|
$
|
10,045,000
|
|
|
April 11, 2019
|
The Company did not, however, accrue any
liability in connection with such guarantee because the borrower has been current in its repayment obligation. As of the date of
this report, the Company has evaluated the guarantee and has concluded that the likelihood of having to make any payments under
the guarantee agreement is remote.
Contingencies
From time to time, the Company is a party
to various legal actions. The majority of these claims and proceedings relate to or arise from, commercial disputes, labor contract
complaints and sales contract complaints. The Company accrues costs related to these matters when they become probable and as a
result the amount of loss can be reasonably estimated (See Dispute Matters Arising in the Ordinary Course of Business for more
information). In determining whether a loss from a claim is probable, and if it is possible to estimate the loss, the Company reviews
and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and
legal developments. If the Company determines a favorable outcome is probable, or that the amount of loss cannot be reasonably
estimated, the Company does not accrue costs for a potential litigation loss. In those situations, the Company discloses an estimate
of the probable losses or a range of possible losses, if such estimates can be made as indicated below (See Legal Matters). Currently,
except as otherwise noted below, the Company does not believe that it is possible to estimate the potential losses incurred or
a range of reasonably possible losses related to the outstanding claims. Legal costs incurred in connection with loss contingencies
are expensed as incurred.
As of September 30, 2018, the Company’s VIE, Xin Ao, was subject to several civil lawsuits for which
the Company estimated that it is more than likely to pay judgments in the amount of approximately $4.8 million (including interest
and penalty of $0.8 million). These amounts are presented in the accompanying consolidated balance sheets (See Accrued Contingent
Liabilities). During the three months ended September 30, 2018, additional estimated claims charges of approximately $0.6 million principally
for interest and penalties on existing claims which are presented in the accompanying consolidated statements
of operations under the caption “Estimated claims charges”.
As of the date of this 10-Q, the Company’s
management does not expect any other material liability from the disposition of claims from litigation individually, or in the
aggregate that would have a material adverse impact on the Company’s consolidated financial position, results of operations
and cash flows.
Due to the Company’s operations in
the PRC and the legal environment in the PRC, it is possible that the Company’s VIE, Xin Ao could be named as a defendant
in litigation based upon the guarantees of Mr. Han and Mr. He and/or their related parties.
(i)
|
Disputes Arising in the Ordinary Course of Business
|
As of September 30, 2018,
the Company had approximately $4.8 million in accrued contingent liabilities, net of amounts paid by a related party of
approximately $1.3 million, and approximately $0.6 million of additional estimated claims charges for the three months ended
September 30, 2018. As of September 30, 2018, further details regarding the type of litigation disputes and accrued costs
associated with the claims are summarized as follows:
|
Dispute
matter
|
|
Claim
amount as of September 30,
2018
|
|
|
Interest
and penalties
|
|
|
Total
claim amount as of September 30,
2018
|
|
|
1) Guarantees
|
|
$
|
2,155,054
|
|
|
$
|
-
|
|
|
$
|
2,155,054
|
|
|
2) Sales
|
|
|
20,171
|
|
|
|
9,062
|
|
|
|
29,233
|
|
|
3) Purchase
|
|
|
1,098,535
|
|
|
|
344,665
|
|
|
|
1,443,200
|
|
|
4) Leases
|
|
|
1,992,119
|
|
|
|
430,864
|
|
|
|
2,422,983
|
|
|
5) Labor
|
|
|
26,196
|
|
|
|
-
|
|
|
|
26,196
|
|
|
6) Others
|
|
|
12,281
|
|
|
|
-
|
|
|
|
12,281
|
|
|
Total
|
|
$
|
5,304,356
|
|
|
$
|
784,591
|
|
|
|
6,088,947
|
|
|
Payments made by related party
|
|
|
|
|
|
|
|
|
|
|
(1,254,312
|
)
|
|
Accrued contingent liabilities
|
|
|
|
|
|
|
|
|
|
$
|
4,834,635
|
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The major legal cases are summarized
as follows:
In December 2016, the Company
guaranteed approximately $2.1 million (RMB 14,736,000) that a third-party borrowed from a bank:
|
Name
of party being guaranteed
|
|
Guaranteed
amount
|
|
|
Guarantee
expiration date
|
|
Tangshan Long Tang Trading Co., Ltd
|
|
$
|
2,145,296
|
|
|
December 29, 2017
|
This loan has not paid as of
the date of this report. As of the date of this report, the Company has evaluated the guarantee and has concluded that the likelihood
of having to make any payments under the guarantee agreement is probable. The Company accrued approximately $2.1 million contingent
liability in connection with such guarantee as of June 30, 2018.
