Item 1. Business
OUR BUSINESS
Overview
The Company is a holding company whose
primary business operations are conducted through our wholly-owned subsidiaries BVI-ACM and China-ACMH, and our variable interest
entities, Xin Ao and its subsidiaries. The Company engages in the production of advanced construction materials for large scale
infrastructure, commercial and residential developments. The Company is primarily focused on engineering, producing, servicing,
delivering and pumping a comprehensive range of advanced ready-mix concrete materials for highly technical, large scale, and environmentally-friendly
construction projects. Ready-mixed concrete products are important building materials that are used in a vast majority of commercial,
residential and public works construction projects. We are committed to conducting our operations with an emphasis on the extensive
use of recycled waste materials, extending product life, the efficient production of our concrete materials with minimal energy
usage, dust and air pollution, and innovative products, methods and practices.
Our Corporate Structure
We own all of the issued and outstanding
capital stock of Xin Ao Construction Materials, Inc., or “BVI-ACM”, a British Virgin Islands corporation, which in
turn owns 100% of the outstanding capital stock of Beijing Ao Hang Construction Materials Technology Co., Ltd., or “China-ACMH”,
a company incorporated under the laws of China. On November 28, 2007, China-ACMH entered into a series of contractual agreements
with Beijing Xin Ao Concrete Group Co., Ltd., or “Xin Ao”, a company incorporated under the laws of China, and its
two shareholders, in which China-ACMH effectively took over management of the business activities of Xin Ao and has the right
to appoint all executives and senior management and the members of the board of directors of Xin Ao. The contractual arrangements
are comprised of a series of agreements, including an Exclusive Technical Consulting and Services Agreement and an Operating Agreement,
through which China-ACMH has the right to advise, consult, manage and operate Xin Ao for an annual fee in the amount of Xin Ao’s
yearly net profits after tax. Additionally, Xin Ao’s shareholders have pledged their rights, titles and equity interest
in Xin Ao as security for China-ACMH to collect technical consulting and services fees provided to China-ACMH through an Equity
Pledge Agreement. In order to further reinforce China-ACMH’s rights to control and operate Xin Ao, Xin Ao’s shareholders
have granted China-ACMH the exclusive right and option to acquire all of their equity interests in Xin Ao through an Option Agreement.
The following chart reflects our organizational structure as
of the date of this report:
Our Corporate History
China Advanced Construction Materials
Group, Inc. was founded as an unincorporated business on September 1, 2005, under the name TJS Wood Flooring, Inc., and became
a C corporation in the State of Delaware on February 15, 2007. On April 29, 2008, we changed our name to China Advanced Construction
Materials Group, Inc. in response to a reverse acquisition transaction with BVI-ACM described below.
On April 29, 2008, we completed a reverse
acquisition transaction with BVI-ACM whereby we issued to the stockholders of BVI-ACM 8,809,583 shares of our common stock in
exchange for all of the issued and outstanding capital stock of BVI-ACM. BVI-ACM thereby became our wholly owned subsidiary and
the former stockholders of BVI-ACM became our controlling stockholders.
On August 1, 2013, we consummated a reincorporation
merger pursuant to which we merged with and into our wholly-owned subsidiary, China Advanced Construction Materials Group, Inc.,
a newly formed Nevada corporation and the surviving entity in the merger, pursuant to the terms and conditions of an Agreement
and Plan of Merger entered into as of August 1, 2013. As a result of the reincorporation the Company is now governed by the laws
of the state of Nevada.
Background and History of BVI-ACM and
China-ACMH
BVI-ACM was established on October 9,
2007, under the laws of British Virgin Islands. The majority shareholders of BVI-ACM are Chinese citizens who own 100% of Xin
Ao, a limited liability company formed under laws of China. BVI-ACM was established as a “special purpose vehicle”
for foreign fund raising for Xin Ao. China State Administration of Foreign Exchange, or SAFE, requires the owners of any Chinese
companies to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as
well as subsequent acquisition matters. On September 29, 2007, BVI-ACM was approved by local Chinese SAFE as a “special
purpose vehicle” offshore company.
On November 23, 2007, BVI-ACM established
a subsidiary, China-ACMH, in China as a wholly owned foreign limited liability company with registered capital of $5 million.
Through China-ACMH and its variable interest entity Xin Ao, we are engaged in producing general ready-mixed concrete, customized
mechanical refining concrete, and some other concrete-related products which are mainly sold in China. On September 20, 2010,
China ACM established a 100% owned subsidiary, Advanced Investment Holdings Co., Inc., or AIH, in the State of Nevada. AIH never
engaged in operations and the Company subsequently dissolved AIH on August 30, 2011.
In March and April 2010, Xin Ao established
five 100% owned subsidiaries in China: Beijing Heng Yuan ZhengKe Technical Consulting Co., Ltd (“Heng Yuan ZhengKe”),
Beijing Hong Sheng An Construction Materials Co., Ltd (“Hong Sheng An”), Beijing Heng Tai Hong Sheng Construction
Materials Co., Ltd (“Heng Tai”), Da Tong Ao Hang Wei Ye Machinery and Equipment Rental Co., Ltd (“Da Tong”)
and Luan Xian HengXin Technology Co., Ltd (“Luan Xian HengXin”). Total registered capital for these five subsidiaries
was approximately $2.1 million (RMB 14 million) and none of these Xin Ao subsidiaries had actual operation. The Company decided
to dissolve these entities between March 2016 and June 2016. As of June 30, 2017, all of these entities have been dissolved.
Our Business
Our concrete sales business is comprised
of the formulation, production and delivery of the Company’s line of C10-C100 concrete mixtures primarily through our current
fixed plant, a ready mix concrete batching plant in Beijing. The ready-mixed concrete sales business engages principally in the
formulation, preparation and delivery of ready-mixed concrete to the worksites of our customers. For this segment of our business,
we procure raw materials, mix them according to our measured mixing formula, ship the final products in mounted transit mixers
to the destination work site, and, for more sophisticated structures, pump the mixture and set it into structural frame molds
as per structural design parameters. The process of delivering and setting the ready mix concrete mixture cannot exceed 90 minutes
because the chemistry of concrete mixture hardens thereafter. The deliverable radius of a concrete mixture from our ready mix
plant in Beijing is approximately 25 kilometers. Traffic conditions would affect the timing and shipment of our concrete mixtures.
Since the 2008 Olympics, there are alternating license plate traffic restrictions on many traffic routes in Beijing to ease traffic
congestion and associated exhaust pollution. Due to the large amounts of working capital required for the acquisition of raw materials
associated for this business segment, a supply shortage or degradation of supplier accounts payable credit terms would pose a
potential risk to our business.
Our principal market, Beijing, has enjoyed
stronger economic growth and a higher demand for construction than other regions of China. As a result, we believe that competitors
will try to expand their sales and build up their distribution networks in our principal market. We anticipate that this trend
will continue and likely accelerate. Increased competition may have a material adverse effect on our financial condition and operation
results.
Our Industry
Our Industry was influenced by the decline
in the macro economy in recent periods. The concrete products industry experienced a slowdown in industry production and economic
growth since September 2011. In 2014, the slowdown in the industry became more obvious month by month, with profit generally being
squeezed by the greater pressure to maintain stable level of production and operation.
China’s average annual GDP growth
remained approximately 10% over the past 31 years. China has become the world’s second largest economy, both in nominal
GDP and Purchasing Power Parity terms, after the United States. In line with this macroeconomic growth, the Chinese construction
and building material industry has grown tremendously.
China is already among the world’s
largest construction materials producers, ranking first in the world’s annual output of cement, flat glass, building ceramic
and ceramic sanitary ware. The construction materials market includes all manufacturers of sand, gravel, aggregates, cement, concrete
and bricks. The market does not include other finished or semi-finished building materials.
Construction Demand in China
According to the Summary of Construction
Outlook in China (the “Summary”), published in August 6, 2013 by the Freedonia Group, an industry research firm, construction
expenditures in China are expected to increase 8.5 percent per year in real terms through 2017. Ongoing urbanization and industrialization,
rising income levels, further population and household growth, and the government’s continuing efforts to expand and upgrade
physical infrastructure in the country will support healthy growth in construction spending.
Construction expenditures in China are
nearly equally split among residential buildings, nonresidential buildings, and nonbuilding structures. Nonbuilding construction
will experience the fastest growth (in real terms) through 2017. The increases will benefit from stated efforts to expand and
upgrade the country’s transportation infrastructure, such as highways network, subway systems in major cities, and several
airports. Utilities construction will also contribute to the expenditures on nonbuilding construction, particularly in rapidly
growing urban areas, as the government continues to expand and improve access to such infrastructure like water supply, sewage
treatment, rubbish disposal, and gas distribution. Further efforts to increase the country’s power generation capacity and
improve electricity transmission networks will also drive spending on nonbuilding construction.
China’s Cement & Concrete
Demand
Demand for cement in China will be driven
by rising, but decelerating, construction expenditures in China. Further advances in cement manufacturing technology are also
expected to stimulate sales by improving the quality of the product, stressing the versatility of certain types of cement with
excellent performance and/or price benefits over other types of cement across a range of construction applications. Regional cement
markets reflect differences in construction expenditures, which in turn are driven by local trends in demographics, industrial
output and economic activity. The cement markets in Northwest and Southwest China are expected to grow at a faster pace, as a
result of the government’s Great Western Development strategy, which aims to promote investment in these areas. Consumption
of cement in Central and Northern China is also expected to exceed the national average, supported by high levels of transportation
infrastructure construction and booming urban markets in Beijing and Tianjin. (Summary of the Freedonia Group’s January
2009 “Cement in China” report from Business Wire).
Residential and non-residential buildings
in China are increasingly requiring much more concrete due to, among other reasons, the short supply of wood. China is currently
the largest consumption market of cement worldwide at over $200 billion annually. At the present rate, it is presumed that China
will continue to be an important player in the global construction materials market for at least the next two decades.
