Item 7. Management’s Discussion and Analysis of Financial
Conditions and Results of Operations.
THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR
FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE
OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS
OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS
INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND THOSE INCLUDED ELSEWHERE IN THIS ANNUAL
REPORT.
Overview
Yangtze River Development Limited is a Nevada
corporation that operates through its wholly-owned subsidiary Energetic Mind Limited, a British Virgin Islands company, which holds
100% of the capital stock of Ricofeliz Capital (HK) Ltd., a Hong Kong company that holds 100% of the capital stock of Wuhan Yangtze
River Newport Logistics Co., Ltd., a wholly foreign-owned enterprise formed under the laws of the People’s Republic of China
that primarily engages in the business of real estate and infrastructural development with a port Logistics Center located in Wuhan,
Hubei Province of China. Situated in the middle reaches of the Yangtze River, Wuhan Newport is a large infrastructure development
project implemented under China's latest "One Belt One Road" initiative and is believed to be strategically positioned
in the anticipated "Pilot Free Trade Zone" of the Wuhan Port, a crucial trading window among China, the Middle East and
Europe. To be fully developed upon completion, within the Logistics Center, there will be six operating zones: including port operation
area, warehouse and distribution area, cold chain logistics area, rail cargo loading area, exhibition area and business related
area. The logistics center is also expected to provide a number of shipping berths for cargo ships of various sizes. Wuhan Newport
is expected to provide domestic and foreign businesses a direct access to the Pilot Free Trade Zone in Wuhan. The project will
include commercial buildings, professional logistic supply chain centers, direct access to the Yangtze River, Wuhan-Xinjiang-Europe
Railway and ground transportation, storage and processing centers, and IT supporting services, among others.
Plan of Operation
Our Logistics Center is an extensive complex
located in Wuhan, the capital of the Hubei Province of China, a major transportation hub city with access to numerous railways,
roads and expressways passing through the city and connecting to major cities in China, as well as other international centers
of commerce and business.
The Logistics Center is expected to occupy
approximately 1,918,000 square meters, for which the construction and development are expected to be completed in three phases
in three years and reach its target maximum annual profit by the end of 2021 assuming the entire funding required for construction
of the Logistics Center of $1.03 billion is in place by 2020 and the Logistics Center is in operation according to our business
plan. The following table illustrates the timeframe of our investment and construction progress.
|
Time
|
|
Phase of
Investment/Construction
|
|
Percentage of Total
Anticipated
Investment/
Construction (1)
|
|
|
Production
Capacity (2)
|
|
|
1
st
Year (2017)
|
|
1
st
Phase
|
|
|
40
|
%
|
|
|
30
|
%
|
|
2
nd
Year (2018)
|
|
2
nd
Phase
|
|
|
70
|
%
|
|
|
40
|
%
|
|
3
rd
Year (2019)
|
|
3
rd
Phase
|
|
|
100
|
%
|
|
|
60
|
%
|
|
4
th
Year (2020)
|
|
Completed
|
|
|
100
|
%
|
|
|
75
|
%
|
|
5
th
Year (2021)
|
|
Completed
|
|
|
100
|
%
|
|
|
100
|
%
|
|
(1)
|
The percentage of construction in a certain phase reflects the anticipated contribution of the investment in such particular phase. For example, contribution of 40% of the total investment in Phase 1 will lead to construction of 40% of total value of the Wuhan Project.
|
|
(2)
|
The percentage of Production Capacity shows the fraction of the target maximum annual profit to be earned under the full operation of the Wuhan Project. We target to reach its maximum annual profit by the end of 2021 assuming the entire funding required for construction of the Logistics Center of $1.03 billion is in place by 2020 and the Logistics Center is in operation according to our business plan.
|
The Logistics Center is located within the
Wuhan Newport Yangluo Port, on the upper stream of the Yangtze River, and close to the northern base of Wuhan Iron and Steel, China's
first mega-sized iron and steel production complex. The Logistics Center is expected to include a port terminal that will be located
approximately 26.5km from the Wuhan Guan and 5.5km from the Yangluo Yangtze River Bridge. The operation area of the port is expected
to consist of a riverbank of 1,039 meters with eight 5,000-to-10,000-ton berths, two of which are multi-purpose berths and the
other six are general cargo berths. It is designed to be able to handle up to 5,000,000 tons of cargo annually, including up to
100,000 TEU for annual container throughput (including 20,000 TEU in freezers areas), 1,000,000 tons of iron and steel and 3,000,000
tons of general cargo.
