Yulong Eco-Materials Ltd - FORM 10-Q

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EX-31.1 - CERTIFICATION - Yulong Eco-Materials Ltd	f10q0316ex31i_yulong.htm
EX-31.2 - CERTIFICATION - Yulong Eco-Materials Ltd	f10q0316ex31ii_yulong.htm
EX-32.2 - CERTIFICATION - Yulong Eco-Materials Ltd	f10q0316ex32ii_yulong.htm
EX-32.1 - CERTIFICATION - Yulong Eco-Materials Ltd	f10q0316ex32i_yulong.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

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

For the transition period from ____________________________ to____________________________

Commission File Number: 001-37459

YULONG ECO-MATERIALS LIMITED

(Exact name of registrant as specified in its charter)

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

Eastern End of Xiwuzhuang Village Jiaodian Town, Xinhua Area Pingdingshan, Henan Province People’s Republic of China
(Address of principal executive offices)		(Zip Code)

+86-375-8888988

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

	Large Accelerated Filer	☐	Accelerated Filer	☐
	Non-accelerated filer	☐	Smaller reporting company	þ

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

As of May 6, 2016, the registrant had 11,997,184 shares of ordinary shares outstanding.

TABLE OF CONTENTS

		Page Number
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Income	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45

PART II.	OTHER INFORMATION	46
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47

SIGNATURES		48

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this report, other than statements of historical facts, that address future activities, events or developments, are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect,” “project,” “may,” “might,” “will,” the negative forms thereof, and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control. Actual results, performance or achievements may differ materially from those expressed or implied by forward-looking statements depending on a variety of important factors, including, but not limited to, weather, local, regional, national and global coke and coal price fluctuations, levels of coal and coke production in the region, the demand for raw materials such as iron and steel which require coke to produce, availability of financing and interest rates, competition, changes in, or failure to comply with, government regulations, costs, uncertainties and other effects of legal and other administrative proceedings, and other risks and uncertainties. Such risks and uncertainties are described in greater details in the “Risk Factors” section beginning on page 20 of the registrant’s annual report on Form 10-K for the year ended June 30, 2015 filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2015 (the “Annual Report”).

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

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 31,			June 30,
	2016			2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	31,759,252		$	16,470,299
Accounts receivable		14,120,224			9,329,495
Deposits and other receivables		1,092,865			286,153
Inventories		573,939			364,254
Advances to suppliers		118,291			17,421
Prepaid expenses and other		210,451			373,617
Total current assets		47,875,022			26,841,239

PLANT AND EQUIPMENT, net		39,289,978			41,267,655

OTHER ASSETS
Prepayments		2,853,914			3,658,748
Intangible assets, net		4,568,757			4,913,376
Deferred tax asset, net		665,575			520,147
Long-term deposit		611,043			397,300
Prepaid expenses-net of current portion		50,000			-
Total other assets		8,749,289			9,489,571

Total assets	$	95,914,289		$	77,598,465

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Short term loan - bank	$	7,398,270		$	7,972,190
Accounts payable, trade		2,550,941			1,726,158
Other payables and accrued liabilities		5,605,400			4,817,399
Other payables - related parties		20,163			2,584,104
Customer deposits		537,698			-
Taxes payable		2,324,746			1,098,093
Capital lease obligation		4,217,120			4,615,083
Dividends payable		-			7,994,125
Warrant liabilities		295,943			-
Total current liabilities		22,950,281			30,807,152

LONG TERM LIABILITIES
Capital lease obligation-net of current portion		58,763			138,952

Total liabilities		23,009,044			30,946,104

COMMITMENTS AND CONTINGENCIES

EQUITY
Common stock, $0.00125 par value, 100,000,000 shares authorized, 11,997,184 and 8,000,000 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively		14,997			10,000
Subscription receivable		(10,000	)		(10,000	)
Additional paid-in capital		40,572,662			19,011,464
Statutory reserves		3,922,228			3,922,228
Retained earnings		29,434,261			21,211,829
Accumulated other comprehensive (loss) income		(1,028,903	)		2,506,840
Total equity		72,905,245			46,652,361

Total liabilities and equity	$	95,914,289		$	77,598,465

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

	For the Three Months Ended March 31,						For the Nine Months Ended March 31,
	2016			2015			2016			2015
REVENUES
Bricks	$	3,429,182		$	3,685,593		$	10,895,564		$	11,760,921
Concrete		6,219,209			6,763,023			20,798,897			21,888,479
Recycling		1,556,473			-			5,452,931			-
TOTAL REVENUES		11,204,864			10,448,616			37,147,392			33,649,400

COST OF REVENUES
Bricks		1,548,895			1,466,709			4,868,376			4,654,917
Concrete		4,632,665			5,022,570			15,458,608			16,753,593
Recycling		712,495			-			2,274,255			-
TOTAL COST OF REVENUES		6,894,055			6,489,279			22,601,239			21,408,510

GROSS PROFIT		4,310,809			3,959,337			14,546,153			12,240,890

OPERATING EXPENSES:
Selling		85,335			144,026			336,245			509,789
General and administrative		670,288			779,574			2,812,501			2,379,241
Total operating expenses		755,623			923,600			3,148,746			2,889,030

INCOME FROM OPERATIONS		3,555,186			3,035,737			11,397,407			9,351,860

OTHER INCOME (EXPENSE), net
Interest income		28,372			17,423			74,409			45,844
Interest expense		(251,372	)		(305,034	)		(737,042	)		(955,048	)
Change in fair value of warrant liabilities		36,663			-			179,437			-
Other (expense) income, net		(12,558	)		(52,098	)		173,532			(138,708	)
Total other expense, net		(198,895	)		(339,709	)		(309,664	)		(1,047,912	)

INCOME BEFORE INCOME TAXES		3,356,291			2,696,028			11,087,743			8,303,948

PROVISION FOR INCOME TAXES		810,791			648,591			2,865,311			2,097,387

NET INCOME		2,545,500			2,047,437			8,222,432			6,206,561

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments		500,223			188,779			(3,535,743	)		237,924

COMPREHENSIVE INCOME	$	3,045,723		$	2,236,216		$	4,686,689		$	6,444,485

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
Basic and diluted		11,970,616			8,000,000			11,903,375			8,000,000

EARNINGS PER SHARE
Basic and diluted	$	0.21		$	0.26		$	0.69		$	0.78

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months Ended March 31,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,222,432		$	6,206,561
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		1,709,408			1,198,259
Amortization		87,476			41,339
Deferred tax benefit		(174,091	)		(209,497	)
Change in fair value of warrant liabilities		(179,437	)		-
Stock based compensation expense		419,105			-
Loss from disposal of equipment		7,031			-
Change in operating assets and liabilities
Accounts receivable		(5,321,713	)		(2,498,564	)
Deposits and other receivables		(1,044,262	)		(338,204	)
Inventories		(230,591	)		(88,530	)
Advances to suppliers		(102,007	)		50,920
Prepaid expense and other		260,838			(37,447	)
Accounts payable, trade		922,546			1,380,854
Other payables and accrued liabilities		142,552			848,571
Customer deposits		541,858			(387,244	)
Taxes payable		1,294,278			(173,555	)
Net cash provided by operating activities		6,555,423			5,993,463

CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for equipment, construction in progress and land use rights		(371,459	)		(398,669	)
Prepayment for land use rights		-			(9,762	)
Proceeds from disposal of equipment		7,190			-
Prepayments for construction-in-progress		(73,694	)		(1,492,423	)
Repayments from related parties		-			26,641
Net cash used in investing activities		(437,963	)		(1,874,213	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loans - bank		6,173,850			3,823,450
Payments of short-term loans - bank		(6,330,150	)		(3,481,780	)
Repayments to related parties		(645,902	)		(7,167,070	)
Principal payments on capital lease obligations		(536,012	)		(1,131,942	)
Proceeds from issuance of IPO shares, net		11,510,157			-
Net cash provided by (used in) financing activities		10,171,943			(7,957,342	)

EFFECT OF EXCHANGE RATE ON CASH		(1,000,450	)		92,627

CHANGES IN CASH AND CASH EQUIVALENTS		15,288,953			(3,745,465	)