|
(a)
|
On
August 10, 2017, Guowang International Finance Leasing Co. Ltd. (“Gouwang”) filed a lawsuit against Xin Ao in People’s
Court of Nankai District, Tianjin Province (“Nankai Court”) to seek compensatory damages in connection with Xin
Ao’s failure to make payments under a financing lease agreement. On October 23, 2017, Nankai Court ruled against Xin Ao
and rendered a judgement to award damages in an amount of RMB 9,168,463 (approximately US$1.3 million) to Guowang (the “Decision”).
On September 26, 2018, Xin Ao appealed to the Decision which was
rejected in its entirety with prejudice. As of date of this report, Xin Ao has not made any payment. This agreement was initially
entered into by Xin Ao for the benefit of a related party that is owned by the Company’s officers/major shareholders. Accordingly,
the Company accrued approximately $1.3 million as a liability and a corresponding “Other Receivable – Related Party”
in the same amount. Should the entity not repay the Company, the officers/major shareholders have agreed to indemnify the Company
for any unpaid amounts.
|
|
(b)
|
On
April 30, 2016, China Black Metal Materials Beijing Co., Ltd (“China Black Metal”) filed a lawsuit against Xin Ao
and Beijing Jinshengding Mineral Products Co., Ltd. (“Jinshengding”) in connection with their failure to make payments
under a lease agreement. The court ruled that effective December 28, 2016, the lease agreement was void and Xin Ao and/or Jinshengding
shall make payment to China Black Metal which shall include rent due from December 4, 2015 to December 28, 2016 in an amount of
RMB 1,572,669, plus interest, expenses for utilities in an amount of RMB 271,579 (approximately US$40,000), penalty under the
agreement of RMB 250,000 (approximately US$36,000), legal fees of RMB 73,238 (approximately US$11,000) and rent due from December
28, 2016 to September 30, 2018 of RMB 2,264,329 (approximately US$0.3 million). The total amount of compensation is RMB 4,431,816
(approximately US$0.6 million). As of date of this report, Jinshengding has paid RMB 1,800,000 (approximately US$0.3 million)
out of the total compensation.
|
As of September 30,
2018, the Company’s VIE, Xin Ao, was subject to several civil lawsuits with potential judgments in the amount
of approximately $13.7 million and the likelihood of the outcome of these lawsuits cannot be determined as of the date of
this report. These lawsuits involved with the Company were mainly due to the personal guarantees by Mr. Xianfu Han, and Mr.
Weili He, the Company’s shareholders and officers, and of which they are also the shareholders of Xin Ao. Because Mr.
Han and Mr. He are the shareholders of Xin Ao, the plaintiffs included Xin Ao in the joint complaints. Xin Ao was not
involved in some of the lawsuits but named as a joint defendant in the lawsuits. As a result, Xin Ao might have exposure to
the pending judgements in the future under PRC laws.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
On September 28, 2018, Mr. Han
and Mr. He signed an agreement with the Company to indemnify the Company for these liabilities and personally become responsible
for all of the pending potential judgements amount from these related civil lawsuits. Both Mr. Han and Mr. He agreed to liquidate
their personal assets or their ownership interest in their privately held companies to pay for any of the pending potential judgements
amounts of approximately $13.7 million.