Within the Logistics Center, functional areas
will be divided into six operating zones: a port operation area, a warehouse and distribution area, a cold chain supply logistics
area, a rail cargo loading area, an exhibition area and a business related area. The Logistics Center will also be complemented
with container storage areas, multi-functional areas, general storage areas, multi-functional warehouse and infrastructural development,
including new roads, gas stations, parking areas, gas and water pipes, electricity lines and all other facilities and equipment
to operate the Logistics Center.
Aside from being situated in the Wuhan Yangluo
Comprehensive Bonded Zone, the Yangluo development area is amongst the third group of China’s Pilot Free Trade Zone (FTZ)
applicants to submit FTZ applications to the State Council. As of the date of this prospectus, approvals have been granted to Shanghai,
Tianjin, Guangdong and Fujian. Enterprises within the approved free-trade zones are typically entitled to a series of favorable
regulations and policies that could help the businesses grow and succeed. However, we can provide no assurance at this point that
the FTZ application will in fact be approved.
Wuhan Newport has signed a twenty-year lease
agreement, the maximum number of years permitted by the applicable PRC laws, and with rights to renew at its sole discretion, effective
April 27, 2015 to lease approximately 1,200,000 square meters of land for building logistics warehouses in support of the Logistics
Center. The warehouses are expected to comprise of port terminal zones, warehouse logistics zones, cold chain supply zones and
railroad loading and unloading zones. The warehouses will connect the port terminal along the Yangtze River and the railway leading
to Europe, satisfying the requirement of China’s latest “One Belt, One Road” initiative. It will also be able
to support large logistics companies in Wuhan and other nearby provinces, which will rent the warehouses, terminals and offices
within the Logistics Center
Factors Affecting our Operating Results
Growth of China’s Economy
.
We operate and derive all of our revenue from operations in China. Economic conditions in China, therefore, affect our operations,
including the demand for our properties and services and the availability and prices of land maintenance among other expenses.
China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 7.4% in 2014, 6.9% in 2015
and 6.7% in 2016. China is expected to experience continued growth in all areas of investment and consumption. However,
if the Chinese economy were to become significantly affected by a negative stimulus, China’s growth rate would likely to
fall and our revenue could correspondingly decline.
Government Regulations.
Our
business and results of operations are subject to PRC government policies and regulations regarding the following:
|
|
●
|
Land Use Right
— According to the Land Administration Law of the PRC and Interim Regulations of the People’s Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas, individuals and companies are permitted to acquire rights to use urban land or land use rights for specific purposes, including residential, industrial and commercial purposes. We acquire land use rights from local governments and/or other entities for development of residential and commercial real estate projects. We do not have ownership over these lands.
|
|
|
|
|
|
|
●
|
Land Development
— According to the Urban Real Estate Development and Operation Administration Regulation, the Urban Real Estate Development and Operation Administration Rules of Hebei Province promulgated by the government of the Hebei Province, and the Real Estate Development Enterprise Qualification Administration Regulation, a real estate development enterprise shall obtain a Real Estate Development Enterprise Qualification Certificate. We obtained the related certificates and seek to ensure that each phase of our projects complies with our certificates.
|
|
|
|
|
|
|
●
|
Project Financing
— According to the Land Administration Law and the Property Law of the PRC, the land use rights, residential housing and other buildings still in process of construction may be pledged and mortgaged. From time to time, we pledge and mortgage our land use rights and real properties to lenders in order to obtain project financing.
|
Interest Rate and Inflation Challenges.
We
are subject to market risks due to fluctuations in interest rates and refinancing of mid-term debt. Higher interest rates may also
affect our revenues, gross profits and our ability to raise and service debt and to finance our developments. Inflation could result
in increases in the price of raw materials and labor costs. We do not believe that inflation or deflation has affected
our business materially.
Acquisitions of Land Use Rights and Associated
Costs
.