Demand for Ready-Mixed Concrete
Construction contractors are expected
to continuously represent the largest market for cement. Economic downturns or reductions in government funding of infrastructure
projects could significantly reduce our revenues. However, we believe that the ready-mix concrete market exhibits the strongest
growth in the cement industry. Revenues are expected to be received from government regulations banning on-site concrete and mortar
mixing. Demand for cement used in concrete products is expected to be driven by the increasing popularity of precast concrete
with many construction contractors. In addition, the phase-out of clay bricks will heighten demand for concrete blocks. Recognizing
the significant environmental impact created from the large-scale construction activities undertaken in the past few decades,
China’s government implemented Decree #341 in 2004 which bans onsite concrete production in over 200 major cities across
China in order to reduce environmental damage from onsite cement mixing and improve the quality of concrete used in construction.
Our Competitive Strengths
Ready-mixed concrete is a highly versatile
construction material that results from combining coarse and fine aggregates, such as gravel, crushed stone and sand, with water,
various chemical admixtures and cement. We manufacture ready-mixed concrete in variations, which in each instance may reflect
a specific design use. We generally maintain inventory of raw materials for a short period of time to coordinate our daily materials
purchases with the time-sensitive delivery requirements of our customers.
The quality of ready-mixed concrete is
time-sensitive as it becomes difficult to place within hours after mixing. Consequently, the market for a permanently installed
ready-mixed concrete plant is usually limited to an area within certain radius of such plant’s location. We produce ready-mixed
concrete in batches at our plant and use mixer and other trucks to complete the production process, then distribute and deliver
the concrete to the worksites of our customers.
Concrete has many attributes that make
it a highly versatile construction material. In recent years, industry participants have developed various uses for concrete products.
We generally obtain contracts through
local sales and marketing efforts directed at concrete subcontractors, general contractors, property owners and developers, governmental
agencies and home builders.
Our competitors includes a number of state-owned
and large private PRC-based manufacturers and distributors that produce and sell products similar to ours. We compete primarily
on the basis of quality, technological innovation and price. Essentially all contracts on which we bid are awarded through a competitive
bid process with awards often made to the lowest bidder, though other factors such as shorter completion time or prior experiences
are often just as important. Within our markets, we compete with many national, regional and local state-owned and private construction
corporations, some of which have achieved greater market penetration or have greater financial and other resources than us. In
addition, there are a number of large national companies in our industry that could potentially enter into our markets and compete
with us. If we are unable to compete successfully in our markets, our relative market share and profits would be reduced.
We believe that the following competitive
strengths enable us to compete effectively and to capitalize on the remaining market for construction materials in China:
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Large Scale Contractor Relationships.
We have
contracts with major construction contractors which are constructing key infrastructure, commercial and residential projects.
Our sales efforts focus on large-scale projects and large customers which place large recurring orders and raise less credit risk
to us. For the year ended June 30, 2017, five customers accounted for approximately 40% of the Company’s sales and 28% of
the Company’s account receivables as of June 30, 2017. Should we lose these customers in the future and are unable to obtain
additional customers, our revenues will suffer.
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Experienced Management
. The technical knowledge
and business relationships of our management give us the ability to secure major infrastructure projects, increase production
volumes, and implement quality standards and environmentally sensitive policies, and it also provide us with leverage to acquire
less sophisticated operators. If there is any significant turnover in our management, we would lose the institutional knowledge
held by our existing senior management team.
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Innovation Efforts
. We strive to produce the most
technically and scientifically advanced products for our customers hence we maintain close relationships with Tsinghua University,
Xi’an University of Architecture and Technology and Beijing Dongfang Jianyu Institute of Concrete Science &Technology,
which assist us with our research and development activities. During our five year agreement with the Institute, we obtain an
advantageous status over many of our competitors by gaining access to a wide array of resources and knowledge. The Company incurred
research & development expenses of approximately $0.8 million and $0.7 million for the years ended June 30, 2017 and 2016,
respectively.
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Our Growth Strategy
We are committed to enhancing profitability
and cash flows through the following strategies:
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Focusing on High Capacity Utilization.
We intend
to focus on achieving high capacity utilization in order to efficiently operate our plant, by increasing capacity utilization
at existing plant or expanding capacity by building new plants to meet existing contracts and anticipated increase in demand.
We were focused on our capacity utilization at our Beijing-based concrete plant in fiscal year 2016 and 2017. As a result, we
terminated our leased station based on slowing demand for railway construction and the suspension of new and ongoing high speed
railway projects stemming from a changing policy announced by China’s Ministry of Rail and national development and reform
commission.
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Mergers and Acquisitions
. When capital permits,
we intend to capitalize on the challenges that smaller companies are encountering in our industry by acquiring complementary companies
at favorable prices. We believe that buying rather than building capacity is an option that may be attractive to us if replacement
costs are higher than purchase prices. We continue to look into acquiring smaller concrete manufacturers in China as part of our
expansion plans. We have not identified specified targets or entered into any Letters-of-Intent at this time.
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Vertical Integration
. When capital permits, we
plan to acquire smaller companies within the construction industry, develop more material recycling centers, and hire additional
highly qualified employees. In order to accomplish this, we may need to offer additional equity or debt securities. Certain companies
we seek to acquire are suppliers of the raw materials we purchase to manufacture our products. If we do acquire such companies
we will have greater control over our raw material costs.
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Supply Chain Efficiencies and Scale.
We intend
to streamline our supply chain process and leverage our scale.
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New Product Offering
. We plan to produce a lightweight
aggregate concrete for use in projects and to expand product offerings to include pre-cast concrete.
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Our Operations
We provide materials through our ready-mixed
concrete plant in Beijing. We own one concrete plant and its related equipment.
Products
As architectural designs become more complex,
challenging, and modern in scope, the need for technology driven companies to provide high-end specialty concrete mixtures has
rapidly accelerated. Increasing demand for state-of-the-art cement mixtures has spurred our technological innovation and our ability
to provide advanced mixtures of building materials that meet project specific engineering and environmental specifications. We
produce a range of C10 to C100 concrete materials and specialize in an array of specialized ready-mixed concretes tailored to
each project’s technical specifications and environmental standards.
We specialize in “ready-mixed concrete”,
a concrete mixture made at our facility with complete computerized operating systems. Such concrete accounts for nearly three-fourths
of all concrete produced. Ready-mixed concrete is mixed on demand and is shipped to worksites by concrete mixer trucks.
Our ready-mixed concrete products consist
of proportioned mixes we prepare and deliver in an unhardened plastic state for placement and shaping into designed forms at the
worksite. Selecting the optimum mix for a worksite entails determining not only the ingredients with the desired permeability,
strength, appearance and other properties after it hardened, but also the ingredients necessary to achieve a workable consistency
considering the weather and other conditions at the worksite. We believe we can achieve product differentiation for the mixes
we offer because of the variety of mixes we produce, our volume production capacity and our scheduling, delivery and placement
reliability.
We produce ready-mixed concrete by combining
the desired type of cement, other cementitious materials and gravel and crushed stone with water and, typically, one or more admixtures.
These admixtures, such as chemicals, minerals and fibers, determine the usefulness of the product for particular applications.
We use a variety of chemical admixtures
to relieve internal pressure, increase resistance to crack in subfreezing weather, retard the hardening process to make concrete
more workable in hot weather, strengthen concrete by reducing its water content, accelerate the hardening process, reduce the
time required for curing, and facilitate the placement of concrete acquiring low water content.
We frequently use various mineral admixtures
as supplements to cement, which we refer to as cementitious materials, to alter the permeability, strength and other properties
of concrete.
The ready-mixed concrete sector in the
market is growing at a fast rate, largely due to the Chinese government’s implementation of Decree #341 in 2004. This law
bans on-site concrete production in over 200 cities across China, with the goal of reducing environmental damages from onsite
concrete mixing and improving the quality of concrete used in construction. The use of ready-mix concrete minimizes worksite noise,
dirt and congestion, and most additives used in ready-mix concrete are environmentally safe. Our goal is to continue the use of
at least 30% recyclable components in our concrete mixtures.
We are building a comprehensive product
portfolio that serves the diverse needs of our developing customer base and all unique construction and infrastructure projects.
While we mainly specialize in ready-mix concrete formulations from controlled low-strength material to high-strength concrete,
each of them are specifically formulated to meet the needs of each project. We provide both industry standard and highly innovative
products, including:
Common
Industry Mixtures
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Industry
Leading Mixtures
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(Customized
to Project)
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Highly
Technical Blends
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Ready-mixed
Concrete Blends: C10 to C100
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Compound
Admixture Concrete
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Controlled
Low-Strength Material (CLSM)
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Lightweight
Aggregate Concrete
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High-Strength
Concrete with Customized Fibers
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Energy-saving
Phase change thermostat concrete
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Soil
Cement, Unique Foundation Concrete
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C100
High Performance Concrete
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Our Customers
For the fiscal year ended June 30, 2017,
we had one customer, whose sales accounted for more than 10% of our total sales. For the fiscal year ended June 30, 2016, we had
no customer, whose sales accounted for more than 10% of our total sales. Five customers accounted for approximately 40% and 30%
of the Company’s sales for the years ended June 30, 2017 and 2016, respectively. The total accounts receivable from these
customers amounted to approximately $17.9 million and $13.1 million as of June 30, 2017 and 2016, respectively.
Developing New Relationships
Our business will be damaged if project
contracts with the Chinese government, for which we may act as a sub-contractor, are cancelled. Our sales strategy balances these
risks by focusing on building new long-term cooperative relationships with some of China’s top construction companies in
order to enhance our reputation and to enter new markets. Our sales representatives are actively building relationships with the
Chinese government, general contractors, architects, engineers, and other potential sources of new business in target markets.
Our sales efforts are further supported by our executive officers and engineering personnel, who have substantial experience in
the design, formulation and implementation of advanced construction and concrete materials projects.