CASH AND CASH EQUIVALENTS, beginning of period		16,470,299			19,732,770

CASH AND CASH EQUIVALENTS, end of period	$	31,759,252		$	15,987,305

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income tax	$	2,344,702		$	2,430,403
Cash paid for interest	$	196,120		$	882,009

NON-CASH INVESTING AND FINANCING ACTIVITIES
Reclassification of construction-in-progress from prepayments-construction	$	675,425		$	2,807,478
Additions to plant and equipment, and construction-in-progress through other payables	$	853,445		$	606,490
Acquisition of machinery and equipment by capital leases	$	305,848		$	2,179,627
Repayments from related parties offset with other payable-related parties	$	-		$	911,120
Conversion of shareholders' debt to 1,593,538 ordinary shares	$	9,959,613		$	-
Issuance of ordinary shares for deferred compensation	$	152,700		$	-
Valuation of 112,500 warrants allocated to warrant liabilities from additional paid-in capital	$	475,380		$	-
Reclassification of payables for litigations from other payables - related parties	$	177,903		$	-
Other receivable-related parties offset with other payable-related parties	$	112,536		$	-

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Nature of business and organization

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

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

Contractual Arrangements

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

Exclusive Consulting Services and Operating Agreements

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

Option Agreements

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Equity Pledge Agreements

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

Voting Rights Proxy and Financial Supporting Agreements

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

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

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

Name	Background		Ownership
Yulong BVI	●	A British Virgin Islands company	100%
	●	Incorporated on June 15, 2011
Yulong HK	●	A Hong Kong company	100%
	●	Incorporated on July 21, 2011
Yulong WFOE	●	A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)	100%
	●	Incorporated on September 2, 2011
	●	Registered capital of $9,935,303 fully funded
Yulong Bricks	●	A PRC limited liability company	VIE by contractual
	●	Incorporated on September 20, 2006	arrangements
	●	Registered capital of $4,395,000 (RMB 30,000,000) fully funded
Yulong Concrete	●	A PRC limited liability company	VIE by contractual
	●	Incorporated on December 7, 2004	arrangements
	●	Registered capital of $2,830,000 (RMB 20,000,000) fully funded
Yulong Transport	●	A PRC limited liability company	VIE by contractual
	●	Incorporated on July 13, 2009	arrangements
	●	Registered capital of $1,465,464 (RMB 10,010,000) fully funded
Yulong Renewable	●	A PRC limited liability company	VIE by contractual
	●	Incorporated on August 16, 2011	arrangements
	●	Registered capital of $9,510,000 (RMB 60,000,000) fully funded

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 2 – Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included. Interim results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the year ended June 30, 2015, that was filed with the SEC on September 28, 2015.

Principles of consolidation

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

Use of estimates and assumptions

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

Foreign currency translation

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

Translation adjustments included in accumulated other comprehensive income amounted to a loss of $1,028,903 and income of $2,506,840 as of March 31, 2016 and June 30, 2015, respectively. The balance sheet amounts, with the exception of equity, at March 31, 2016 and June 30, 2015 were translated at 6.45 RMB and 6.11 RMB to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rate applied to statement of income and other comprehensive income accounts for the three months ended March 31, 2016 and 2015 was 6.54 RMB and 6.12 RMB, respectively. The average translation rate applied to statement of income and other comprehensive income accounts for the nine months ended March 31, 2016 and 2015 was 6.40 RMB and 6.15 RMB, respectively. Cash flows are also translated at the average translation rate for the periods; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, demand deposits and time deposits placed with banks or other financial institutions which are unrestricted as to withdrawal and use and have original maturities of less than three months. Cash and cash equivalents also consist of funds for payment of Company expenses entrusted to the Company’s founder, which the founder agreed to convert into U.S. dollars in his personal capacity and make payments therefrom for the Company.

The Company entrusted RMB 3,000,000 ($465,300) to its founder. As of March 31, 2016, he converted and paid approximately RMB 194,000 ($30,000) of the Company’s U.S. expenses and returned approximately RMB 571,000 ($88,607) in unconverted funds to the Company. Subsequent to March 31, 2016, he converted and paid approximately RMB 815,000 ($126,433) of the Company’s U.S. expenses, and returned approximately RMB 1,420,000 ($220,260) of the unconverted funds to the Company.

Accounts and other receivables

During the normal course of business, the Company extends unsecured credit to its customers and others. Management reviews its accounts and other receivables balances each reporting period to determine if an allowance for doubtful accounts is required. Customer accounts are considered past due over 90 days. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Bad debts are written off against the allowance after all collection efforts have ceased. The Company determined that no allowance is necessary at the balance sheet dates based on historical experience.

Inventories

Inventories consist of raw materials and finished goods and are stated at the lower of cost or market, as determined using the weighted average cost method. Management compares the cost of inventories with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost. On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories equal to the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. When inventories are written-down to the lower of cost or market, it is not marked up subsequently based on changes in underlying facts and circumstances. As of March 31, 2016 and June 30, 2015, the Company determined that no reserves for obsolescence were necessary.

Advances to suppliers

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

Plant and equipment

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

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

Prepayments

Prepayments represent advances made to certain suppliers for equipment purchases or advance made to contractors in connection with the Company’s construction-in-progress. Management regularly reviews aging of prepayments and records an allowance when management believes collection of equipment or services to be performed due are at risk. Advances aged over one year and considered uncollectible are written off after exhaustive efforts at collection. No allowance for doubtful accounts is considered necessary at the balance sheet dates.

Intangible assets

Intangible assets are carried at cost less accumulated amortization.

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

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

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

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

Impairment for long-lived assets

Long-lived assets, including buildings and improvements, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, the Company reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of March 31, 2016 and June 30, 2015, management believes there was no impairment.

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Fair Values of Financial Instruments

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

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

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

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

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

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

	Carrying value at March 31, 2016		Fair value measurement at March 31, 2016
			Level 1		Level 2		Level 3
Warrant liabilities	$	295,943	$	-	$	-	$	295,943

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

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

	March 31, 2016
Beginning fair value	$	-
Recognized fair value at issuance on July 1, 2015		475,380
Realized gain recorded in earnings		(179,437	)
Ending fair value	$	295,943

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Revenue recognition

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

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

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

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

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

CWM revenue also includes revenue from the following activities:

●

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

●

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

●

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

Shipping and handling

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

Shipping costs incurred in the delivery of products and depreciation expenses for transportation equipment (under Yulong Transport) are included in selling expense. Shipping costs amounted to $49,794 and $73,185 for the three months ended March 31, 2016 and 2015, respectively, and $189,808 and $268,356 for the nine months ended March 31, 2016 and 2015, respectively. Depreciation expense amounted to $2,919 and $40,701 for the three months ended March 31, 2016 and 2015, respectively, and $43,989 and $148,399 for the nine months ended March 31, 2016 and 2015, respectively.

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Concentration of risk

Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. As of March 31, 2016 and June 30, 2015, $31,275,994 and $16,393,414 were deposited with various major financial institutions located in the PRC, respectively. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness. Historically, deposits in Chinese banks are secure due to state policy to protect depositor interests. However, China promulgated a Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures to provide for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the current Bankruptcy Law, a Chinese bank may file bankruptcy if it deems itself to be insolvent. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have intensified competition in many aspects, especially since the opening of the RMB business to foreign banks in late 2006. Therefore, the risk of bankruptcy at the institutions that the Company maintains deposits has increased. In the event of bankruptcy, the Company is unlikely to reclaim its deposits in full since it is unlikely to be classified as a secured creditor under PRC laws.

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

Customer and vendor concentration risk

For the three months ended March 31, 2016, two customers accounted for 17% and 13% of the Company's total revenues. For the three months ended March 31, 2015, no customer accounted for more than 10% of the Company’s total revenues. For the nine months ended March 31, 2016 and 2015, no customer accounted for more than 10% of the Company’s total revenues.

As of March 31, 2016, three customers accounted for 15%, 14% and 10% of the Company’s total accounts receivable. As of June 30, 2015, two customers accounted for 12% and 11% of the Company’s total accounts receivable, respectively.

For the three months ended March 31, 2016, three suppliers accounted for 22%, 22% and 19% of the Company’s total purchases, respectively. For the three months ended March 31, 2015, four suppliers accounted for 20%, 17%, 15% and 13% of the Company's total purchases, respectively. For the nine months ended March 31, 2016, three suppliers accounted for 26%, 18% and 17% of the Company’s total purchases, respectively. For the nine months ended March 31, 2015, four suppliers accounted for 19%, 17%, 15% and 14% of the Company’s total purchases, respectively.