We acquire land use rights for development through the governmental auction process and by obtaining land use rights
permits from third parties through negotiation, acquisition of entities, co-development or other joint venture arrangements. Our
ability to secure sufficient financing for land use rights acquisitions and property development depends on internal cash flows
in addition to lenders’ perceptions of our credit reliability, market conditions in the capital markets, investors’
perception of our securities, the PRC economy and the PRC government regulations that affect the availability and cost of financing
real estate companies or property purchasers.
Critical Accounting Estimates
As discussed in Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2016, we consider our estimates on revenue recognition, impairment of long-lived assets, and real estate property
refunds and compensation payables to be the most critical in understanding the judgments that are involved in preparing our consolidated
financial statements. There have been no significant changes to these estimates in the year ended December 31, 2016.
Results of Operations
Comparison of Years Ended December 31, 2016 and 2015
The following table
sets forth the results of our operations for the periods indicated in U.S. dollars
|
|
|
For the years ended
December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Costs of revenue
|
|
|
-
|
|
|
|
-
|
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
$
|
2,348
|
|
|
$
|
11,577
|
|
|
General and administrative expenses
|
|
|
5,446,175
|
|
|
|
4,547,646
|
|
|
Total operating expenses
|
|
|
5,448,523
|
|
|
|
4,559,223
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,448,523
|
)
|
|
|
(4,559,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
3,587
|
|
|
|
868
|
|
|
Other expenses
|
|
|
(174
|
)
|
|
|
(3,231
|
)
|
|
Interest income
|
|
|
229
|
|
|
|
55
|
|
|
Interest expenses
|
|
|
(8,424,794
|
)
|
|
|
(3,199,031
|
)
|
|
Total other expenses
|
|
|
(8,421,152
|
)
|
|
|
(3,201,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(13,869,675
|
)
|
|
|
(7,760,562
|
)
|
|
Income taxes expense
|
|
|
1,143,595
|
|
|
|
1,378,700
|
|
|
Net loss
|
|
$
|
(12,726,080
|
)
|
|
$
|
(6,381,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(19,227,596
|
)
|
|
|
(6,649,917
|
)
|
|
Comprehensive loss
|
|
$
|
(31,953,676
|
)
|
|
$
|
(13,031,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
177,459,678
|
|
|
|
151,682,554
|
|
Revenue.
We did not generate any revenue from the sales
of real estate property for the years ended December 31, 2016 and 2015. In addition, since our Logistics Center is still in its
development stage and therefore is not yet in operation, we have not started providing any logistics service within our port terminal
and have not generated any sales from providing such services.
Cost of Revenue.
For the years ended December 31, 2016 and 2015,
our cost of goods sold was $0, respectively.
Gross Profit.
Our gross margin was $0 for the years ended
December 31, 2016 and 2015, respectively.
Selling expenses.
Selling expenses were $2,348 for the year ended
December 31, 2016, compared to $11,577 for the year ended December 31, 2015, a decrease of $9,229. The decrease is primarily
due to the decrease of marketing expenses.
General and administrative expenses
.
Our general and administrative expenses consist
of salaries, office expenses, utilities, business travel, amortization expenses (including legal expenses, accounting expenses
and other professional service expenses) and stock compensation. General and administrative expenses were $5,446,175 for
the year ended December 31, 2016, compared to $4,547,646 for the year ended December 31, 2015, an increase of $898,529.
The significant increase is primarily due to the increase of expenses related to professional services.
Loss from operations.
Operating loss was $5,448,523 for the year
ended December 31, 2016, compared to operating loss of $4,559,223 for the year ended December 31, 2015, an increase of $889,300.
The significant increase is primarily due to the increase of operations expenses relating to general and administrative expenses.
Other expenses.
Other expenses were $8,421,152 for the year
ended December 31, 2016, compared to $3,201,339 for the year ended December 31, 2015. The significant increase in other expenses
is mainly attributable to the interest of convertible bond issued on December 19, 2015. Our interest income and expenses were $229
and $8,424,794, respectively, for the year ended December 31, 2016, compared to interest income and expenses of $55 and $3,199,031,
respectively, for year ended December 31, 2015. Our other income and expenses were $3,587 and $174, respectively, for the year
ended December 31, 2016, compared to other income and expenses of $868 and $3,231, respectively, for the year ended December 31,
2015.