Our Suppliers
We rely on third party suppliers of the
raw materials to manufacture our products. Our top five suppliers accounted for approximately 48% and 28% of the Company’s
purchases for the years ended June 30, 2017 and 2016, respectively. The total accounts payable to these suppliers amounted to
approximately $1.1 million and $8.5 million as of June 30, 2017 and 2016, respectively.
Sales and Marketing
General contractors typically select their
suppliers of ready-mixed concrete and precast concrete. In large, complex projects, an engineering firm or division within a state
transportation or public works department, may influence the purchasing decision, particularly if the concrete has complicated
design specifications. In connection with large, complex projects and government-funded projects, the general contractor or project
engineer usually awards supply orders on the basis of either direct negotiation or a competitive bidding process. Our marketing
efforts target on general contractors, developers, design engineers, architects and homebuilders whose focus extends beyond the
price of our product to quality, consistency and reducing the in-place cost.
Our marketing efforts are geared toward
advancing China-ACMH as the supplier to build China’s most modern and challenging projects. The Company is constantly seeking
ways to raise its profile and leverage additional publicity. To this end, the Company plans to expand its presence at leading
construction industry events and in periodicals to build up successful reputation. The primary goal is to reinforce the sales
efforts by promoting positive testimonials and successful stories from the Company’s high profile clients and projects.
Our marketing and sales strategy emphasizes on the sale of value-added products and solutions to customers.
Research and Development
Construction materials companies are under
extreme pressure to respond quickly to industrial demands with new designs and product innovations that support rapidly changing
technical demand and regulatory requirements. We devote a substantial amount of attention to the research and development of advanced
construction materials that meet the specific needs of projects while striving to lead the industry in value, materials and processes.
We have sophisticated in-house R&D and testing facilities, a highly technical onsite team, in cooperation with a leading research
institution, experienced management and advisory experts. Our research and development expense was approximately $0.8 million
for the year ended June 30, 2017, as compared to $0.7 million for the year ended June 30, 2016.
University Relationships & Cooperation
Agreements
We have strong relationships with Tsinghua
University and the Xi’an University of Architecture and Technology. We signed a ten-year cooperation agreement with Xi’an
University, a top university in the fields of building and material science research and education, on June 10, 2007, so as to
keep pace with the global advancements of the cement and concrete industries.
Beijing Concrete Institute Partnership
The Beijing Dongfang Jianyu Institute
of Concrete Science & Technology, or Beijing Concrete Institute, has 40 employees, with five senior research fellows, and
15 mid-level researchers. The Institute and its staff have frequently participated and collaborated with national and local government
agencies to establish the following industry standards:
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Specification
For Mix Proportion Design of Ordinary Concrete JGJ55-2000
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Code
for Acceptance of Constructional Quality Of Concrete Structures GB 50204-2002
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Applied
Technical Specification of Mineral Admixtures In Concrete DBJ/T01-64-2002
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Ready-Mixed
Concrete GB/T 14902-2003
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Practice
Code for Application of Ready-Mixed Mortar DBJ 01-99-2005
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Management
Specification of Quality for Ready-Mixed Concrete
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Technical
Requirement for Environmental Labeling Products Ready-Mixed Concrete HJ/T412- 2007
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High
Performance Concrete mineral admixtures; GB/T18736-2012
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Test
method for determining cement density GB/T 208-2014
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Evaluation
for Life Cycle Environment-friendly Assessment of concrete products national standard GB/T XXXX- 20XX
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Compound
admixtures for concrete industry standard JG/T XXXX-20XX
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The
evaluation system on clean production of ready-mixed concrete
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Safety
production management regulation of premixed concrete
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Technical
specifications of waster concrete regeneration, commercial standard
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We have a close association with the Beijing
Concrete Institute and have been able to incorporate many of these research findings into our operations, products, and procedures.
We work closely with the institute and, in return for our sponsorships to multiple research initiatives, we have been granted
exclusive works for the development of the materials used for our existing plant’ regional projects.
We are able to use the Research Findings
and Technical Publication and Procedures of the Beijing Concrete Institute, University of Science and Technology Beijing, Beijing
University of Technology, China Academy of Building Research, China Building Materials Academy in our business, which provides
us with an advantage over many of our competitors. Because of our contracts with the institutes, our competitors are unable to
commercially utilize the findings. Some of these findings include:
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Research
on Compound Admixture HPC; 3rd Class Award for China Building Materials Science & Technology Progress.
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Research
and Application of C100 HPC; 3rd Class Award for Beijing Science & Technology Progress.
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Research
on pumping Light Aggregate Concrete; Innovation Award for China Building Materials Science& Technology.
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Research
and Application of Green (nontoxic) HPC; First Prize for Beijing Science & Technology Progress.
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Construction
Technology of HPC for the Capital International Airport.
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Research
on Production and Construction Technology of Phase Change Energy-saving Thermostat Concrete and Mortar.
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Polycarboxylate
Series High Performance Water Reducing Agent Compositing Technique.
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State
Swimming Center for Concrete Cracking Control Technology.
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Research
on construction waste recycled materials in concrete; Through the identification of the scientific and technological achievements
with China Building Materials Science& Technology Progress.
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Research
on the application of tailings waste rocks in the concrete. Through the scientific and technological achievements identification
by China Building Materials Science & Technology.
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The
research and application of alkali-free & high performance accelerator on concrete; Through the scientific and technological
achievement identification by China Building Materials Science & Technology.
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In addition, we collaborate closely with
the institute and its executives who play a strong role in recommending industry standards, advising on major infrastructure developments,
and creating and maintaining strong connections with leading developers, construction companies, and governmental officials.
Successful Innovations
Some of our advanced products and processes
are developed through our relationships with research institutes and universities, including:
C100 High Performance Concrete
High Strength Concrete is often defined
as concrete with a compressive strength greater than 6000 psi (41 MPa). The primary difference between high-strength concrete
and normal-strength concrete is the compressive strength that represent the maximum resistance of a concrete sample to applied
pressure. Manufacturing high-strength concrete involves making optimal use of the basic ingredients that constitute normal-strength
concrete.
Through our collaborative efforts, we
have developed a high performance concrete which can be produced at an impermeable grade above P35, and can be used as self-waterproofing
concrete for structural engineering, as the water-cement (W/C) ratio and carbonized shrinking is minimal and the structure is
close-grained.
Only a limited number of corporations
in the Beijing are equipped with the expertise to produce C100 High Performance Concrete.
Compound Admixture Concrete
This compound mineral mixture is a composite
of coal powder, mineral powder and mineral activators blended to specific proportions. This mixture improves activity, filling,
and super-additive effects of the concrete and also improves the compatibility between cement and aggregate.
Lightweight Aggregate Concrete &
Innovative Pumping Technology
This procedure involves a pumping technology
of lightweight aggregate. It is a pretreatment method of lightweight aggregate. Setting appropriate times and pressure, lightweight
aggregate will reach an appropriate saturation state under pressure once it is put into a custom designed sealed pressure vessel.
Lightweight aggregate concrete was prepared through the above pretreatment method, and would dry quicker under pumping pressure
without losing consistency. Accordingly, lightweight aggregate concrete will be easily pumped when applied which shorten the construction
time.
Energy-saving Technologies of Phase
Change Thermostat Concrete
Energy conservation concrete may adjust
and reflect process temperature, which would solve cracking problem brought about by cement heat of hydration in large-scale concrete
pours.
Polycarboxylate Series High Performance
Water Reducing Agent Compositing Technique
The research and production of water reducing
admixture would improve performance while lowering pollution and environmental impact. Super plasticizer Polycarboxylate series
which reduces water requirements is an attractive additive in that it enables high strength concrete, super-strength concrete,
high fluidity and super plasticizer concrete, and self-defense concrete. The water reduction of Polycarboxylate may reach 20%
to 25%, higher than the current industry standard -- the Naphthaline water reducing agent. The cost of the water reducing agent
is highly competitive, as it may replace Naphthaline to be used for high strength and high performance concrete production.
Application of Reused Water in Concrete
The re-use of waste water of a concrete
plant to mix concrete is significant as it can reduce production costs, minimize fresh water usage and introduce an efficient
approach to address industrial waste. The practical application of this effort is a further step towards the goal of minimal pollution
and emissions.
Our Competition
Our principal market, Beijing, has enjoyed
stronger economic growth and a higher demand for construction than other regions of China. As a result, we believe that competitors
will try to expand their sales and build up their distribution networks in Beijing. Our future success depends on our ability
to establish and maintain a competitive position in the marketplace.
We compete primarily on the basis of
quality, technological innovation and price. Our main competitors include Beijing Construction Engineering Group, BBMG Group
Co., LTD, Beijing Uni-Construction Group., Jidong Concrete Group, Essentially all of the contracts we bid on are awarded
through a competitive bid process with awards generally made to the lowest bidder, though other factors such as shorter
completion time or prior experiences are often just as important. Within our markets, we compete with many national, regional
and local construction corporations. Some of these competitors have achieved greater market penetration or have greater
financial and other resources than us. In addition, we compete with a number of state-owned enterprises, which have
significantly greater financial resources and competitive advantage than us.
There are approximately140 concrete mixture
stations in the Beijing area. The concrete production industry is highly segmented, with no single supplier having greater than
a 10% market share.
Intellectual Property
We currently own the following intellectual
property rights:
Name
|
|
Patent
No.
|
|
Duration
|
|
Patent
Owner
|
An ultra-fine powder and its
preparation method active regeneration
|
|
ZL 2013 1 0070164.7
|
|
July 9, 2014-
July 8, 2034
|
|
Xin Ao
|
A Polycarboxylate and preparation
method used recycled aggregate concrete
|
|
ZL 2013 1 0072014.X
|
|
January 1, 2014-
December 31, 2034
|
|
Xin Ao
|
An early strength of recycled
aggregate concrete superplasticizer
|
|
ZL 2013 1 0072015.4
|
|
April 9, 2014-
April 8, 2034
|
|
Xin Ao
|
Environmental Matters
We are obliged to comply with environmental
protection laws and regulations promulgated by the Ministry of Construction and the State Environmental Protection Administration.