As of March 31, 2016, four suppliers accounted for 22%, 19%, 17% and 15% of the Company’s accounts payable balances, respectively. As of June 30, 2015, three suppliers accounted for 32%, 23% and 18% of the Company’s accounts payable balances, respectively.

Income taxes

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company applies ASC 740, Accounting for Income Taxes, to account for uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

As of March 31, 2016, Yulong WFOE and the VIEs had each filed income tax returns in China for the years ended December 31, 2010 to 2014. All such tax returns are subject to examination by the Chinese taxing authorities.

Warrant liabilities

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

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

Earnings per share

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

Comprehensive income

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

Employee benefit

The full-time employees of Yulong WFOE and the VIEs are entitled to staff welfare benefits including medical care, housing fund, pension benefits and unemployment insurance, which are government mandated defined contribution plans. The Company is required to accrue for these benefits based on certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC regulations, and make cash contributions to the state-sponsored plans out of the amounts accrued. Total expense for the plans was $30,667 and $28,087 for the three months ended March 31, 2016 and 2015, respectively, and $106,578 and $86,406 for the nine months ended March 31, 2016 and 2015, respectively.

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Recently issued accounting pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this ASU is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of the fiscal year of adoption for public entities if the entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company does not expect the adoption of ASU 2016-01 to have material impact on its financial position, results of operations or cash flows.

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

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective is to identity, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintain or improving the usefulness of the information provided to users of financial statements. The areas for simplification include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas apply only to nonpublic entities. For public business entities, the ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company does not expect the adoption of ASU 2016-09 to have material impact on its financial position, results of operations or cash flows.

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

Note 3 – Variable interest entities

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

(1)

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

(2)

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

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

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

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

	March 31, 2016		June 30, 2015
Current assets	$	47,416,424	$	26,547,906
Plant and equipment, net		39,289,978		41,267,655
Other noncurrent assets		8,099,289		9,489,571
Intercompany receivable		147,247		-
Total assets		94,952,938		77,305,132
Total liabilities		31,743,727		29,529,680
Net assets	$	63,209,211	$	47,775,452

The VIEs’ liabilities consist of the following:

	March 31, 2016		June 30, 2015
Current liabilities:
Short term loan - banks	$	7,398,270	$	7,972,190
Accounts payable		2,550,941		1,726,158
Other payables and accrued liabilities		5,199,639		3,711,210
Other payables - related parties		20,163		2,273,869
Customer deposits		537,698		-
Taxes payable		2,324,746		1,098,093
Capital lease obligations-current		4,217,120		4,615,083
Intercompany payable		9,436,387		7,994,125
Total current liabilities		31,684,964		29,390,728
Long term liabilities:
Capital lease obligations-non-current		58,763		138,952
Total long term liabilities		58,763		138,952
Total liabilities	$	31,743,727	$	29,529,680

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The operating results of the VIEs are as follows:

	Three Months ended March 31,
	2016		2015
Revenue	$	11,204,864	$	10,448,616
Gross profit	$	4,310,809	$	3,959,337
Income from operations	$	3,917,122	$	3,267,153
Net income	$	2,871,733	$	2,278,854

	Nine Months ended March 31,
	2016		2015
Revenue	$	37,147,392	$	33,649,400
Gross profit	$	14,546,153	$	12,240,890
Income from operations	$	12,634,865	$	9,961,798
Net income	$	9,281,776	$	6,816,499

Note 4 – Deposits and other receivables

Deposits and other receivables consisted of the following:

	March 31, 2016		June 30, 2015
Refundable deposits for equipment purchase	$	778,079	$	126,856
Deposit for outsourcing agreement ⁽¹⁾		139,590		147,330
Deposit for new project		65,685		8,185
Advances to employees ⁽²⁾		106,410		3,782
Deposit with government agency		3,101		-
Total	$	1,092,865	$	286,153

(1)	In December 2011, Yulong Bricks agreed to outsource some brick production to Pingdingshan Hongrui New Construction Materials Co., Ltd., an unrelated third party, and paid approximately $139,590 (RMB 900,000) as security deposit, which is due on demand.

(2)	The Company entrusts funds to its employees to pay certain of its expenses in the normal course of business, particularly for projects or jobsites beyond Pingdingshan.

Note 5 – Inventories

Inventories consisted of the following:

	March 31, 2016		June 30, 2015
Raw materials	$	452,597	$	267,560
Semi-finished byproduct		88,474		6,196
Finished goods		32,868		90,498
Total inventories	$	573,939	$	364,254

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Note 6 – Plant and equipment, net

Plant and equipment consisted of the following:

	March 31, 2016			June 30, 2015
Building and improvements	$	25,522,626		$	17,959,588
Machinery and equipment		8,178,200			7,861,193
Machinery and equipment under capital lease		2,163,958			1,883,535
Transportation equipment		881,724			938,202
Transportation equipment under capital lease		2,769,688			2,923,262
Office equipment		108,482			107,128
Construction-in-progress		8,266,328			16,889,716
Subtotal		47,891,006			48,562,624
Less: accumulated depreciation		(8,601,028	)		(7,294,969	)
Total	$	39,289,978		$	41,267,655

Construction-in-progress represents labor costs and materials incurred in connection with building CWM facilities, research and development center, office building and employee dormitory for Yulong Renewable. No depreciation is provided for construction-in-progress until it is completed and placed into service. Total budget for the construction of the CWM facilities is approximately $36.0 million, of which approximately $19.5 million was capitalized in plant and equipment. Construction was completed and formal operations at the CWM facilities commenced in April 2015. Renovation of the research center and the office building continues and is currently expected to be done by the end of June 2016.

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

Construction-in-progress description		Value				Estimated completion date				Estimated additional cost to complete
Research and development center, office building and dormitory ⁽¹⁾		$	8,259,005				June 2016			$	5,156,588

(1)

As of March 31, 2016, approximately $2.8 million was included in prepayment (See Note 7), approximately $8.3 million was included in construction-in-progress, approximately $19.5 million was transferred to fixed assets, and approximately $5.2 million was not yet due. The Company may incur other costs in addition to what have been contracted for.

Depreciation expense is $556,688 and $423,692 for the three months ended March 31, 2016 and 2015, respectively, and $1,709,408 and $1,198,259 for the nine months ended March 31, 2016 and 2015, respectively.

Machinery and equipment under capital lease

In March 2014, the Company entered into a lease agreement with a third party to lease an excavator for two years for approximately $141,000 (RMB 908,240). The lease requires a one-time payment of $35,958 and an additional $5,522 as a security deposit paid in March 2014, monthly lease payments of approximately $5,000 from June 2014 to May 2016, with interest rate per annum of 8.8%. The ownership of the excavator will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 11).

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In September 2014, the Company entered into a lease agreement with a third party to lease an excavator for two years for approximately $199,000 (RMB 1,285,000). The lease requires a one-time payment of $51,642 and an additional $7,972 as a security deposit paid in October 2014, monthly lease payments of approximately $7,000 from November 2014 to October 2016, with interest rate per annum of 8.7%. The ownership of the excavator will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 11).

In September 2014, the Company entered into a lease agreement with a third party to lease an excavator for two years for approximately $138,000 (RMB 890,000). The lease requires a one-time payment of $35,958 and an additional $5,522 as a security deposit paid in October 2014, monthly lease payments of approximately $5,000 from November 2014 to October 2016, with interest rate per annum of 8.7%. The ownership of the excavator will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 11).

In September 2014, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $53,000 (RMB 339,000). The lease requires a one-time payment of $16,825 and an additional $5,258 as a security deposit paid in October 2014, monthly lease payments of approximately $2,000 from November 2014 to April 2016, with interest rate per annum of 8.3%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 11). As of March 31, 2016, approximately $40,000 of lease payments remained outstanding. In May 2016, the lessor verbally agreed to extend the due date for the unpaid balance to October 2016.

In September 2014, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $52,000 (RMB 338,000). The lease requires a one-time payment of $16,776 and an additional $5,242 as a security deposit paid in October 2014, monthly lease payments of approximately $2,000 from November 2014 to April 2016, with interest rate per annum of 8.3%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 11). As of March 31, 2016, approximately $40,000 of lease payments remained outstanding. In May 2016, the lessor verbally agreed to extend the due date for the unpaid balance to October 2016.