On December 10, 2018, Mr. Han
and Mr. He entered into an amendment No. 1 to the indemnification agreement to clarify the indemnification terms which Mr. Han
and Mr. He’s certain actions including but not limited to personal guarantees, loans or investments in their own name to
other entities which has caused Xinao to be involved as a co-defendant in certain legal proceedings. Mr. Han and Mr. He have agreed
to unconditionally indemnify Xin Ao for all losses, damages, legal fees, expenses or other costs related to the legal proceedings
whereby Xin Ao was named as a co-defendant or defendant due to Mr. Han and Mr. He being a shareholder of Xin Ao. The indemnification
for the amended terms are irrevocable. In addition, Mr. Han and Mr. He agreed to unconditionally indemnify Xin Ao for all the losses,
damages, legal fees, expenses and other costs, including additional interest, related to the legal proceedings accrued and contingencies
determined in the future.
The type of litigation disputes
with contingencies associated are summarized as follows as of September 30, 2018:
|
Dispute
matter
|
|
Claim
amount as of September 30, 2018
|
|
|
Interest
and penalties
|
|
|
Total
claim amount as of September 30, 2018
|
|
|
1) Guarantees
|
|
$
|
56,039,285
|
|
|
$
|
10,093,006
|
|
|
$
|
66,132,291
|
|
|
2) Purchase
|
|
|
1,584,406
|
|
|
|
47,897
|
|
|
|
1,632,303
|
|
|
3) Leases
|
|
|
895,071
|
|
|
|
-
|
|
|
|
895,071
|
|
|
4) Labor
|
|
|
227,890
|
|
|
|
-
|
|
|
|
227,890
|
|
|
Total
|
|
$
|
58,746,652
|
|
|
$
|
10,140,903
|
|
|
|
68,887,555
|
|
|
Settled claims
|
|
|
|
|
|
|
|
|
|
|
(55,202,577
|
)
|
|
Remaining claims amount
|
|
|
|
|
|
|
|
|
|
$
|
13,684,978
|
|
The major legal cases are summarized
as follows:
|
1)
|
Claims Resulting from
Executives’ Personal Guarantee to Affiliated Entities
|
|
(a)
|
Mr. Xianfu Han, the CEO
and director of the Company and a shareholder of Xin Ao, Mr. Weili He, the interim CFO and director of the Company and a shareholder
of Xin Ao, and Xin Ao (the “Defendants”) were parties to a lawsuit filed on June 23, 2017, by China Cinda Asset Management
Co., Ltd. Beijing Branch (“Cinda Beijing Branch”) in the Beijing First Intermediate People’s Court (the “Beijing
Intermediate Court”) to seek compensatory damages, liquidated damages, costs, and attorney’s fees for default in a
certain loan repayment. The loan agreement was entered into by and between Xin Ao Ecological Construction Materials Co., Ltd.