Some specific environmental regulations require sealed transportation of dust materials and final products, closed storage of
sand and gravel, as well as reduction of noise and dust pollution on worksites and encouragement of the use of waste materials.
The governmental regulatory authorities conduct periodic inspections. We have met all the requirements in the past inspections.
We are one of the 10 companies in the industry that have been awarded the honor of “Green Concrete Producer” by the
PRC government.
Regulation
The company has been in compliance with
all registrations and requirements for the issuance and maintenance of all licenses and certificates required by the applicable
governing authorities, including the Ministry of Construction and the Beijing Administration of Industry & Commerce. The Ministry
of Construction awards Level II and Level III qualifications to concrete producers in the PRC construction industry, based on
criteria such as production capacity, technical qualification, registered capital and capital equipment, as well as performance
on their past projects. Level II companies are licensed to produce concrete of all strength levels as well as special concretes,
and Level III producers are licensed to produce concrete with strength level C60 and below. We are currently a Level II concrete
producer.
Additionally, to make improvements at
our currently existing plant, we do not need to apply for regulatory approval. However, in order to build new concrete plants,
we need to (i) apply for a business license from the local Administration of Industry and Commerce, (ii) receive environmental
approval from the local Environmental Protection Bureau in the relevant district area, and (iii) apply for an Industry Qualification
Certificate from the local Municipal Construction Committee. The time estimated to receive each of these approvals is approximately
one month. In the past, we have not been rejected by any of these three regulators for approval.
Our Labor Force
As of June 30, 2017, we employed 322 full-time
employees. The following table sets forth the number of our full-time employees by function as of June 30, 2017.
Employees/Independent Contractors and
their Functions
Management & Administrative Staff
|
|
|
75
|
|
|
|
23.29
|
%
|
Sales
|
|
|
24
|
|
|
|
7.45
|
%
|
Technical & Engineering Staff
|
|
|
31
|
|
|
|
9.63
|
%
|
Production Staff
|
|
|
31
|
|
|
|
9.63
|
%
|
Drivers & Heavy Equipment Operators
|
|
|
79
|
|
|
|
24.53
|
%
|
Sub-Total
|
|
|
240
|
|
|
|
74.53
|
%
|
Independent Contractors
|
|
|
82
|
|
|
|
25.47
|
%
|
Total
|
|
|
322
|
|
|
|
100.00
|
%
|
As required by applicable PRC law, we
have entered into employment contracts with all our officers, managers and employees. We believe that we maintain a satisfactory
working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting
staff.
In addition, we are required by PRC law
to cover employees in China with various types of social insurance and believe that we are in material compliance with the relevant
laws.
Insurance
We believe our insurance coverage is customary
and standard for companies of comparable size in comparable industries in China.
Restatement and Independent Investigation
On October 6, 2018, the Audit
Committee of the Board of Directors of the Company, after consultation with the Company’s then independent registered
public accounting firm, Friedman LLP (“Friedman”) concluded, that the Company’s audited financial
statements at and for the period ended June 30, 2017 contained in the Company's Annual Reports on Form 10-K originally filed
with the SEC on September 28, 2018 as well as the unaudited financial statements at and for the periods ended March 31, 2018,
December 31, 2017 and September 28, 2017 contained in the Company’s Quarterly Reports on Form 10-Q originally filed on
November 15, 2017, February 13, 2018 and May 15, 2018, respectively, should no longer be relied upon. The Company’s
review of the above mentioned filings revealed that the financial statements in such filings contained errors primarily as a
result of omission of certain contingencies.
As a result of such review, the Company has decided to restate the financial statement for the fiscal
year ended June 30,2017 as well as those for the fiscal quarters ended March 31, 2018, December 31, 2017 and September 28, 2017.
As a result of the errors described
above, management has concluded that the Company’s internal control over financial reporting and its disclosure controls
and procedures were not effective as of the ends of each of the applicable restatement periods.
In connection with above finding, the
Audit Committee commenced an independent investigation into the reasons that led to the Company’s conclusion that the previously
filed financials should no longer be relied upon. Specially, the Audit Committee engaged independent investigation team to investigate
circumstances surrounding errors in Company’s financial statements, which primarily resulted from the omission of certain
contingent liabilities. The investigation concluded in mid-November 2018. The investigation team found several reasons that appear
to have caused, or contributed to, the failures to promptly identify and disclose the legal proceedings and contingencies, including,
1) the Head of the Legal Department’s significant lack of understanding of the important of timely disclosure of legal proceedings
and the Legal Department’s problematic decision-making process with regard to reporting of legal proceedings; 2) the Company’s
lack of accounting personnel trained in U.S. GAAP; 3) the Company’s need for a full-time CFO; 4) the ongoing lack of communication
and coordination between executive management and the various departments within the Company; and 5) the Company’s failures
to timely address significant deficiency and material weaknesses in the Company’s internal control over financial reporting.
As of the date of this Amended 10-K,
the Company is in the process of conducting comprehensive review of the issues identified by the investigation team and intends
to take all remedial measures recommended by the Audit Committee within its resources to cure the material weaknesses in its internal
and disclosure control procedure.
Matters relating to or arising from
the Audit Committee investigation and the associated material weaknesses identified in our internal control over financial reporting,
including adverse publicity, have caused us to incur significant legal, accounting and other professional fees and other costs,
have exposed us to greater risks associated with other civil litigation, regulatory proceedings and government enforcement actions,
have diverted resources and attention that would otherwise be directed toward our operations and implementation of our business
strategy and may have impacted our ability to attract and retain customers, employees and vendors.
Item 1A. Risk Factors
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks described below, together with all of the other information included
in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition
or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all
or part of your investment.
RISKS RELATED TO OUR BUSINESS
Our business is subject to the risk
of supplier concentration.
Our top five suppliers provide approximately
47.5% of the sourcing of the raw materials for our concrete production business for the year ended June 30, 2017. As a result
of this concentration in our supply chain, our business and operations would be negatively affected if any of our key suppliers
were to experience significant disruption affecting the price, quality, availability or timely delivery of their products. The
partial or complete loss of one of these suppliers, or a significant adverse change in our relationship with any of these suppliers,
could result in lost revenue, added costs and distribution delays that could harm our business and customer relationships. In
addition, concentration in our supply chain can exacerbate our exposure to risks associated with the termination by key suppliers
of our distribution agreements or any adverse change in the terms of such agreements, which could have an adverse impact on our
revenues and profitability.
We may experience major accidents
in the course of our operations, which may cause significant property damage and personal injuries.
Significant industry-related accidents
and natural disasters may cause interruptions to various parts of our operations, or could result in property or environmental
damage, increase in operating expenses or loss of revenue. The occurrence of such accidents and the resulting consequences may
not be covered adequately, or at all, by the insurance policies we carry. In accordance with customary practice in China, we do
not carry any business interruption insurance or third party liability insurance for personal injury or environmental damage arising
from accidents on our property or relating to our operations other than our automobiles. Losses or payments incurred may have
a material adverse effect on our operating performance if such losses or payments are not fully insured.
Our planned expansion and technical
improvement projects could be delayed or adversely affected by, among other things, failures to receive regulatory approvals,
difficulties in obtaining sufficient financing, technical difficulties, or human or other resource constraints.
We intend to expand new production facilities
during the next few years. The costs projected for our planned expansion and technical improvement projects and expansion may
exceed those originally contemplated. Costs savings and other economic benefits expected from these projects may not materialize
as a result of any such project delays, cost overruns or changes in market circumstances.
To make improvements at our currently
existing plant, we do not need to apply for regulatory approval. However, in order to build a new concrete plant, we will need
to (i) apply for a business license from the local Administration of Industry and Commerce, (ii) apply for an Industry Qualification
Certificate from the local Municipal Construction Committee, and (iii) receive environmental approval from the local Environmental
Protection Bureau in the relevant district area. There is no guarantee that we will be able to obtain these regulatory approvals
in a timely manner or at all.
Additionally, in order to construct a
new concrete plant, we may need to apply for a short term loan from a local commercial bank to be used for working capital. Because
the lending policies of the local commercial banks are subject to change, there is no guarantee that we will be able to obtain
approval for such a loan with conditions favorable to us in a timely manner or at all.
Failure to obtain intended economic benefits
from these new plants and technical improvements projects, either due to cost overruns, our failure to obtain the necessary regulatory
approvals or our failure to obtain necessary loan financing on terms favorable to us could adversely affect our business, financial
condition and operating performances.
We cannot assure you that our growth
strategy will be successful.
One of our strategies is to grow through
increasing the distribution and sales of our products by penetrating existing markets in China and entering new geographic markets
in China. However, many obstacles to entering such new markets exist including, but not limited to, competition from established
companies in such existing markets in the China. We cannot, therefore, assure you that we will be able to successfully overcome
such obstacles and establish our products in any additional markets. Our inability to implement this growth strategy successfully
may have a negative impact on our growth, future financial condition, results of operations or cash flows.
If we fail to effectively manage
our growth and expand our operations, our business, financial condition, results of operations and prospects could be adversely
affected.
Our future success depends on our ability
to expand our business to address growth in demand for our products and services. In order to maximize potential growth in our
current and potential markets, we believe that we must expand our manufacturing and marketing operations. Our ability to accomplish
these goals is subject to significant risks and uncertainties, including:
|
●
|
the need
for additional funding to construct additional manufacturing facilities, which we may
be unable to obtain on reasonable terms or at all;
|
|
●
|
delays
and cost overruns as a result of a number of factors, many of which may be beyond our
control, such as problems with equipment vendors and manufacturing services provided
by third-party manufacturers or subcontractors;
|
|
●
|
our receipt
of any necessary government approvals or permits that may be required to expand our operations
in a timely manner or at all;
|
|
●
|
diversion
of significant management attention and other resources; and
|
|
●
|
failure
to execute our expansion plan effectively.
|
To accommodate our growth, we will need
to implement a variety of new and upgraded operational and financial systems, procedures, and controls, including improvements
to our accounting and other internal management systems, by dedicating additional resources to our reporting and accounting function,
and improvements to our record keeping and contract tracking system. We will also need to recruit more personnel and train and
manage our growing employee base. Furthermore, our management will be required to maintain and expand our relationships with our
existing customers and find new customers for our services. There is no guarantee that our management can succeed in maintaining
and expanding these relationships.