In June 2015, the Company entered into a lease agreement with a third party to lease an excavator for two years for approximately $138,000 (RMB 890,000). The lease requires a one-time payment of $35,958 and an additional $5,522 as a security deposit paid in October 2015, monthly lease payments of approximately $5,000 from October 2015 to September 2017, with interest rate per annum of 9.6%. The ownership of the excavator will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 11).

In June 2015, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $52,000 (RMB 336,000). The lease requires a one-time payment of $16,676 and an additional $5,211 as a security deposit paid in October 2015, monthly lease payments of approximately $2,000 from October 2015 to March 2017, with interest rate per annum 9.5%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 11).

In June 2015, the Company entered into a lease agreement with a third party to lease a loader for eighteen months for approximately $51,000 (RMB 330,000). The lease requires a one-time payment of $16,379 and an additional $5,118 as a security deposit paid in October 2015, monthly lease payments of approximately $2,000 from October 2015 to March 2017, with interest rate per annum 9.5%. The ownership of the loader will transfer to the Company if there is no default of the lease payments at the end of the lease term (see Note 11).

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Transportation equipment under capital leases

In November 2012, the Company entered into a lease agreement with a third party to lease ten waste hauling trucks for two years for approximately of $625,000 (RMB 4,027,225), including $49,322 (RMB 318,000) as security deposits and $53,975 (RMB 348,000) for insurance. The lease also requires a one-time payment of $155,104 on April 30, 2013, monthly lease payments of approximately $30,000 from July 2013 to June 2014, and monthly lease payments of approximately $16,000 originally from July 2014 to June 2015, with interest rate at 16.8 % per annum. The ownership of the trucks has been transfer to the Company with an attached lien that will be removed if there is no default of the lease payments at the end of the extended lease term (see Note 11). As of March 31, 2016, approximately $142,000 of lease payments remained outstanding, which the Company expects to pay in full by the end of June 2016.

In January 2014, the Company entered into a memorandum of understanding to lease 100 waste hauling trucks with a third party for approximately $65,000 (RMB 418,000) per truck. In July 2014, the Company entered into a binding agreement with the same party to lease the first 30 trucks for two years for approximately $1,724,000 (RMB 11,115,000), or approximately $57,000 (RMB 370,500) per truck. The lease also requires a one-time payment of $362,934 (RMB 2,340,000) as security deposit paid in July 2014 and monthly lease payments of approximately $84,000 from August 2014 to July 2016, with interest rate at 15.6% per annum. The Company has an option to purchase the vehicles for $465 if there is no default of the lease payments at the end of the lease term (see Note 11). For the remaining 70 trucks, the Company maintains the option to enter into another binding agreement with the same third party in the near future if the Company decides not to purchase 300 pre-owned trucks from different companies after thorough evaluation.

Purchase of Mobile Recycling Stations

In July 2015, the Company entered into four agreements to purchase four mobile recycling stations for approximately $6.0 million (RMB 36,400,000) in the aggregate. As of March 31, 2016, the Company received one station with purchase price of approximately $620,000 (RMB 4,000,000), and paid approximately $111,000 (RMB 713,000).

The Company recognized approximately $190,000 and $192,000 of depreciation expense related to the above capital lease equipment for the three months ended March 31, 2016 and 2015, respectively, and $573,000 and $500,000 for the nine months ended March 31, 2016 and 2015, respectively.

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

	March 31, 2016			June 30, 2015
Machinery and equipment	$	2,163,958		$	1,883,535
Transportation equipment		2,769,688			2,923,262
Subtotal		4,933,646			4,806,797
Less: accumulated depreciation		(1,550,677	)		(1,036,884	)
Total	$	3,382,969		$	3,769,913

Note 7 – Prepayments

Prepayments consisted of the following:

	March 31, 2016		June 30, 2015
Prepayment for equipment purchase	$	6,979	$	21,281
Prepayment for construction ⁽¹⁾		2,846,935		3,637,467
Total non-current	$	2,853,914	$	3,658,748

(1)	Prepayments for construction are advances made in connection with the construction of Yulong Renewable’s facilities (see Note 6).

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 8 – Intangibles, net

Intangible assets consisted of the following:

	March 31, 2016			June 30, 2015
Land use rights	$	4,991,077		$	5,267,495
Less: accumulated amortization		(422,320	)		(354,119	)
Total	$	4,568,757		$	4,913,376

Land use rights

All land in the PRC is state-owned, but the government can grant “land use rights”. The Company acquired three land use rights in 2007, 2009 and 2015 for a total of $4,713,272 (RMB 30,388,600) and incurred $277,805 (RMB 1,791,136) of associated costs. The Company has not completed the ownership transfer registration for such rights. Pursuant to supplement land usage reimbursement agreements between Yulong Bricks and the Villagers’ Committee of Xiwuzhuang Village dated February 12, 2014, between Yulong Concrete and the Villagers’ Committee of Gaozhuang Village dated February 12, 2014, and between Yulong Renewable and the Villagers’ Committee of Lvzhuang Village dated September 6, 2015, the purchase price of each land use right will be accounted for as lease expense over 50 years, which will expire in December 2058 with respect to Yulong Bricks’ and Yulong Concrete’s rights, and in March 2065 with respect to Yulong Renewable’s right, until the Company can complete their transfer registrations.

Amortization expense for the three months ended March 31, 2016 and 2015 amounted to $24,505 and $13,797, respectively, and $87,476 and $41,339 for the nine months ended March 31, 2016 and 2015, respectively.

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

Year ending March 31,	Estimated amortization expense

2017	$	104,968
2018		104,968
2019		104,968
2020		104,968
2021		104,968
Thereafter		4,043,917
Total	$	4,568,757

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 9 – Short-term loans

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

Short term loans due to banks consisted of the following:

	March 31, 2016		June 30, 2015

Loan from Pingdingshan Bank. $617,500 was due in April 2015, with annual interest of 12%. The Company repaid $257,360 in April 2015 and obtained the bank’s approval to extend the remaining $360,140 until April 2016, and is negotiating with the bank to further extend the due date. Interest rate is 11.5% per annum. The loan’s guaranteed by Yulong Bricks, the executive director of Yulong Bricks, a third party, and the Company founder and his relatives.	$	341,220	$	360,140

Loan from Pingdingshan Rural Credit Cooperative Union. Guaranteed by the founder, his relative, Yulong Industry Company, a related party, and Yulong Bricks. Due in June 2015, with interest rate of 12.1% annually. The Company repaid the loan in July 2015.		-		2,373,650

Loan from Pingdingshan Bank, matured in January 2015. Interest rate of 10.8% per annum. Guaranteed by a third party. The Company repaid $75,850 in January 2015 and extended the remaining $736,650, which matured in July 2015, with interest rate of 10.8% per annum. The Company repaid the loan in August 2015 with a new loan.		-		736,650

Loan from Pingdingshan Rural Credit Cooperative Union, matured in May 2015. Interest rate of 12.1% per annum. Guaranteed by Yulong Bricks, Yulong Transport and three relatives of the founder. The Company repaid $59,600 in May 2015 and obtained approval from the Union to extend the remaining balance through May 14, 2016, with interest rate of 12.1% per annum. Guaranteed by Yulong Bricks, Yulong Concrete and the founder.		697,950		736,650

Loan from Pingdingshan Bank, matured in August 2015. Interest rate of 10.8% per annum. Guaranteed by Yulong Concrete, Yulong Transport, Yulong Renewable, the executive director of Yulong Bricks, the founder and his relatives. The loan was repaid in full.		-		818,500

Loan from Pingdingshan Rural Credit Cooperative Union, matured in December 2015. Interest rate of 12.6% per annum. Guaranteed by Yulong Transport, a third party, the founder and the executive director of Yulong Bricks. The loan was repaid in full in April 2016.		1,551,000		1,637,000

Loan from Pingdingshan Bank, matured in March 2016. Interest rate is 10.2% per annum. Guaranteed by Yulong Concrete, Yulong Renewable, the executive director of Yulong Bricks, the founder and his relative. The loan was repaid.		-		654,800

Loan from China Construction Bank, matures in June 2016. Interest rate is 6.1% per annum. Guaranteed by Yulong Concrete and a third party.		620,400		654,800

Loan from Pingdingshan Rural Credit Cooperative Union, matures in July 2016. Interest rate is 12.1% per annum. Guaranteed by Yulong Bricks, Yulong Renewable, the founder and a company that he owns.		2,248,950		-

Loan from Pingdingshan Bank, matures in August 2016. Interest rate is 8.7% per annum. Guaranteed by a third party.		697,950		-

Loan from Pingdingshan Bank, matures in September 2016. Interest rate is 8.3% per annum. Guaranteed by Yulong Concrete, Yulong Industry and Yulong Renewable.		620,400		-

Loan from Pingdingshan Bank, matures in March 2017. Interest rate is 8.7% per annum. Guaranteed by Yulong Renewable, Yulong Industry and Yulong Concrete.		620,400		-

Total short-term loans - bank	$	7,398,270	$	7,972,190

Interest expense on short-term loans for the three months ended March 31, 2016 and 2015 amounted to $224,144 and $232,799, respectively, and $629,415 and $715,595 for the nine months ended March 31, 2016 and 2015, respectively. No interest expense has been capitalized into construction-in-progress since all borrowings were for working capital purposes.