Income tax.
We received an income tax benefit of $1,143,595
for the year ended December 31, 2016, compared to $1,378,700 for the year ended December 31, 2015. The slight decrease is primarily
due to the decrease of net loss incurred from Wuhan Newport.
Net loss.
Our net loss from operations for the year ended
December 31, 2016 was $12,726,080, compared to net loss of $6,381,862 for the year ended December 31, 2015, an increase in net
loss of $6,344,218. This increase is primarily due to significant increase is primarily due to the increase of expenses related
to professional services, the increase of operations expenses relating to general and administrative expenses, and the interest
of convertible bond issued on December 19, 2015.
Foreign currency translation.
Our consolidated financial statements are expressed
in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated
at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the
period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating
the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency
translation loss for the year ended December 31, 2016 was $19,227,596, compared to a foreign currency translation loss of $6,649,917
for the year ended December 31, 2015, an increase of $12,577,679. The significant decrease of foreign currency translation is mainly
attributable to the depreciation of RMB against U.S. dollars.
Net loss available to common stockholders.
Net loss available to our common stockholders
was $0.07 per share, for the year ended December 31, 2016, compared to net loss of $0.04 per share for the year ended December
31, 2015.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the
years indicated:
|
|
|
Years Ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net Cash Used in Operating Activities
|
|
$
|
(2,135,205
|
)
|
|
$
|
(4,735,142
|
)
|
|
Net Cash (Used in) Provided by Investing Activities
|
|
$
|
(1,851
|
)
|
|
$
|
494,179
|
|
|
Net Cash Provided by Financing Activities
|
|
$
|
1,688,769
|
|
|
$
|
4,698,162
|
|
We had a balance of cash and cash equivalents
of $63,092 as of December 31, 2016. We have historically funded our working capital needs through advance payments from customers,
bank borrowings, and capital from stockholders. Our working capital requirements are influenced by the state and level of our operations,
and the timing of capital needed for projects.
Operating Activities
.
Net cash
used in operating activities was $2,135,205 for the year ended December 31, 2016, compared to net cash used in operating activities
of $4,735,142 for the year ended December 31, 2015, a decrease of $2,599,937. The decrease in net cash used in operating activities
was primarily contributed by the following factors:
|
|
●
|
Share-based compensation expense contributed $2,014,664 cash inflow for the year ended December 31, 2016. In the same period of 2015, share-based compensation expense contributed $1,808,867 cash inflow, which led to a decrease of $205,797 in net cash outflow.
|
|
|
|
|
|
|
●
|
Changes in real estate properties and land lots under development provided $367,826 cash outflow for the year ended December 31, 2016, compared to changes in real estate properties and land lots under development contributed $778,977 cash outflow in the same period of 2015, which led to a decrease of $411,151 in net cash outflow.
|
|
|
|
|
|
|
●
|
Changes in accounts payable provided $7,553 cash outflow for the year ended December 31, 2016, compared to $nil cash outflow for the year ended December 31, 2015, which lead to an increase of $7,553 in net cash outflow from operating activities.
|
|
|
●
|
Changes in other payables and accrued liabilities provided $8,559,773 cash inflow for the year ended December 31, 2016, compared other payables and accrued liabilities contributed $2,257,051 cash inflow for the year ended December 31, 2015, which led to a decrease of $6,302,722 in net cash outflow.
|
|
|
|
|
|
|
●
|
We have net loss of $12,726,080 for the year ended December 31, 2016, compared to net loss of $6,381,862 for the year ended December 31, 2015, which led to an increase of $6,344,218 in net cash outflow.
|
Investing Activities.
Net
cash used in investing activities was $1,851 for the year ended December 31, 2016, compared to $494,179 provided by investing activities
for the year ended December 31, 2015, representing an increase of $496,030 in cash outflow. This increase is primarily due
to the effect of share exchange.
Financing Activities
.
Net cash
provided by financing activities was $1,688,769 for the year ended December 31, 2016, compared to net cash of $4,698,162 provided
by financing activities for the year ended December 31, 2015, representing a decrease of $3,009,393 in cash inflow. The decrease
was primarily due to advances of $2,201,144 from related parties in the year ended December 31, 2016, compared to $4,874,761 for
the year ended December 31, 2015.