If we encounter any of the risks described
above, or if we are otherwise unable to establish or successfully operate additional capacity or increase our output, we may be
unable to grow our business and revenues, reduce our operating costs, maintain our competitiveness or improve our profitability
and, consequently, our business, financial condition, results of operations, and prospects will be adversely affected.
If we are unable to accurately estimate
the overall risks or costs associated with a project on which we are bidding on, we may achieve a profit lower than anticipated
or even incur a loss on the contract.
Substantially all of our revenues and
contract backlog are typically derived from fixed unit price contracts. Fixed unit price contracts require us to perform the contract
for a fixed unit price irrespective of our actual costs. As a result, we realize a profit on these contracts only if we successfully
estimate our costs and then successfully control actual costs and avoid cost overruns. If our cost estimates for a contract are
inaccurate, or if we do not execute the contract within our cost estimates, then cost overruns may cause the contract not to be
as profitable as we expected, or may cause us to incur losses. This, in turn, could negatively affect our cash flow, earnings
and financial position.
The costs incurred and gross profit realized
on those contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but
not limited to:
|
●
|
onsite
conditions that differ from those assumed in the original bid;
|
|
|
|
|
●
|
delays
caused by weather conditions;
|
|
|
|
|
●
|
later
contract start dates than expected when we bid on the contract;
|
|
|
|
|
●
|
contract
modifications creating unanticipated costs not covered by change orders;
|
|
|
|
|
●
|
changes
in availability, proximity and costs of materials, including steel, concrete, aggregate and other construction materials (such
as stone, gravel and sand), as well as fuel and lubricants for our equipment;
|
|
|
|
|
●
|
availability
and skill level of workers in the geographic location of a project;
|
|
|
|
|
●
|
our
suppliers’ or subcontractors’ failure to perform;
|
|
|
|
|
●
|
fraud
or theft committed by our employees;
|
|
|
|
|
●
|
mechanical
problems with our machinery or equipment;
|
|
|
|
|
●
|
citations
issued by governmental authorities
|
|
|
|
|
●
|
difficulties
in obtaining required governmental permits or approvals;
|
|
|
|
|
●
|
changes
in applicable laws and regulations; and
|
|
|
|
|
●
|
claims
or demands from third parties alleging damages arising from our work or from the project of which our work is part.
|
Economic downturns or reductions
in government funding of infrastructure projects could significantly reduce our revenues.
Our business is highly dependent on the
amount of infrastructure work funded by various governmental entities, which, in turn, depends on the overall condition of the
economy, the need for new or replacement infrastructure, the priorities placed on various projects funded by governmental entities
and national or local government spending levels. Decreases in government funding of infrastructure projects could decrease the
number of civil construction contracts available and limit our ability to obtain new contracts, which could reduce our revenues
and profits.
The worldwide recession and credit
crisis could impact our business.
The tightening of credit in financial
markets and the general economic downturn could adversely affect the ability of our customers, and suppliers to obtain the financing
they need to make purchases from us, to perform their obligations under agreements with us or even to continue their operations.
The credit tightening and decreased cash availability could also result in an increase in cancellation of orders for our products
and services and/or a decrease in demand for our products and services in the markets in which we operate. While we believe that
the effects of the recession and credit crisis have abated, we are unable to predict potential future economic conditions and
disruptions in financial markets or their effect on our business and results of operations, and the consequences may be materially
adverse.
Our concrete production plant in
Beijing may be subject to a general city rezoning plan which, if implemented in the future, may require us to relocate or possibly
permanently shut down certain of this plant.
Our concrete production plant in Beijing
may be subject to a general city rezoning plan which has been prepared by the Beijing municipal government. Under the rezoning
plan, it is intended that the properties where this plant is located will be rezoned from industrial to commercial use. If and
when implemented in respect of those properties, the rezoning plan may require us to vacate these properties and relocate the
plant. In the event we are required to vacate the above properties, we would implement certain strategies to minimize any loss
of production capacity during relocation. There can be no assurance that our strategies to deal with the relocation of the facilities
can be implemented, or that such strategies can be implemented before we are required to vacate the above properties due to the
proposed general city rezoning plan. If we are required to relocate the facilities, our results of operation and financial condition
may be materially and adversely affected.
Our exposure to financially troubled
customers or suppliers could harm our business, financial condition and operating results.
We produce, sell and deliver ready-mix
concrete, and rely on suppliers, that have in the past and may in the future experience financial difficulty, particularly in
light of recent conditions in the credit markets and the overall economy that affected access to capital and liquidity. As a result,
we devote significant resources to monitor receivables and inventory balances with certain of our customers. If our customers
experience financial difficulty, we could have difficulty recovering amounts owed to us from these customers, or demand for our
services from these customers could decline. Furthermore, the government tightened monetary policy in order to regulate inflation,
which in turn led to delayed payment on our housing construction projects. Due to concern over inflation, the Chinese government
began to tighten its monetary policy from October of 2010, which affected the real estate and construction industries adversely.
As a result, our accounts receivable increased and the provision for doubtful accounts expense also increased. Some of our customers
appeared to suffer from declining business and shortage in cash. The allowance for doubtful accounts increased to approximately
$15.8 million as of June 30, 2017, compared to approximately $11.5 million as of June 30, 2016. In fact, our provision for doubtful
accounts, as a percentage of our overall accounts receivable, has increased from approximately 22% as of June 30, 2016, to approximately
25% as of June 30, 2017. The inability to collect on our outstanding accounts receivable could adversely affect our operating
cash flows and reduce our working capital. As a result, we may suffer material write-offs on our accounts receivable. The inability
of our suppliers to supply us with needed raw material could adversely affect our production process and therefore, we may not
be able to fulfill our contract arrangements with customers.
We rely on internal models to manage
risk, to provide accounting estimates and to make other business decisions. Our results could be adversely affected if those models
do not provide reliable estimates or predictions of future activity.
We rely heavily on internal models in
making a variety of decisions crucial to the successful operation of our business, including allowances for doubtful accounts
and other accounting estimates. It is therefore important that our models are accurate, and any failure in this regard could have
a material adverse effect on our results. Models are inherently imperfect predictors of actual results because they are based
on historical data available to us and our assumptions about factors such as credit demand, payment rates, default rates, delinquency
rates and other factors that may overstate or understate future experience. Our models could produce unreliable results for a
number of reasons, including the limitations of historical data to predict results due to unprecedented events or circumstances,
invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic
conditions, incorrect coding of the models, incorrect data being used by the models or inappropriate application of a model to
products or events outside of the model’s intended use. In particular, models are less dependable when the economic environment
is outside of historical experience, as has been the case recently. Due to the factors described above and in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, we may, among other things, experience actual
charge-offs that exceed our estimates and which are possibly greater than our allowance for doubtful accounts, or which require
material adjustments to the allowance. Unanticipated and excessive default and charge-off experience can adversely affect our
profitability and financial condition and adversely affect our ability to finance our business.
Our business will be damaged if
project contracts with the Chinese government, for which we may act as a subcontractor are cancelled.
We do not enter into any contracts directly
with the Chinese government. For contracts that are funded by the Chinese government, we place bids and enter into subcontracts
with the private entity prime contractor. A sudden cancellation of a prime contract, and in turn our subcontract, could cause
our equipment and work crews to remain idle for a significant period of time until other comparable work becomes available. This
idle time could have a material adverse effect on our business and results of operations.
Our industry is highly competitive,
with numerous larger companies with greater resources competing with us, and our failure to compete effectively could reduce the
number of new contracts awarded to us or adversely affect our margins on contracts awarded.
Our competition includes a number of state-owned
and large private PRC-based manufacturers and distributors that produce and sell products similar to ours. We compete primarily
on the basis of quality, technological innovation and price. Essentially all of the contracts on which we bid are awarded through
a competitive bid process, with awards generally being made to the lowest bidder, though other factors such as shorter schedules
or prior experience with the customer are often just as important. Within our markets, we compete with many national, regional
and local state-owned and private construction firms. Some of these competitors have achieved greater market penetration or have
greater financial and other resources than us. In addition, there are a number of larger national companies in our industry that
could potentially establish a presence in our markets and compete with us for contracts. As a result, we may need to accept lower
contract margins in order to compete against these competitors. If we are unable to compete successfully in our markets, our relative
market share and profits could be reduced.
We could face increased competition
in our principal market.
Our principal market, Beijing, has enjoyed
stronger economic growth and a higher demand for construction than other regions of China. As a result, we believe that competitors
will try to expand their sales and build up their distribution networks in our principal market. We anticipate that this trend
will continue and likely accelerate. Increased competition may have a material adverse effect on our financial condition and results
of operations.
Our dependence on subcontractors
and suppliers of materials could increase our costs and impair our ability to compete on contracts on a timely basis or at all,
which would adversely affect our profits and cash flow.
We rely on third-party subcontractors
to perform some of the work on many of our contracts. We do not bid on contracts unless we have the necessary subcontractors committed
for the anticipated scope of the contract and at prices that we have included in our bid. Therefore, to the extent that we cannot
obtain third-party subcontractors, our profits and cash flow will suffer.
We may have inadvertently violated
Section 13(k) of the Exchange Act and may be subject to sanctions as a result.
Section 13(k) of the Securities Exchange
Act of 1934 (Section 402 of the Sarbanes-Oxley Act of 2002, (“Sarbanes-Oxley”) provides that it is unlawful for a
company that has a class of securities registered under Section 12 of the Exchange Act to, directly or indirectly, including through
any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the company.