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 10 – Related party transactions

Other payables - related parties

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

Other payables - related parties consisted of the following:

Name of related parties	Relationship	Nature of transactions	March 31, 2016		June 30, 2015

Yulong Zhu	Founder	Loan for operating cash flows	$	-	$	2,342,541	⁽¹⁾
Henan Yuliang Hotel Co., Ltd.	Owned by founder	Loan for operating cash flows		20,163		21,281
Lei Zhu	Relative of founder	Loan for operating cash flow		-		220,282	⁽²⁾
Total other payables			$	20,163	$	2,584,104

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

(2)	Fully converted into shares of the Company’s ordinary shares concurrently with the closing of the IPO at the IPO Price.

Note 11 – Capital lease obligations

Capital lease obligations consisted of the following:

	March 31, 2016			June 30, 2015

Lease obligations for ten waste hauling trucks expired May 2015, lease payment at $24,947 per month with interest at 18.2% per annum. The lease obligation was extended to December 2015 and paid off.	$	-		$	334,323
Lease obligations for ten waste hauling trucks expired June 2015, lease payment at $30,349 and $15,615 per month from July 2013 to June 2014 and from July 2014 to June 2015, respectively, with interest at 16.8% per annum. In June 2015, lessor verbally agreed to extend due date for the unpaid balance to June 2016.		141,610			290,552
Lease obligations for a loader expired in November 2015, lease payment at $2,497 per month with interest at 8.5% per annum. The lease obligation was paid off.		-			28,073
Lease obligations for an excavator expiring in May 2016, lease payment at $5,035 per month with interest at 8.8% per annum.		71,111			82,442
Lease obligations for thirty waste hauling trucks expiring in July 2016, lease payment at $84,382 per month with interest at 15.6% per annum.		1,503,107			1,673,890
Lease obligation for a loader expired in April 2016, lease payment at $2,497 per month with interest at 8.3% per annum. In May 2016, the lessor verbally agreed to extend the due date for the unpaid balance to October 2016.		39,933			43,107
Lease obligation for a loader expired in April 2016, lease payment at $2,490 per month with interest at 8.3% per annum. In May 2016, the lessor verbally agreed to extend the due date for the unpaid balance to October 2016.		39,815			42,979
Lease obligation for an excavator expiring in October 2016, lease payment at $7,270 per month with interest at 8.7% per annum.		142,623			156,228
Lease obligation for an excavator expiring in October 2016, lease payment at $5,035 per month with interest at 8.7% per annum.		98,781			108,204
Lease obligation for a land use right which the Company expects to pay in full by June 30, 2016.		1,989,070			2,109,864
Lease obligation for a loader expiring in March 2017, lease payment at $2,475 per month with interest at 9.5% per annum.		36,348			-
Lease obligation for a loader expiring in March 2017, lease payment at $2,431 per month with interest at 9.5% per annum.		35,699			-

Lease obligation for an excavator expiring in September 2017, lease payment at $5,035 per month with interest at 9.6% per annum.		103,509			-
Lease obligation for an excavator expiring in September 2017, lease payment at $5,035 per month with interest at 9.6% per annum.		103,509			-
Subtotal		4,305,115			4,869,662
Less: deferred interest		(29,232	)		(115,627	)
Capital lease obligations, net		4,275,883			4,754,035
Less: capital lease obligations - current		(4,217,120	)		(4,615,083	)
Capital lease obligations – non-current	$	58,763		$	138,952

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of March 31, 2016 and June 30, 2015 , the Company accrued interest of $229,229 and $179,264, respectively, in connection with its capital lease obligations, which interest is classified in the Company’s consolidated balance sheets under the caption “Other payables and accrued liabilities”. Interest expense on capital lease obligations for the three months ended March 31, 2016 and 2015 amounted to $27,228 and $72,235, respectively, and $107,627 and $239,453 for the nine months ended March 31, 2016 and 2015, respectively.

Future annual capital lease payments approximately consist of the following:

Twelve months ending March 31,	Amount
2017	$	4,217,120
2018		58,763
Total	$	4,275,883

Note 12 – Taxes

Income taxes

Cayman Islands

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

British Virgin Islands

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

Hong Kong

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

PRC

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

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

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

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

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

	For the three months ended March 31,
	2016			2015

Current	$	873,937		$	761,998
Deferred		(63,146	)		(113,407	)
Total provision for income taxes	$	810,791		$	648,591

	For the nine months ended March 31,
	2016			2015

Current	$	3,039,402		$	2,306,884
Deferred		(174,091	)		(209,497	)
Total provision for income taxes	$	2,865,311		$	2,097,387

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table reconciles the statutory rates in China to the Company’s effective tax rate for the three months and nine months ended March 31, 2016 and 2015:

	Three months ended March 31, 2016			Three months ended December 31, 2014

China income tax rate		25.0	%		25.0	%
Effect of allowance for temporary differences		(2.0	%)		(4.3	%)
Effect of permanent differences		1.2	%		3.4	%
Effective income tax rates		24.2	%		24.1	%

	Nine months ended March 31, 2016			Nine months ended March 31, 2015

China income tax rate		25.0	%		25.0	%
Effect of allowance for temporary differences		(1.3	%)		0.0	%
Effect of permanent differences		2.1	%		0.0	%
Effective income tax rates		25.8	%		25.0	%

Deferred taxes

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

	March 31, 2016			June 30, 2015

Deferred tax assets
Startup cost	$	207,363		$	218,861
Plant and equipment		445,071			351,583
Intangible assets		(40,775	)		(50,297	)
Others		53,916			-
Net operating loss carryforward in China		45,970			48,519
Total deferred tax assets		711,545			568,666
Valuation allowance		(45,970	)		(48,519	)
Total deferred tax assets, net	$	665,575		$	520,147

Uncertain tax positions

Aggregate undistributed earnings of Yulong WFOE and the VIEs that are available for distribution to the Company are approximately $32.4 million as of March 31, 2016. Such undistributed earnings are considered to be indefinitely reinvested, because the Company does not have any present plan to pay any cash dividends on its ordinary shares in the foreseeable future and intends to retain most of its available funds and any future earnings for use in the operation and expansion of its business. Accordingly, no deferred tax liability has been accrued for the Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to the Company as of March 31, 2016.

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

There were no unrecognized tax benefits as of March 31, 2016 and June 30, 2015. Management does not anticipate any potential future adjustments in the next twelve months which would result in a material change to its tax positions.

Value added tax

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

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

Taxes payable

Taxes payable consisted of the following:

	March 31, 2016		June 30, 2015

Income taxes payable	$	1,621,451	$	983,767
VAT taxes payable		558,071		102,077
Other taxes payable		145,224		12,249
Total	$	2,324,746	$	1,098,093

Note 13 – Equity

Restricted net assets

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

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of March 31, 2016 and June 30, 2015, Yulong WFOE and the VIEs collectively appropriated $3,922,228 of retained earnings for their statutory reserves.

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

Foreign exchange and other regulation in the PRC may further restrict Yulong WFOE and the VIEs from transferring funds to the Company in the form of dividends, loans and advances. As of March 31, 2016 and June 30, 2015, the aggregate net assets of Yulong WFOE and the VIEs amounted to $63,997,518 and $47,875,838, respectively.