As shown in our financial statements, we have
negative cash flows from operations, sustained recurring losses for a number of years and currently we are not generating revenues.
Over the past years, the Company has been funded through a combination of bank loans and advances from shareholders. On January
29, 2016, we received an undertaking commitment letter provided by our majority shareholder who is willing to provide sufficient
funding on an as-needed basis. In addition, the Company plans to dispose of the existing developed real estate properties with
market value of approximately $42 million when the Company needs cash flows. The Company believes that, as a result of these, it
currently has sufficient cash and financing commitments to meet its funding requirements for a reasonable period of time.
Firm Commitment Offering
The Company has entered into an investment
banking agreement with Boustead Securities, LLC., who is acting as representative of the underwriters of a $40,000,000 firm commitment
offering for the Company. The underwriters will be committed severally to purchase all of the shares of common stock offered by
us. The obligations of the underwriters may be terminated upon the occurrence of certain events to be specified in the underwriting
agreement. Furthermore, pursuant to the proposed underwriting agreement, the underwriters’ several obligations will be subject
to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters
of officers’ certificates and legal opinions. We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect
thereof. The underwriters propose to offer the shares of common stock offered by us to the public at the registered direct offering
price to be determined. There is no assurance that this offering will close or that the Company will receive the $40,000,000.
Off-Balance Sheet Arrangements
On January 29, 2016, we received an undertaking
commitment letter provided by the our majority shareholder who is willing to provide sufficient funding on an as-needed basis.
We believe that the financial commitment provided by our majority shareholder could provide our company with sufficient capital
resources to meet our capital needs for a reasonable period of time.
Critical Accounting Policies
We prepare our consolidated financial statements
in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial
statements require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during
the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and
judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results
may differ from these estimates as a result of different assumptions or conditions.
The methods, estimates, and judgment we use
in applying our most critical accounting policies have a significant impact on the results we report in our financial statements.
The SEC has defined “critical accounting policies” as those accounting policies that are most important to the portrayal
of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of
the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates relate
to the fair value of warrant liabilities, impairment of long-lived assets, commitments and contingencies, and revenue recognition.
We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require
us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period. For additional information see Note 2, “Summary of Significant
Accounting Policies” in the notes to our consolidated financial statements appearing elsewhere in this report. Although we
believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results
may differ significantly from these estimates.
Internal Control
As detailed in the Item 9A in this Report,
we have determined that as of December 31, 2016, the Company’s internal control over financial reporting was not effective.
The circumstances that gave rise to such ineffectiveness were as follow:
Lack of sufficient full-time accounting staff
in our accounting department that have experience and knowledge in identifying and resolving complex accounting issues under U.S.
Generally Accepted Accounting Principles (“GAAP”); The weakness resulted in the restatement of consolidated balance
sheet and consolidated income statement to treat an extinguishment transaction between related entities as a capital transaction
in the Form 10-K for the year ended December 31, 2015, and such weakness had not been fully remediated as of December 31, 2016;
and
Lack of sufficient accounting personnel which
would provide segregation of duties within our internal control procedures to support the accurate reporting of our financial results;
The weakness resulted in the amendment and additions of the disclosure of real estate properties and land lots under development
in the Form 10-K for the year ended December 31, 2015, and such weakness had not been fully remediated as of December 31, 2016.
PART III
Item 9A. Controls and Procedures.
|
|
1.
|
Evaluation of Disclosure Controls and Procedures
|
We maintain "disclosure controls and procedures,"
as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are
designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures
are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions.
Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures
as of December 31, 2016 and concluded that the disclosure controls and procedures were not effective due to the material weakness
in our internal control over financial reporting identified below.
|
|
2.
|
Internal Control over Financial Reporting
|
|
|
(a)
|
Management's Annual Report on Internal Control Over Financial Reporting
|
The management of the Company is responsible
for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system
was designed to, in general, provide reasonable assurance to the Company’s management and Board regarding the preparation
and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Our management assessed the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2016. The framework used by management in making
that assessment was the criteria set forth in the document entitled “
Internal Control – Integrated Framework (2013)
”
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded
that our internal control over financial reporting as of December 31, 2016 was not effective.