We overlooked this prohibition and Xin Ao, our VIE, inadvertently made certain advances and provided a guarantee to Beijing Lianlv
Technology Group Co. Ltd., an entity controlled by Mr. Han and Mr. He our chief executive and chief financial officers. Such advance
and guarantee may have violated Section 13(k). Issuers who are found to have violated Section 13(k) may be subject to civil sanctions,
including injunctive remedies and monetary penalties, as well as criminal sanctions. The imposition of any of such sanctions on
the Company could have a material adverse effect on our business, financial position, results of operations or cash flows.
We have identified material weaknesses
in our internal control over financial reporting, and we cannot provide assurances that these weaknesses will be effectively remediated
or that additional material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure
controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file
our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and
which may lead to a decline in our stock price.
On October 6, 2018, the Audit
Committee of the Board of Directors, after consultation with the Company’s then independent registered public
accounting firm, Friedman LLP (“Friedman”) concluded, that the Company’s audited financial statements at
and for the year ended June 30, 2017 contained in the Company’s Annual Report on Form 10-K originally filed with the
SEC on as well the unaudited financial statements at and for the periods ended March 31, 2018, December 31, 2017 and
September 28, 2017 contained in the Company’s Quarterly Reports on Form 10-Q originally filed on November 15, 2017,
February 13, 2018 and May 15, 2018, respectively, should no longer be relied upon. The Company’s review of the above-
mentioned filings revealed that the financial statements in such filings contained errors primarily as a result of omission
of certain contingencies. As a result of such review, the Company has decided to make certain corrections to include certain
contingencies disclosure in the aforementioned consolidated financial statements and notes thereto. The Company also
evaluated whether any of the contingencies’ losses should be recorded in the aforementioned consolidated financial
statements and recorded $1,276,293 of contingent liabilities for the year ended June 30, 2017. As a result of the
errors described above, management has concluded that the Company’s internal control over financial reporting and its
disclosure controls and procedures were not effective as of the ends of each of the applicable restatement periods.
Furthermore, as discussed in
“Part II, Item 9A. Controls and Procedures,” our management has identified material weaknesses in our internal
control over financial reporting, which were not remediated as of June 30, 2017. 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 registrant’s annual or interim financial statements will not be prevented or detected on a
timely basis.
We did not maintain an effective control
environment as there was an insufficient complement of personnel with appropriate accounting knowledge, experience and competence,
resulting in incorrect application of accounting principles generally accepted in the United States of America (“U.S. GAAP”). This material weakness contributed to the following
material weaknesses. We did not maintain effective controls over our financial close process. Also, we did not design and maintain
effective controls over the review of supporting information to determine the completeness and accuracy of the accounting for
complex transactions, specifically related to the business combination that occurred on September 9, 2016, which resulted in an
incorrect application of U.S. GAAP that resulted in material misstatements and a restatement of
our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016.
As of the date of this Amended 10-K,
we are re-assessing the design of our controls and modifying processes related to the identification and reporting for contingencies.
However, there can be no assurance that we will be able to fully remediate our existing material weaknesses or that our internal
control over financial reporting will not suffer in the future from other material weaknesses, thus making us unable to prevent
or detect on a timely basis material misstatements in our periodic reports with the SEC. If we fail to remediate these material
weaknesses or otherwise maintain effective internal control over financial reporting in the future, the existence of one or more
internal control deficiencies could result in errors in our financial statements, and substantial costs and resources may be required
to rectify internal control deficiencies. If we cannot produce reliable financial reports, we may have difficulty in filing timely
periodic reports with the SEC, investors could lose confidence in our reported financial information, the market price of our
stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our
business and financial condition could be materially harmed. In addition, any failure to remediate the existing material weaknesses
or a failure to maintain effective internal control over financial reporting could negatively impact our results of operations,
cash flows and financial condition, subject us to potential litigation and regulatory inquiry and cause us to incur additional
costs in future periods relating to the implementation of remedial measures.
Matters relating to or arising
from the Restatements, Audit Committee investigation and the associated material weaknesses identified in our internal
control over financial reporting, including adverse publicity, have caused us to incur significant legal, accounting and
other professional fees and other costs, have exposed us to greater risks associated with other civil litigation, regulatory
proceedings and government enforcement actions, have diverted resources and attention that would otherwise be directed toward
our operations and implementation of our business strategy and may impact our ability to attract and retain customers,
employees and vendors, any of which could have a material adverse effect on our business, financial condition and results of
operations.
We may be exposed to liabilities
under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act or Chinese anti-corruption
law could have a material adverse effect on our business.
We are subject to the Foreign Corrupt
Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials
and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business.
Chinese anti-corruption law also strictly prohibits bribery of government officials. We have operations, agreements with third
parties and make sales in China, where corruption may occur. Our activities in China create the risk of unauthorized payments
or offers of payments by one of the employees, consultants, sales agents or distributors of our Company, even though these parties
are not always subject to our control. It is our policy to implement safeguards to prevent these practices by our employees. However,
our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales
agents or distributors of our Company may engage in conduct for which we might be held responsible.
Violations of the FCPA or other anti-corruption
laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect
our business, operating results and financial condition. In addition, the United States government may seek to hold our Company
liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
The relative lack of public company
experience of our management team may put us at a competitive disadvantage.
Our management team lacks
U.S. public company experience, which could impair our ability to comply with legal and regulatory requirements such as
those imposed by the Sarbanes-Oxley Act. Our senior management does not have experience managing a U.S. publicly traded
company and lacks knowledge about the Sarbanes-Oxley Act. Such responsibilities include complying with federal securities
laws and making required disclosures on a timely basis. Our senior management are unable to implement programs and policies
in an effective and timely manner or that adequately respond to the increased legal, regulatory and reporting requirements
associated with being a U.S. publicly traded company. Our failure to comply with all applicable requirements could lead to
the imposition of fines and penalties, distract our management from attending to the management and growth of our business,
result in a loss of investor confidence in our financial reports and have an adverse effect on our business and stock
price.
We depend heavily on key personnel,
and turnover of key employees and senior management could harm our business.
Our future business and results of operations
depend in significant part upon the continued contributions of our key technical and senior management personnel, including Xianfu
Han, our Chairman and Chief Executive Officer and Weili He, our Vice-Chairman and interim Chief Financial Officer. They also depend
in significant part upon our ability to attract and retain additional qualified management, technical, operational and support
personnel for our operations. If we lose a key employee, if a key employee fails to perform in his or her current position, or
if we are not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior
management could significantly deplete the institutional knowledge held by our existing senior management team. We depend on the
skills and abilities of these key employees in managing the reclamation, technical, and marketing aspects of our business, any
part of which could be harmed by turnover in the future.
Certain of our existing stockholders
have substantial influence over our company, and their interests may not be aligned with the interests of our other stockholders.
Our Chairman, Xianfu Han, owns approximately
22.3% of our outstanding voting securities and our Vice-Chairman, Weili He, owns approximately 15.7% of our outstanding voting
securities as of June 30, 2017, in a fully-diluted share base. As a result, each have significant influence over our business,
including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. This concentration of ownership may also have the effect of discouraging,
delaying or preventing a future change of control, which could deprive our stockholders of an opportunity to receive a premium
for their shares as part of a sale of our company and might reduce the price of our shares.
We may require additional capital
and we may not be able to obtain it on acceptable terms or at all.
We may require additional cash resources
due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or
obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The
incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financing
covenants that would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety
of uncertainties, including:
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investors’
perception of, and demand for, securities of Chinese-based companies involved in construction supply or concrete industries;
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conditions
of the U.S. and other capital markets in which we may seek to raise funds;
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our
future results of operations, financial condition and cash flows; and
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economic,
political and other conditions in China.
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Financing may not be available in amounts
or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could
have a material adverse effect on our business, financial condition and results of operations.
We may be exposed to potential risks
relating to our internal controls over financial reporting.
As directed by Section 404 of the Sarbanes-Oxley
Act of 2002 or SOX 404, the SEC adopted rules requiring public companies to include a report of management on the company’s
internal controls over financial reporting in their annual reports. Under current law, the auditor attestation will not be required
as long as our filing status remains as a smaller reporting company, but we may cease to be a smaller reporting company in future
years, in which case we will be subject to the auditor attestation requirement. We were subject to management report for the fiscal
year ended June 30, 2017, and a report of our management for the 2017 fiscal year is included under Item 9A of this annual report
concluding that, as of June 30, 2017, our internal controls over financial reporting were not effective. Specifically, certain
contingencies related to legal proceedings involving our VIE entity, Xin Ao and/or our executive officers, were not identified
nor disclosed in a timely manner. If we cannot remediate the material weakness identified in a timely manner or, if and when we
are subject to the auditor attestation report requirement, we are unable to receive a positive attestation from our independent
auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements,
which could adversely affect the price of our common stock.
We have limited insurance coverage
for our operations in China.
The insurance industry in China is still
at an early stage of development. Insurance companies in China offer limited insurance products. We have determined that the risks
of disruption or liability from our business, the loss or damage to our property, including our facilities, equipment and office
furniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially
reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption,
litigation or property insurance coverage for our operations in China except for insurance on some company owned vehicles. Any
uninsured occurrence of loss or damage to property, or litigation or business disruption may result in the incurrence of substantial
costs and the diversion of resources, which could have an adverse effect on our operating results.
We may not be current in our payment
of social insurance and housing accumulation fund for our employees and such shortfall may expose us to relevant administrative
penalties.
The PRC laws and regulations require all
employers in China to fully contribute their own portion of the social insurance premium and housing accumulation fund for their
employees within a certain period of time. Failure to do so may expose the employers to make rectification for the accrued premium
and fund by the relevant labor authority. Also, an administrative fine may be imposed on the employers as well as the key management
members. As of June 30, 2017, Xin Ao has fully contributed the social insurance premium and housing accumulation fund according
to PRC laws and regulations.
Our operations may incur substantial
liabilities to comply with environmental laws and regulations.