Initial Public Offering

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

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

●

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

●

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

●

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

●

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

Stock-based compensation expenses amounted to $10,000 and $155,000 for the three months and nine months ended March 31, 2016.

Conversion in related party indebtedness

Five shareholders of the Yulong operating companies, including the Company’s founder, converted the RMB equivalent of $9,959,613 due to them in the aggregate from the Yulong operating companies into the Company’s ordinary shares concurrently with the closing of the IPO at the IPO Price, or 1,593,538 shares.

Warrants

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

The value of the warrant liabilities was $295,943 at March 31, 2016 and $475,380 at the issuance date on July 1, 2015. The decrease resulted in a $179,437 gain on change in fair value of warrants for the nine months ended March 31, 2016.

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Because the warrants are not traded on an active securities market, the Company estimates their fair value using the Cox-Ross-Rubinstein binomial model on March 31, 2016 and on July 1, 2015 as follows:

	March 31, 2016			July 1, 2015
Number of shares exercisable		112,500			112,500
Exercise price	$	6.25		$	6.25
Stock price	$	4.00		$	6.00
Expected term (years)		4.25			5.00
Risk-free interest rate		1.04	%		1.63	%
Expected volatility		104	%		92	%

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

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

	Nine Months Ended March 31, 2016		Weighted Average Exercise Price		Average Remaining Contractual Life

Outstanding, beginning balance		-		-		-
Granted		112,500	$	6.25		5.00
Forfeited		-		-		-
Exercised		-		-		-
Outstanding, ending balance		112,500	$	6.25		4.25

Stock-based compensation – consulting services

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

●

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

●

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

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

Stock-based compensation expenses for consulting services amounted to $264,106 for the three and nine months ended March 31, 2016.

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 14 – Earnings per share

The basic and diluted earnings per share are as follows:

	For the three months ended March 31, 2016		For the three months ended March 31, 2015

Net income	$	2,545,500	$	2,047,437
Weighted average shares outstanding - basic and diluted		11,970,616		8,000,000
Earnings per share - basic and diluted	$	0.21	$	0.26

	For the nine months ended March 31, 2016		For the nine months ended March 31, 2015

Net income	$	8,222,432	$	6,206,561
Weighted average shares outstanding - basic and diluted		11,903,375		8,000,000
Earnings per share - basic and diluted	$	0.69	$	0.78

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

Note 15 – Commitments and contingencies

Contingencies

From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity. Three of the four Yulong operating companies were parties to four civil lawsuits with judgment amounts of approximately $203,461 (RMB 1,311,808) in the aggregate, of which unpaid amounts of approximately $176,000 (RMB 1,136,216) are included in other payables and accrued liabilities as of March 31, 2016.

Guarantees

As of March 31, 2016, the Company guaranteed approximately $1.2 million for a bank loan of an unrelated third-party as follows:

Name		Guaranteed amount				Guarantee expiration date
Pingdingshan Yushi Automobile Accessory Sales Co., Ltd		$	1,240,800				December 29, 2016

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

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Variable interest entity structure

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

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

Note 16 – Segments

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

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

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

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

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

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

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

Revenues:	2016		2015
Yulong Bricks	$	3,429,182	$	3,685,593
Yulong Concrete and Yulong Transport		6,219,209		6,763,023
Yulong Renewable		1,556,473		-
Consolidated revenues	$	11,204,864	$	10,448,616

Gross profit:	2016		2015
Yulong Bricks	$	1,880,287	$	2,218,884
Yulong Concrete and Yulong Transport		1,586,544		1,740,453
Yulong Renewable		843,978		-
Consolidated gross profit	$	4,310,809	$	3,959,337

Income (loss) from operations:	2016			2015
Yulong Bricks	$	1,809,568		$	2,144,758
Yulong Concrete and Yulong Transport		1,465,737			1,507,699
Yulong Renewable		641,816			(385,303	)
Subtotal		3,917,121			3,267,154
Yulong WFOE		9,171			-
Yulong Eco-Materials		(371,106	)		(231,417	)
Consolidated income from operations	$	3,555,186		$	3,035,737

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Net income (loss):	2016			2015
Yulong Bricks	$	1,379,065		$	1,619,768
Yulong Concrete and Yulong Transport		1,027,402			1,053,243
Yulong Renewable		465,266			(394,157	)
Subtotal		2,871,733			2,278,854
Yulong WFOE		9,160			-
Yulong Eco-Materials		(335,393	)		(231,417	)
Consolidated net income	$	2,545,500		$	2,047,437

Depreciation and amortization:	2016		2015
Yulong Bricks	$	129,378	$	134,012
Yulong Concrete and Yulong Transport		33,176		86,940
Yulong Renewable		418,639		216,537
Consolidated depreciation and amortization	$	581,193	$	437,489

Interest expenses:	2016		2015
Yulong Bricks	$	125,366	$	117,453
Yulong Concrete and Yulong Transport		98,778		115,346
Yulong Renewable		27,228		72,235
Consolidated interest expenses	$	251,372	$	305,034

Capital expenditures:	2016		2015
Yulong Bricks	$	11,176	$	2,072
Yulong Concrete and Yulong Transport		-		5,060
Yulong Renewable		5,735		98,831
Consolidated capital expenditures	$	16,911	$	105,963

The following represents results of divisional operations for the following nine months ended March 31:

Revenues:	2016		2015
Yulong Bricks	$	10,895,564	$	11,760,921
Yulong Concrete and Yulong Transport		20,798,897		21,888,479
Yulong Renewable		5,452,931		-
Consolidated revenues	$	37,147,392	$	33,649,400

Gross profit:	2016		2015
Yulong Bricks	$	6,027,188	$	7,106,004
Yulong Concrete and Yulong Transport		5,340,289		5,134,886
Yulong Renewable		3,178,676		-
Consolidated gross profit	$	14,546,153	$	12,240,890

YULONG ECO-MATERIALS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Income (loss) from operations:	2016			2015
Yulong Bricks	$	5,774,955		$	6,838,342
Yulong Concrete and Yulong Transport		4,828,795			4,303,521
Yulong Renewable		2,031,114			(1,180,065	)
Subtotal		12,634,864			9,961,798
Yulong HK		(302,351	)		-
Yulong Eco-Materials		(935,106	)		(609,938	)
Consolidated income from operations	$	11,397,407		$	9,351,860

Net income (loss):	2016			2015
Yulong Bricks	$	4,423,692		$	5,158,101
Yulong Concrete and Yulong Transport		3,402,935			2,988,719
Yulong Renewable		1,455,149			(1,330,321	)
Subtotal		9,281,776			6,816,499
Yulong WFOE		2,078			-
Yulong HK		(308,506	)		-
Yulong Eco-Materials		(752,916	)		(609,938	)
Consolidated net income	$	8,222,432		$	6,206,561

Depreciation and amortization:	2016		2015
Yulong Bricks	$	389,494	$	401,472
Yulong Concrete and Yulong Transport		164,747		287,271
Yulong Renewable		1,242,643		550,855
Consolidated depreciation and amortization	$	1,796,884	$	1,239,598

Interest expenses:	2016		2015
Yulong Bricks	$	320,148	$	376,747
Yulong Concrete and Yulong Transport		309,267		338,848
Yulong Renewable		107,627		239,453
Consolidated interest expenses	$	737,042	$	955,048

Capital expenditures:	2016		2015
Yulong Bricks	$	74,118	$	82,996
Yulong Concrete and Yulong Transport		35,387		33,668
Yulong Renewable		335,648		1,784,190
Consolidated capital expenditures	$	445,153	$	1,900,854

The following represents assets of division as of March 31, 2016 and June 30, 2015:

Total Assets as of:	March 31, 2016			June 30, 2015
Yulong Bricks	$	53,186,536		$	37,840,558
Yulong Concrete and Yulong Transport		33,840,207			26,391,895
Yulong Renewable		43,623,923			40,638,270
Interdivision assets		(36,314,281	)		(27,565,591	)
Yulong WFOE		575,118			-
Yulong HK		250,041			-
Yulong Eco-Materials		752,745			293,333
Total Assets	$	95,914,289		$	77,598,465

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

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

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

Recent Developments

We are continuing our evaluation of the request from Shangqiu’s municipal government to consolidate the hauling of the city’s construction waste, which we believe would require us to establish a construction waste processing facility in Shangqiu similar to the one that Yulong Renewable currently operates in Pingdingshan. We would also house the second production line that has been planned for the Pingdingshan facility in Shangqiu. As such, we have suspended all activities relating to the second production line until we can complete our evaluation. As of the date of this report, however, we have not entered into any definitive agreement in connection with or relating to the request being evaluated.