(“Borrower”) and Cinda Beijing Branch dated as of June 23, 2014 with Mr. Han and Mr. He acting as the guarantors for
such loans (the “Guarantors”). Mr. Han and Mr. He together are the controlling shareholders of the Borrower, holding
an aggregate of 60% equity interests of the Borrower. The aggregate amount of the loan was RMB288,506,497 (approximately US$42.0
million) with interest at 12.8% per annum (the “Loan”). Cinda Beijing Branch alleged that since the Borrower
breached its obligation to make the repayment of the Loan on the maturity date, the Guarantors, along with Xin Ao and those entities
owned or controlled by the Guarantors, should be brought into the lawsuit as co-defendants (the “Defendants”). On
July 5, 2017, Beijing Intermediate Court ruled in favor of Cinda Beijing Branch and issued a judgment for execution to freeze
the Defendants’ assets, an aggregate amount of RMB 304,972,608 (approximately US$44.4 million) which shall be used for the
repayment of the Loan, the liquidated damages, the interest on the Loan, and other costs and expenses undertaken by Cinda Beijing
Branch. Following the mediation, China Cinda Asset Management Co., Ltd. (“Cinda”), two shareholders of Da Tong Lianlv
Technologies Co., Ltd. (“Datong Lianlv”), Beijing Ao Huan Fund Management Co., Ltd. (“Ao Huan”), and Shou
Tai Jin Xin (Chang Xing) Investment Management Co., Ltd (“Jin Xin”) entered into a certain limited partnership agreement
(the “Partnership Agreement”) on December 22, 2017 to settle the lawsuit. Datong Lianlv is an affiliate of the Company
and Xin Ao. Cinda is the parent company of Cinda Beijing Branch. As provided in the Partnership Agreement, the distributions of
the limited partnership shall be allocated to Cinda first, who made a capital contribution in the form of its rights, title and
interests in and to the repayment of the Loan in an aggregate amount of RMB 322,435,300 (approximately US$46.9 million) (the “Capital
Contribution”). Pursuant to the Partnership Agreement, payment shall be made until Cinda has received an amount equal to
the aggregate of its unreturned Capital Contributions and a cumulative distribution equal to 7.5% of all distributions made. Datong
Lianlv made its capital contribution in cash in an aggregate amount of RMB 150,000,000 (approximately US$21.8 million) along with
its shareholders consent to transfer 99% of Datong Lianlv’s equity interests to the limited partnership. The PRC legal counsel
of Xin Ao indicated that Cinda and Cinda Beijing Branch orally confirmed that this claim was fully settled in the form of the
Partnership Agreement. In February 2018, the Cinda Beijing Branch filed an enforcement order with the court as the partnership
had not been formed at that time. The partnership was subsequently formed in March 2018. No attempt to collect payment from
Xin Ao has been made since the enforcement order was filed in February 2018. Based upon the legal opinion issued by the
Company’s PRC legal counsel, Xin Ao believes a favorable outcome is probable of the exposure to the pending judgements as
the enforcement order has been resolved with the establishment of the Partnership.
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
(b)
|
On July 11, 2018, Chengde County Rural Cooperatives Credit Union (the “Credit Union”) filed
an arbitration demand (“Arbitration Demand”) with the People’s Court of Shuangqiao District, Chengde, Hebei Province
(“Shuangqiao Court”) against certain entities and individuals (collectively the “Respondent”) including
Xin Ao and Chengde Tianhang Concrete Co Ltd. (“Chengde Tianhang”) and Chengde Kaixuan Real Estate Development Co. Ltd.
(“Chengde Kaixuan”) in connection with Chengde Tianhang’s potential default in its loan repayment. In accordance
with the loan agreement, Mr. Weili He and Mr. Xianfu Han together acted as the guarantors for such loan. In addition, Mr. Han and
Mr. He are the controlling shareholders and officers of Xin Ao. They are also the shareholder of Chengde Tianhang. Mr. Han
and Mr. He were therefore named as co-respondents in the Arbitration Demand, where the Bank sought property preservation. Shuangqiao
Court, accepting the Arbitration Demand of the Bank, rendered a decision to seize the bank deposits or equivalents of Respondent
in an aggregate amount of RMB 26,000,000 (approximately US$3.8 million). Currently, none of the Company’s funds on deposit
have been seized.