Our concrete manufacturing operations
are subject to laws and regulations relating to the release or disposal of materials into the environment or otherwise relating
to environmental protection. Applicable law required that we obtain an environmental impact report and environmental approval
from the environmental protection administration prior to obtaining the business license and construction enterprise qualification
certificate for Xin Ao. However, the local administration of industry and commerce and the Beijing Municipal Construction Commission
did not require Xin Ao to provide the environmental impact report and environmental approval, and Xin Ao has not received any
notice of non-compliance nor has any fine or other penalty been assessed. However, the environmental protection administration
may in the future require that Xin Ao provide the applicable report and apply for the required environment approval. Our failure
to have complied with the applicable laws regarding delivery of the report may result in the assessment of administrative, civil
and criminal penalties, the incurrence of investigatory or remedial obligations and the imposition of injunctive relief. Resolution
of these matters may require considerable management time and expense. In addition, changes in environmental laws and regulations
occur frequently and any changes that result in more stringent or costly manufacturing, storage, transport, disposal or cleanup
requirements could require us to make significant expenditures to reach and maintain compliance and may otherwise have a material
adverse effect on our industry in general and on our own results of operations, competitive position or financial condition.
If we are unable to realize the
current assets within the normal operating cycle, the Company may not have sufficient funds to meet our working capital requirements
and debt obligations as they become due.
Our business is capital intensive and
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. There are a number of factors,
such as the demand for the Company’s products, economic conditions, the competitive pricing in the concrete-mix industry,
the Company’s operating results not continuing to deteriorate and the Company’s bank and shareholders being able to
provide continued support, might result in insufficient funds to meet our working capital requirements, operating expenses and
capital expenditure obligations. Due to recurring losses, the Company’s working capital was approximately $6.2million as
of June 30, 2017 as compared to $16.4 million as of June 30, 2016. As of June 30, 2017, cash on-hand balance of approximately
$0.2 million and restricted cash balance of approximately $4.2 million with the remaining current assets are mainly composed of
accounts receivable and prepayments and advances. If we fail to realize the current assets within the normal operating cycle,
or if we are otherwise unable to establish other available funds, we may not have sufficient funds to meet our working capital
requirements and debt obligations, grow our business and revenues, reduce our operating costs and, consequently, our business,
financial condition, results of operations, and prospects will be adversely affected.
RISKS RELATED TO DOING BUSINESS IN
CHINA
In order to comply with PRC regulatory
requirements, we operate our businesses through companies with which we have contractual relationships but in which we do not
have controlling ownership. If the PRC government determines that our agreements with these companies are not in compliance with
applicable regulations, our business in the PRC could be materially adversely affected.
We do not have direct or indirect equity
ownership of our variable interest entity, or VIE, Xin Ao, which operates all our businesses in China. At the same time, however,
we have entered into contractual arrangements with Xin Ao and its individual owners pursuant to which we received an economic
interest in, and exert a controlling influence over Xin Ao, in a manner substantially similar to a controlling equity interest.
Although we believe that our current business
operations are in compliance with the current laws in China, we cannot be sure that the PRC government would view our operating
arrangements to be in compliance with PRC regulations that may be adopted in the future. There have been recent reports of potential
PRC government efforts to regulate or perhaps limit the use of VIE structures for new foreign investment, particularly in the
internet and other telecommunications industries. We are monitoring developments in this area and do not believe any adverse impact
on our operations is likely.
If we are determined not to be in compliance
with future PRC regulations, the PRC government could levy fines, revoke our business and operating licenses, require us to discontinue
or restrict our operations, restrict our right to collect revenues, require us to restructure our business, corporate structure
or operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our
business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our
business. As a result, our business in the PRC could be materially adversely affected.
A slowdown or other adverse developments
in the PRC economy may materially and adversely affect our customers, demand for our services and our business.
We are a holding company. All of our operations
are conducted in the PRC and all of our revenues are generated from sales in the PRC.
According to several articles published
by the Wall Street Journal, CNN, and BBC News in January 2016, after experiencing rapid growth for more than a decade, China’s
economy has been hit by shrinking foreign and domestic demand, weak investment, factory overcapacity and oversupply in the property
market, and has experienced a painful slowdown in the last two years. In 2016, China’s economy grew by 6.7%, compared with
6.9% a year earlier, marking its slowest growth in a quarter of a century. As the government tried to shift the growth engine
away from manufacturing and debt-fueled investment toward the services sector and consumer spending, the outlook of the Chinese
economy is uncertain.
In the next two to three years, China’s
growth performance could deteriorate because of the overhang of its real estate bubble, massive manufacturing overcapacity, and
the lack of new growth engines. The International Monetary Fund expected China’s economy to grow by 6.5% in 2017. If China’s
economy is further slowing down, it may negatively affect our business operation and financial results.
We rely on contractual arrangements
with our VIEs for our operations, which may not be as effective in providing control over these entities as direct ownership.
Our operations and financial results are
dependent on our VIEs, Xin Ao and its subsidiaries, in which we have no equity ownership interest and must rely on contractual
arrangements to control and operate the businesses of our VIEs. These contractual arrangements are not as effective in providing
control over the VIEs as direct ownership. For example, the VIEs may be unwilling or unable to perform its contractual obligations
under our commercial agreements. Consequently, we would not be able to conduct our operations in the manner currently planned.
In addition, the VIEs may seek to renew their agreements on terms that are disadvantageous to us. Although we have entered into
a series of agreements that provide us with substantial ability to control the VIEs, we may not succeed in enforcing our rights
under them insofar as our contractual rights and legal remedies under PRC law are inadequate. In addition, if we are unable to
renew these agreements on favorable terms when these agreements expire or enter into similar agreements with other parties, our
business may not be able to operate or expand, and our operating expenses may significantly increase.
In addition, the VIE structure is subject
to uncertainty amid the PRC’s changing legislative practice. In January 2015, China’s Ministry of Commerce unveiled
a draft legislation that could change how the government is regulating corporate structures, especially for VIEs controlled by
foreign investments. Instead of looking at “ownership”, the draft law focused on the entities or individuals hold
control of a VIE. If a VIE is deemed to be controlled by foreign investors, it may be barred from operating in restricted sectors
or the prohibited sectors listed on a “negative list”, where only companies controlled by Chinese nationals could
operate, even if structured as VIEs.
In the event that the draft law is implemented
in any form, and that the Company’s business is characterized as one of the “restricted” or “prohibited”
sectors, Xin Ao and its subsidiaries may be barred from operation which will materially adversely affect our business.
If we become directly subject to
the recent scrutiny, criticism and negative publicity involving certain U.S.-listed Chinese companies, we may have to expend significant
resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could
result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved quickly.
Recently, U.S. public companies that have
substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions,
have been the subject of intense scrutiny, criticism and negative publicity by investors, short sellers, financial commentators
and regulatory agencies, such as the United States Securities and Exchange Commission. Much of the scrutiny, criticism and negative
publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over
financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations
of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject
to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations.
It is not clear what affect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business
and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or
untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation
could be costly and time consuming and distract our management from growing our company. If such allegations are not proven to
be groundless, our company and business operations will be severely impacted and your investment in our stock could be rendered
worthless.
Adverse changes in political and
economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our
products and damage our business.
We conduct all of our operations and generate
all of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed
countries in many respects, including:
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higher level of government involvement;
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the
early stage of development of the market-oriented sector of the economy;
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the
rapid growth rate;
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the
higher level of control over foreign exchange; and
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the
allocation of resources.
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As the PRC economy has been transitioning
from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic
growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative
effect on us.
Although the PRC government has in recent
years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise
significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.
Any adverse change in the economic conditions
or government policies in China could have a material adverse effect on the overall economic growth and the level of new construction
investments and expenditures in China, which in turn could lead to a reduction in demand for our services and consequently have
a material adverse effect on our business and prospects.
Uncertainties with respect to the
PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business
through our operating subsidiary in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable
to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based
on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series
of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in
China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules
are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections
available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion
of resources and management attention. In addition, all of our executive officers and almost all of our directors are residents
of China and not of the United States, and substantially all the assets of these persons are located outside the United States.
As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained
in the United States against our Chinese operations and subsidiaries.
The PRC government exerts substantial
influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our
ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import
and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in
China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments
of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that
would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the
future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy
or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions
in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties
or joint ventures.
Restrictions on currency exchange
may limit our ability to receive and use our sales revenue effectively.
Most of our sales revenue and expenses
are denominated in RMB. Under PRC law, the RMB is currently convertible under the “current account,” which includes
dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which
includes foreign direct investment and loans. Currently, our PRC operating subsidiary may purchase foreign currencies for settlement
of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign
Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit
or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be
denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated
in RMB to fund our business activities outside China that are denominated in foreign currencies.
Foreign exchange transactions by PRC operating
subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval
of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries borrow
foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the
subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government
authorities, including the Ministry of Commerce, or MOFCOM, or their respective local counterparts. These limitations could affect
their ability to obtain foreign exchange through debt or equity financing.
We may be unable to complete a business
combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations implemented on
September 8, 2006.
The recent PRC Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors also governs the approval process by which a PRC company may participate
in an acquisition of its assets or its equity interests. Depending on the structure of the transaction, the new regulation will
require the Chinese parties to make a series of applications and supplemental applications to the government agencies. In some
instances, the application process may require the presentation of economic data concerning a transaction, including appraisals
of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction.
Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies.
Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can
now exert more control over the combination of two businesses. Accordingly, due to the new regulation, our ability to engage in
business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able
to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.
The new regulation allows PRC government
agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may
have to submit to MOFCOM and the other government agencies an appraisal report, an evaluation report and the acquisition agreement,
all of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit
a transaction at an acquisition price obviously lower than the appraised value of the Chinese business or assets and in certain
transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The
regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration,
contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation
of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such
regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy
our investors and protect our stockholders’ economic interests.
Fluctuations in exchange rates could
adversely affect our business and the value of our securities.