In May 2016, we announced that the Department of Transportation of Henan Province (the "Transportation Department") has published the technical code governing the use of recycled construction waste materials for roadbed construction in the province. We have been instrumental in preparing the code with Henan Communication Science and Technology Research Institute, Ltd. With its publication, the technical code is now the standard for the road construction industry in Henan, and will allow us to begin selling our recycled aggregates as roadbed material for highways, expressways and other road paving projects. Currently we are working closely with two municipal agencies in Zhengzhou, the Highway Bureau and the Urban and Rural Construction Committee, to set up procedures by which road and highway builders will use recycled aggregates in place of sand and stone for roadbeds within the city limit. Several companies are already in the process of adopting recycled aggregates for their current and new road construction projects. Additionally, we are actively negotiating with several large local road and highway builders.

Trends in Our Business

On a macro level, management has observed the following trends and uncertainties, which we believe may have a direct impact on our operations in the near future: (1) planned construction of new (mostly government) buildings in the new district and counties of Pingdingshan, which is consistent with the current policy of the central government favoring urbanization, should translate into increased new construction and drive the demand of construction materials for the next eight to ten years; (2) the national energy conservation policy since the beginning of 2013 should continue to impact our suppliers and drive up raw material costs for the foreseeable future until pollution can become manageable; (3) government efforts to control the residential real estate market can have significant impact on demand for construction materials, such as the decision by the Henan government in September 2014 to lift restriction on the number of residential properties one can purchase, and to reduce home mortgage rate, which we believe will be positive for the local real estate market and demand for construction materials; (4) our operations under Yulong Renewable are deemed “green” by the local government and therefore designated as one of “Henan Province First Class Grade A Important Construction Projects for 2014” by the Reform and Development Commission of Henan Province, based upon which we have applied for tax reduction, although there can be no assurance that our application will be approved; (5) we believe our CWM business will continue to positively affect our revenue and net income in both short and long terms, especially with the Transportation Department’s publication of the technical code as discussed earlier; and (6) the slowdown in our collection of accounts receivable that we have been experiencing since the quarter ended September 30, 2014, may continue at least for the next twelve months or longer (a) as our customers will likely seek to conserve cash in light of tighter bank lending to small and medium-size enterprises, and reduced availability of informal lending arrangements amongst private citizens and enterprises prevalent in our province due to expected government efforts to regulate such arrangements, and (b) as the number of our public sector customers for CWM services increases, such as the local governments in Zhengzhou and Shangqiu, from whom collection has in our experience been slow as payments are subject to their budgeting process, although we do not anticipate any collection risk.

Results of Operations

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

Three months ended March 31, 2016 and 2015

Revenue

Our revenue increased by $756,248 or 7.2% to $11,204,864, as compared to a year ago. Revenue attributable to bricks or brick revenue, revenue attributable to concrete or concrete revenue, and revenue attributable to CWM or CWM revenue, are as follows for the periods indicated:

	Revenue
	Bricks			Concrete			CWM								Total
							Hauling		Recycled Aggregates		Recycled Bricks		Waste Processing Services
Revenue
Three months ended March 31, 2015	$	3,685,593		$	6,763,023		$	-	$	-	$	-	$	-	$	10,448,616
Three months ended March 31, 2016		3,429,182			6,219,209			348,076		2,244		17,277		1,188,876		11,204,864
(Decrease) increase in $	$	(256,411	)	$	(543,814	)	$	348,076	$	2,244	$	17,277	$	1,188,876	$	756,248
(Decrease) increase in %		(7.0	)%		(8.0	)%		N/A		N/A		N/A		N/A		7.2	%

The main contributor of the revenue increase is the CWM revenue. We generate CWM revenue when we haul construction waste, when we process the waste at our mobile recycling stations, and when we sell recycled aggregates and recycled bricks. Our CWM business is still relatively new and thus contributed only 13.9% of total revenue. Brick revenue decreased slightly due to lower average selling price as a result of the value added tax or VAT discussed below, and depreciation of the RMB against the United States dollars as compared to a year ago, offset by increased sales volume from higher demand for fly-ash bricks. Concrete revenue decreased due to a slight decrease in sales volume and the depreciation of the Chinese currency.

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

	Bricks			Concrete
Average selling price per m³
Three months ended March 31, 2015	$	32.3		$	44.7
Three months ended March 31, 2016		25.1			42.7
Decrease in $	$	(7.2	)	$	(2.0	)
Decrease in %		(22.3	)%		(4.5	)%

Quantity sold (m³)
Three months ended March 31, 2015		114,148			151,238
Three months ended March 31, 2016		136,725			145,602
Increase (decrease)		22,577			(5,636	)
Increase (decrease) in %		19.8	%		(3.7	)%

	CWM
	Hauling		Recycled Aggregates		Recycled Bricks		Waste Processing Services		Waste Processing Services
Average selling price	Truckload		m³		m³		Jobsite		m³
Three months ended March 31, 2015	$	-	$	-	$	-	$	-	$	-
Three months ended March 31, 2016		56.94		2.26		12.85		611.06		2.38
Increase	$	56.94	$	2.26	$	12.85	$	611.06	$	2.38
Increase in %		N/A		N/A		N/A		N/A		N/A

Quantity sold
Three months ended March 31, 2015		-		-		-		-		-
Three months ended March 31, 2016		6,113		995		1,344		746		343,600
Increase		6,113		995		1,344		746		343,600
Increase in %		N/A		N/A		N/A		N/A		N/A

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

Cost of Revenue

Cost of revenue increased by $404,776, or 6.2%, to $6,894,055, as compared to the same period last year. Such cost for each of our revenue streams is presented in the following table:

	Cost of Revenue
	Bricks			Concrete			CWM								Total
							Hauling		Recycled Aggregates		Recycled Bricks		Waste Processing Services
Cost of Revenue
Three months ended March 31, 2015	$	1,466,709		$	5,022,570		$	-	$	-	$	-	$	-	$	6,489,279
Three months ended March 31, 2016		1,548,895			4,632,665			403,257		9,056		81,984		218,198		6,894,055
Increase (decrease) in $	$	82,186		$	(389,905	)	$	403,257	$	9,056	$	81,984	$	218,198	$	404,776
Increase (decrease) in %		5.6	%		(7.8	%)		N/A		N/A		N/A		N/A		6.2	%

The average unit cost per cubic meter of bricks and concrete decreased as follows, mainly due to lower market prices for some raw materials (e.g., cement, coal and reclaimed lubricant for bricks, and cement and expansive admixtures for concrete):

	Average unit cost
	Bricks			Concrete
Three months ended March 31, 2015	$	12.8		$	33.2
Three months ended March 31, 2016		11.3			31.8
Decrease in $	$	(1.5	)	$	(1.4	)
Decrease in %		(11.7	)%		(4.2	)%

In addition to lower average unit cost, the depreciation of the RMB against the United States dollars also contributed to the decrease in cost of brick revenue, while lower sales volume also contributed to the decrease in cost of concrete revenue.

We also use third-party manufacturers generally when orders exceed our production capacities. Such third-party manufacturers produce bricks and concrete with their employees and equipment using our pre-formulated raw material blends and under our supervision, and allow us to stage the finished products (in the case of bricks) onsite until our customers take delivery. In return, we pay them a fee for every cubic meter of finished product, which is negotiated individually with each manufacturer. To date, such fees have been lower than our overhead and direct labor cost to produce a cubic meter of brick or concrete on our own. Based on the fees we paid for the three months ended March 31, 2015 and 2016 (i.e., $0.90 and $0.80 for bricks and $1.00 and $0.90 for concrete, respectively), such fees were approximately $2.60 and $2.50 lower per unit for bricks, respectively, and $1.00 lower per unit for concrete. Thus, were we to entirely produce internally during such periods, our cost of revenue would have increased by approximately $85,000 and $143,000 for bricks, respectively, and $42,000 and $36,000 for concrete, respectively, and our gross profit would have decreased accordingly. These fees, however, may change in the future depending on how much bricks or concrete we produce and thus how much overhead and direct labor cost we allocate to each resulting product unit. The brick manufacturer that we have been using lacks a sales department to develop business in the local market, while we are a principal customer of the concrete manufacturer that we have been using. Thus, we believe that we currently have more bargain power with respect to the fees that we pay these manufacturers.