|
|
(c)
|
On October 9, 2017,
Yong Fan filed a lawsuit against Beijing Lianlv Technology Group Co. Ltd (“Beijing Lianlv”), Xin Ao, and Mr. Weili
He, in connection with Beijing Lianlv’s failure to pay off the principal and interest of RMB2,927,400 (approximately US$0.4
million) under its loan agreement (the “Loan Agreement”). Given that Mr. Weili He acted as the guarantor for
such loan, Mr. He was brought into the lawsuit as one of the co-defendants. Since Mr. He is one of the controlling shareholders
of Xin Ao, Xin Ao was also brought into the lawsuit as one of the co-defendants. The Court rendered a judgement in May 2018, ruling
that
|
|
1)
|
Beijing
Lianlv shall pay Yong Fan the damages in an amount of RMB 2.895 million (approximately US$0.4 million) as principal of the loan
and an amount of RMB32,400 (approximately US$5,000) as interest of the loan (the amount of expected interest was computed with
a simple rate of 24%per annum. As of the date of the report, Beijing Lianlv has not made any payment as the Company is currently in the process of appealing the judgement);
|
|
2)
|
Xin Ao and Mr. Weili
He are entitled to the right of recourse to Beijing Lianlv.
|
|
(d)
|
On January 8, 2018, Agricultural Bank of China Tangshan Branch (the “Bank”) filed an arbitration
demand (“Arbitration Demand”) with People’s Court of Fengrun District, Tangshan, Hebei Province (“Fengrun
Court”) against certain entities and individuals including Xin Ao and Tangshan Xinglong Technology Development Co. Ltd. (“Xinlong”)
(collectively the “Respondents”) in connection with Xinlong’s breach of a loan agreement. In accordance with
the loan agreement, Xin Ao, as the guarantor on such loan from the Bank, was named as co-respondent to the Arbitration Demand,
where the Bank sought property preservation. Fengrun Court, accepting the Arbitration Demand of the Bank, rendered a decision to
seize the bank deposits or equivalents of Respondents in an aggregate amount of RMB 51,000,000 (approximately USD $7.4 million).
Currently, none of the Company’s funds on deposit have been seized.
|
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
(a)
|
Nanling Yirui Materials
Supplier Co., Ltd. (Nanling Yirui”) filed a lawsuit against Sihong Jinghong Sheng Concrete Co., Ltd. (“Sihong”)
on October 23, 2017 in the People’s Court in Nanling County, Anhui Province, to seek compensatory damages, interest and
attorney’s fees. A Raw Material Purchase Agreement was entered into by and between Nanling Yirui and Sihong on April 30,
2017. The purchase price of raw materials supplied by Nanling Yirui was in an aggregate amount of RMB 3,452,799 (approximately
US$0.5 million), the payment of which was overdue. Mr. Xianfu Han and Mr. Weili He are the shareholders of Sihong. Since Mr. Han
and Mr. He are the controlling shareholders of Xin Ao, Xin Ao was also brought into the lawsuit as a co-defendant. The Court rendered
a final judgement in June 2018 in favor of Nanling Yirui. As of the date of the report, Sihong has not made any payment.
|
On March 6, 2018, Beijing Chengda
Yu Concrete Co., Ltd (“Beijing Chengda”) filed a lawsuit against Xin Ao in connection with Xin Ao’s breach of
a rental lease. Beijing Chengda stated that on January 24, 2014 both parties entered into a lease agreement (the “Agreement”).
A lease addendum was later entered into on February 25, 2014. The Agreement provided that, effective from July 18, 2013 to April
30, 2018, XinAo shall rent Beijing Chengda’s property, the Concrete Station, and assume all credits and debts incurred during
the term of the lease agreement. Mr. Xianfu Han and Mr. Weili He signed a personal guaranty agreement with Xin Ao to undertake
the liabilities of Xin Ao in the event of its breach on the lease agreement. On March 31, 2017, Beijing Chengda was sued by Beijing
Zhongtong Jiang Xin’hang Construction Materials Co., Ltd for an unpaid balance in an amount of RMB 6,246,059 (approximately
US$0.9 million in total) in connection with utilizing the Concrete Station. Beijing Chengda then brought a lawsuit against Xin
Ao for the payment of such unpaid balance together with the legal fees in connection with the lawsuit. The case is still under
review by the court, and no potential judgment amount has been decided.