A material weakness is a deficiency or a combination
of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Management identified the following material
weaknesses in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2016:
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Lack of sufficient full-time accounting staff in our accounting department that have experience and knowledge in identifying and resolving complex accounting issues under U.S. Generally Accepted Accounting Principles (“GAAP”); The weakness resulted in the restatement of consolidated balance sheet and consolidated income statement to treat an extinguishment transaction between related entities as a capital transaction in the Form 10-K for the year ended December 31, 2015, and such weakness had not been fully remediated as of December 31, 2016; and
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Lack of sufficient accounting personnel which would provide segregation of duties within our internal control procedures to support the accurate reporting of our financial results. The weakness resulted in the amendment and additions of the disclosure of real estate properties and land lots under development in the Form 10-K for the year ended December 31, 2015, and such weakness had not been fully remediated as of December 31, 2016.
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(b)
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Attestation Report of the Independent Registered Public Accounting Firm
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Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Stockholders
of
Yangtze River Development Limited
We have audited Yangtze River Development
Limited’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control
– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Yangtze River Development Limited’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A,
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that
a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely
basis. Certain control deficiencies existed in the internal control over financial reporting as of December 31, 2016, including
lack of adequate knowledge of US GAAP and SEC rules for identifying and resolving complex accounting issues, and supporting the
accurate reporting of the Company’s financial results. These material weaknesses existed as of December 31, 2015 and had
not yet been fully remediated as of December 31, 2016. These material weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect our report dated
March 9, 2017 on those financial statements.
In our opinion, Yangtze River Development
Limited did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016,
based on the COSO criteria.
We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Yangtze River
Development Limited and its subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income and
comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2016
and our report dated March 9, 2017 expressed an unqualified opinion thereon.
/s/ Centurion ZD CPA Ltd. (fka DCAW (CPA) Ltd. as successor
to Dominic K.F. Chan & Co.)
Certified Public Accountants
Hong Kong, April 28, 2017
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(c)
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Remediation Efforts to Address Significant Deficiencies
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We intend to take the following actions to
address the material weaknesses described above:
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Our Nomination Committee of the Board plans to increase our professional accounting and finance personnel to manage our Company’s U.S. GAAP practice and SEC reporting compliance. In specific, the Nomination Committee is actively looking for a new CFO who is capable of and experienced at GAAP financial reporting, corporate governance and internal control management. Such nomination is expected to take place and approved by the Board by the end of the second quarter of 2017;
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Our Audit Committee of the Board will provide further necessary oversight on and training for accounting and finance personnel, so that they are well versed in SEC regulations. We expect to provide it to our staff during the second quarter of 2017;
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Our Audit Committee as well as the Board will perform a thorough review of the processes and procedures used in the Company’s SEC reporting compliance. The review of the processes and procedures shall be carried out during the second quarter of 2017.
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Any
actions we have taken or may take to remediate these material weaknesses are subject to continued management review supported
by testing, as well as oversight by the Audit Committee of our Board. We cannot assure you that these material weaknesses will
not occur in the future and that we will be able to remediate such weaknesses in a timely manner, which could impair our ability
to accurately and timely report our financial position, results of operations or cash flows.
Centurion ZD CPA Ltd., the independent registered public accounting firm that audited our Consolidated Financial Statements included
in the Annual Report on Form 10-K, audited the effectiveness of our internal control over financial reporting as
of December 31, 2016. Centurion ZD CPA Ltd. has issued their report which is included elsewhere herein.
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(d)
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Changes in Internal Controls over Financial Reporting
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On January 25, 2016, the Board formed and adopted
charters for the Audit Committee, which consists of solely independent directors, and is chaired by Harvey Leibowitz, whom the
Board believes qualifies as an “audit committee financial expert,” as that term is defined in applicable regulations
of the SEC.
Other than above, there were no changes in
our internal controls over financial reporting that occurred during the fourth quarter of the fiscal year ended December 31, 2016
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On January 25, 2016, the Board formed and adopted
charters for the Audit Committee, which consists of solely independent directors and is chaired by Harvey Leibowitz, whom the Board
believes qualifies as an “audit committee financial expert,” as that term is defined in applicable regulations of the
SEC.