The value of our common stock will be
indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Because substantially all of our earnings and cash assets are denominated in RMB, fluctuations
in the exchange rate between the U.S. dollar and the RMB will affect our balance sheet and our earnings per share in U.S. dollars.
In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results
reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations
in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars and
earnings from, and the value of, any U.S. dollar-denominated investments we make in the future. From June 30, 2016 to June 30,
2017, the PRC Government devalued its currency by approximately 2.1%, represented the largest yuan depreciation for 20 years.
China weakened the value of RMB currency by 2.1% to 6.78 against the US dollar on June 30, 2017 from 6.64 against the US dollar
on June 30, 2016. Concerns remain that China’s slowing economy, and in particular its exports, will need a stimulus that
can only come from further cuts in the exchange rate.
Very limited hedging transactions are
available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future,
the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure
at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our
ability to convert RMB into foreign currencies.
Currently, some of our raw materials and
major equipment are imported. In the event that the U.S. dollars appreciate against RMB, our costs will increase. If we cannot
pass the resulting costs on to our customers, our profitability and operating results will suffer.
Under the Current Enterprise Income
Tax, or EIT, Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in
unfavorable tax consequences to us and our non-PRC stockholders.
We are a holding company incorporated
under the laws of Nevada. We conduct substantially all of our business through our wholly-owned and other consolidated entities
in China, and we derive all of our income from these entities. Prior to January 1, 2008, dividends derived by foreign enterprises
from business operations in China were not subject to the Chinese enterprise income tax. However, such tax exemption ceased as
of January 1, 2008 and thereafter with the effectiveness of the new Enterprise Income Tax Law, or EIT Law.
Under the EIT Law, if we are not deemed
to be a “resident enterprise” for Chinese tax purposes, a withholding tax at the rate of 10% would be applicable to
any dividends paid by our Chinese subsidiaries to us. However, if we are deemed to be a “resident enterprise” established
outside of China whose “place of effective management” is located in China, we would be classified as a resident enterprise
for Chinese tax purposes and thus would be subject to an enterprise income tax rate of 25% on all of our income, including interest
income on the proceeds from this offering on a worldwide basis.
The regulations promulgated pursuant to
the EIT Law define the term “place of effective management” as “establishments that carry out substantial and
overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.”
The State Administration of Taxation issued a SAT Circular 82 on April 22, 2009, which provides that the “place of effective
management” of a Chinese-controlled overseas-incorporated enterprise is located in China if the following requirements are
satisfied: (i) the senior management and core management departments in charge of its daily operations function are mainly located
in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies located
in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’
meetings are located or kept in the PRC; and (iv) no less than half of the enterprise’s directors or senior management with
voting rights reside in the PRC. SAT Circular 82 applies only to overseas registered enterprises controlled by PRC enterprises,
not to those controlled by PRC individuals. If the Company’s non-PRC incorporated entities are deemed PRC tax residents,
such entities would be subject to PRC tax under the EIT Law. The Company has analyzed the applicability of the EIT Law and related
regulations, and for each of the applicable periods presented, the Company has not accrued for PRC tax on such basis.. In addition,
although under the EIT Law and the related regulations dividends paid to us by our PRC subsidiaries would qualify as “tax-exempted
income,” we cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound
remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. As a result of such changes,
our historical operating results will not be indicative of our operating results for future periods and the value of our shares
of common stock may be adversely affected. We are actively monitoring the possibility of “resident enterprise” treatment
and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
We may be subject to fines and legal
sanctions if we or our Chinese employees fail to comply with PRC regulations relating to employee stock options granted by overseas
listed companies to PRC citizens.
On December 25, 2006, the People’s
Bank of China issued the Administration Measures on Individual Foreign Exchange Control, and its Implementation Rules were issued
by the State Administration of Foreign Exchange (“SAFE”) on January 5, 2007. Both took effect on February 1, 2007.
Under these regulations, all foreign exchange matters involved in an employee stock holding plan, stock option plan or similar
plan in which PRC citizens’ participation requires approval from the SAFE or its authorized branch. On March 28, 2007, the
SAFE issued the Application Procedure for Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock
Holding Plans or Stock Option Plans of Overseas Listed Companies, or Notice 78. Under Notice 78, PRC individuals who participate
in an employee stock option holding plan or a stock option plan of an overseas listed company are required, through a PRC domestic
agent or PRC subsidiary of the overseas listed company, to register with the SAFE and complete certain other procedures. We and
our Chinese employees who have been granted shares or stock options pursuant to our share incentive plan are subject to Notice
78. However, in practice, there are significant uncertainties with regard to the interpretation and implementation of Notice 78.
We are committed to complying with the requirements of Notice 78. However, we cannot provide any assurance that we or our Chinese
employees will be able to qualify for or obtain any registration required by Notice 78. In particular, if we and/or our Chinese
employees fail to comply with the provisions of Notice 78, we and/or our Chinese employees may be subject to fines and legal sanctions
imposed by the SAFE or other PRC government authorities, as a result of which our business operations and employee option plans
could be materially and adversely affected.
The discontinuation, reduction or
delay of any of the preferential tax treatments currently available to us in the PRC could materially and adversely affect our
business, financial condition and results of operations.
Prior to January 1, 2008, under the old
enterprises income tax law, Xin Ao was subject to a 33% income tax rate, which was subject to certain tax holidays and preferential
tax rates. Under the new enterprise income tax law effective January 1, 2008, or the EIT Law, both foreign-invested enterprises
and domestic enterprises are subject to a unified 25% income tax rate. Under the EIT Law, preferential tax treatments will be
granted to enterprises that conduct business in certain encouraged sectors and to enterprises that qualify as “high and
new technology enterprises”, a status reassessed every three years. In addition, an enterprise is entitled to a 0% value-added
tax rate if it uses recycled raw materials to manufacture its products. Xin Ao was recognized as a high and new technology enterprise
in January 2012 and was entitled to a 15% preferential income tax rate for the three-year period ended December 2014. In addition,
Xin Ao uses recycled raw materials to manufacture its products and was entitled to a 0% value-added tax (the “VAT tax”)
rate from June 2013. The favored treatment of being exempted from the VAT tax expired in June 2015, therefore, we will be subject
to the 3% industry-standard rate and our value-added tax expenses increase, which could have a material adverse effect on our
net income and results of operations.
RISKS RELATED TO THE MARKET FOR OUR
COMMON STOCK
We have not been in compliance
with Nasdaq’s requirements for continued listing and as a result our common stock may be delisted from trading on Nasdaq,
which would have a material effect on us and our stockholders.
We were delinquent in the filing of
our periodic reports with the SEC as a result of which we are not in compliance with listing requirements of The Nasdaq Stock
Market LLC (“Nasdaq”) Listing Rule 5250(c)(1), which requires timely filing of periodic financial reports with the
SEC. Under Nasdaq’s listing rules, we were permitted to submit to Nasdaq a plan to regain compliance with the Nasdaq listing
rules. We previously submitted such a plan to the Nasdaq Staff, and Nasdaq is yet to decide on whether to grant an extension for
us to regain compliance. We expect to file our Restated Quarterly Report, the delinquent annual report for fiscal year ended June
30, 2018 and the delinquent report for the quarter ended September 30, 2018 as promptly as practicable following this Amended
10-K filing, however there can be no guarantee that Nasdaq will accept our compliance plan, grant us the extension or that we
will be able to file by the extended compliance period, in which case our common stock may be subject to delisting by Nasdaq.
If our common stock is delisted, there can no assurance whether or when it would be listed for trading on Nasdaq or any other
exchange. If our common stock is delisted, the market price of our shares will likely decline and become more volatile, and our
stockholders may find that their ability to trade in our stock will be adversely affected. Furthermore, institutions whose charters
do not allow them to hold securities in unlisted companies might sell our shares, which could have a further adverse effect on
the price of our stock.
The delayed filing of some of our
periodic reports has made us currently ineligible to use a registration statement on Form S-3 to register the offer and sale of
securities, which could adversely affect our ability to raise future capital or complete acquisitions.
As a result of the delayed filing of
some of our periodic reports with the SEC, we will not be eligible to register the offer and sale of our securities using a registration
statement on Form S-3 until 12 months after the delinquent filings have been made. Should we wish to register the offer and sale
of our securities to the public prior to the time we are eligible to use Form S-3, both our transaction costs and the amount of
time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully
and potentially harming our financial condition.
Our shares of common stock are very
thinly traded, and there can be no assurance that there will be an active market for our shares of common stock in the future.
Our shares of common stock are very thinly
traded, and the price if traded may not reflect our value. There can be no assurance that there will be an active market for our
shares of common stock in the future. The market liquidity will be dependent on the perception of our operating business and any
steps that our management might take to bring us to the awareness of investors. There can be no assurance given that there will
be any awareness generated. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that
reflects the value of the business. If a more active market should develop, the price may be highly volatile. Because there may
be a low price for our shares of common stock, many brokerage firms may not be willing to effect transactions in the securities.
Even if an investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage
commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions
will not permit the use of such shares of common stock as collateral for any loans.
We do not intend to pay dividends
on shares of our common stock for the foreseeable future, but if we intend to do so our holding company structure may limit the
payment of dividends to our stockholders.
We have no direct business operations,
other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the
future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends
or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries,
from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion
of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S.
dollars.
Chinese regulations currently permit the
payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations.
Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting
standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of revenues
or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards
and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any
dividends.
We may be subject to penny stock
regulations and restrictions and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which
generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share
or an exercise price of less than $5.00 per share, subject to certain exemptions. If our common stock becomes a “penny stock”,
we may become subject to Rule 15g-9 under the Exchange Act, or the “Penny Stock Rule”. This rule imposes additional
sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited
investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000
together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this
rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our
securities in the secondary market.
For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared
by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both
the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held in the account and information on the limited
market in penny stock.
There can be no assurance that our common
stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny
Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any
person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.