During 2017, Sihong was subject to certain labor disputes. The potential total amounts of judgment is
around RMB 1,701,979 (approximately US$0.2 million). Mr. Xianfu Han and Mr. Weili He are the shareholders of Sihong. Since Mr.
Han and Mr. He are the controlling shareholders of Xin Ao, Xin Ao was also brought into the lawsuit as a co-defendant. As of the
date of the report, Sihong has not made any payment.
Employment Agreements
The Company has employment agreements with
its two executive officers, Mr. Han and Mr. He from July 1, 2017 until June 30, 2020. Each agreement calls for an annual
base salary of $360,000 plus bonus, if any. If employment is terminated for death, disability or for cause, they are entitled to
any unpaid base salary, vacation, bonus for the fiscal year ending on or prior to the date of termination and unreimbursed expenses
through the date of termination. If employment is terminated for no cause, they will be entitled to the benefits previously mentioned
plus two months additional base salary and continued medical benefits in accordance with the Company’s plan subject to the
execution (and non-revocation) of a general release of claims against the Company and its affiliates.
Notice of Delisting or Failure to Satisfy
a Continued Listing Rule or Standard; Transfer of Listing
On July 5, 2018,
the Company received a notification letter from the Nasdaq Listing Qualifications Staff of The NASDAQ Stock Market LLC (“
Nasdaq
”)
indicating that, since the Company has not yet held an annual meeting of stockholders within twelve months of the end of the Company’s
fiscal year ended September 30, 2018, the Company no longer complies with Nasdaq Listing Rules 5620(a) and 5810(c)(2)(G).
The notification
received has no immediate effect on the listing of the Company’s common stock on Nasdaq. Under the Nasdaq Listing Rules,
the Company has until August 20, 2018 to submit a plan to regain compliance. If the Company’s plan is accepted, Nasdaq may
grant an extension of up to 180 calendar days from September 30, 2018, or December 27, 2018, to regain compliance.
The Company submitted its compliance plan on July 31, 2018 to the Staff. On August 8, 2018, the Staff,
considering the Company was proposing to seek shareholder approval to re-domicile the Company in the Cayman Islands, determined
to grant the Company an extension until December 27, 2018 to regain compliance with the Rule by holding an annual meeting of shareholders.
The Company has remediated this condition on December 27, 2018 by holding such meeting. The Company is still in the process of bringing delinquent filings current.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 13 – Concentrations of risk
Credit Risk
The Company is exposed to credit risk from
its cash in bank and fixed deposits, and accounts and notes receivable, other receivables and advances on equipment purchases.
As of September 30, 2018, approximately
$0.9 million was on deposit with a bank located in the PRC subject to credit risk. In China, the insurance coverage of each bank
is RMB 500,000 (approximately USD $73,000). As of September 30, 2018, approximately $0.2 million was on deposit with a bank located
in the US subject to credit risk. In the US, the insurance coverage of each bank is USD $250,000. Management believes that the
credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions.
Accounts receivable, other receivables
and advances on inventory purchases are subjected to credit evaluations. An allowance has been made for estimated unrecoverable
amounts which have been determined by reference to past default experience and the current economic environment.
Customer Concentration Risk
For the three months ended September 30,
2018, the Company had one customer accounting for approximately 10.2% of total revenue. For the three months ended September 30,
2017, the Company had two customers accounting for approximately 14.6% and 11.2% of total revenue. As of September 30, 2018 and
June 30, 2018, no customer accounted for more than 10% of the total balance of accounts receivable. As September 30, 2018 and June
30, 2018, the total accounts receivable for top five customers is approximately $8.1 million and $5.5 million, respectively.
For the three months ended September 30, 2018, the Company had two vendors each accounting for approximately
14.7% of total purchases, respectively. For the three months ended September 30, 2017, no vendor accounted for more than 10% of
total purchases. As of September 30, 2018 and June 30, 2018, no vendor accounted for more than 10% of the total balance of accounts
payable.