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

	Average unit cost
	CWM
	Hauling		Recycled Aggregates		Recycled Bricks		Waste Processing Services		Waste Processing Services
	Truckload		m³		m³		Jobsite		m³
Three months ended March 31, 2015	$	-	$	-	$	-	$	-	$	-
Three months ended March 31, 2016		65.97		9.10		61.00		103.97		0.41
Increase	$	65.97	$	9.10	$	61.00	$	103.97	$	0.41
Increase in %		N/A		N/A		N/A		N/A		N/A

Gross Profit

Gross profit was $4,310,809, an increase of $351,472 or 8.9% from a year ago. Gross profit margin was approximately 39.0% and relatively consistent from a year ago.

Gross profit attributable to bricks was $1,880,287, a decrease of $338,597 or 15.3%, from a year ago. Gross profit margin was 54.8%, a decrease of 5.4%, from 60.2% a year ago. The reduced margin is consistent with lower average selling price affected by the imposition of the VAT discussed earlier.

Gross profit attributable to concrete was $1,586,544, a decrease of $153,909 or 8.8%, from a year ago. Gross profit margin was 25.5%, which is largely consistent with the 25.7% from a year ago. The slightly decreased margin resulted from decreased average selling price affected by the depreciation of Chinese currency.

Gross profit attributable to CWM was $843,978 for the three months ended March 31, 2016. Gross profit margin was 54.2%.

Operating Expenses

Operating expenses, which consist of selling expense and general and administrative (“G&A”) expenses, were $0.8 million, a decrease of $0.2 million or 18.2% as compared to a year ago. G&A expenses, which decreased by $0.1 million or 14.0%, were $0.7 million, including increased salary expenses of $0.1 million and increased business development expense of $0.1 million to develop the market for our CWM business, offset by a decrease of $0.3 million in start-up costs related to Yulong Renewable’s CWM facilities that commenced operations in April 2015. Selling expense decreased by $0.06 million or 40.8%, to $0.09 million, due to a $0.02 million decrease in fuel costs as average gasoline price decreased by approximately $0.15 (RMB 1.00) per kiloliter during the period, and a $0.04 million decrease in depreciation expense when some of our concrete trucks were completely depreciated in the fourth quarter of fiscal 2014

Although our efforts to control operating expenses are ongoing, we expect them to increase as we continue to expand our CWM business, and as professional fees for regulatory compliance matters are expected to increase as a public reporting company.

Other Expense, Net

Other expense includes finance expense (which consist of interest and other finance expenses, net of interest income), and expense not related to our principal operations.

We had other expense of $198,895, as compared to other expense of $339,709 a year ago. Other expense consisted of $11,608 in other finance and non-operating expense, $251,372 in interest expense and $950 in foreign currency exchange translation loss, offset by $28,372 in interest income and $36,663 gain on change in fair value of warrant liabilities.

Provision for Income Taxes

Provision for PRC income taxes increased by $162,200 to $810,791, as compared to a year ago, due to higher income before tax. While we incurred G&A expenses at our Cayman Islands holding company level (i.e., Yulong), we will not be able to utilize the resulting net operating loss in the future as Yulong is not subject to tax on income or capital gains under current Cayman Islands law. Therefore, the realization of our deferred tax assets is unlikely, since we are not subject to any income tax or credit under current Cayman Islands laws, and we have provided for a full valuation allowance against such deferred tax assets.

Net Income

Net income for the three months ended March 31, 2016 was $2,545,500, as compared to $2,047,437 for the same period last year.

Nine months ended March 31, 2016 and 2015

Revenue

Our revenue increased by $3,497,992 or 10.4% to $37,147,392, as compared to a year ago. Brick revenue, concrete revenue and CWM revenue are as follows for the periods indicated:

	Revenue
	Bricks			Concrete			CWM								Total
							Hauling		Recycled Aggregates		Recycled Bricks		Waste Processing Services
Revenue
Nine months ended March 31, 2015	$	11,760,921		$	21,888,479		$	-	$	-	$	-	$	-	$	33,649,400
Nine months ended March 31, 2016		10,895,564			20,798,897			1,477,989		33,738		212,038		3,729,166		37,147,392
(Decrease) increase in $	$	(865,357	)	$	(1,089,582	)	$	1,477,989	$	33,738	$	212,038	$	3,729,166	$	3,497,992
(Decrease) increase in %		(7.4	%)		(5.0	%)		N/A		N/A		N/A		N/A		10.4	%

The main contributor of the revenue increase is the CWM revenue despite representing only 14.7% of total revenue. Brick and concrete revenues both decreased for the same reasons that they decreased during the three-month period discussed earlier.

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

	Bricks			Concrete
Average selling price per m³
Nine months ended March 31, 2015	$	32.0		$	44.3
Nine months ended March 31, 2016		25.6			43.7
Decrease in $	$	(6.4	)	$	(0.6	)
Decrease in %		(20.0	)%		(1.4	)%

Quantity sold (m³)
Nine months ended March 31, 2015		367,074			493,728
Nine months ended March 31, 2016		424,910			476,215
Increase (decrease)		57,836			(17,513	)
Increase (decrease) in %		15.8	%		(3.5	)%

	CWM
	Hauling		Recycled Aggregates		Recycled Bricks		Waste Processing Services		Waste Processing Services
Average selling price	Truckload		m³		m³		Jobsite		m³
Nine months ended March 31, 2015	$	-	$	-	$	-	$	-	$	-
Nine months ended March 31, 2016		42.52		2.44		23.27		606.02		2.33
Increase	$	42.52	$	2.44	$	23.27	$	606.02	$	2.33
Increase in %		N/A		N/A		N/A		N/A		N/A

Quantities sold
Nine months ended March 31, 2015		-		-		-		-		-
Nine months ended March 31, 2016		34,759		13,851		9,114		1,869		1,149,150
Increase		34,759		13,851		9,114		1,869		1,149,150
Increase in %		N/A		N/A		N/A		N/A		N/A

Cost of Revenue

Cost of revenue increased by $1,192,729, or 5.6%, to $22,601,239, as compared to the same period last year. Such cost for each of our revenue streams is presented in the following table:

	Cost of Revenue
	Bricks			Concrete			CWM								Total
							Hauling		Recycled Aggregates		Recycled Bricks		Waste Processing Services
Cost of Revenue
Nine months ended March 31, 2015	$	4,654,917		$	16,753,593		$	-	$	-	$	-	$	-	$	21,408,510
Nine months ended March 31, 2016		4,868,376			15,458,608			1,224,820		34,011		296,028		719,396		22,601,239
Increase (decrease) in $	$	213,459		$	(1,294,985	)	$	1,224,820	$	34,011	$	296,028	$	719,396	$	1,192,729
Increase (decrease) in %		4.6	%		(7.7	%)		N/A		N/A		N/A		N/A		5.6	%

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

	Average unit cost
	Bricks			Concrete
Nine months ended March 31, 2015	$	12.7		$	33.9
Nine months ended March 31, 2016		11.5			32.5
Decrease in $	$	(1.2	)	$	(1.4	)
Decrease in %		(9.4	)%		(4.1	)%

Thus, cost of brick revenue increased mainly as a function of higher sales volume while cost of concrete revenue decreased as a function of lower sales volume and lower average unit cost.

Based on the fees we paid third-party manufacturers for the nine months ended March 31, 2015 and 2016, which remained consistent during such periods (i.e., $0.90 for bricks, and $0.90 and $1.00 for concrete, respectively), such fees were approximately $2.20 and $2.40 lower per unit for bricks, respectively, and $1.00 lower per unit for concrete. Thus, were we to entirely produce internally during such periods, our cost of revenue would have increased by approximately $206,000 and $342,000 for bricks, respectively, and $124,000 and $106,000 for concrete, respectively, and our gross profit would have decreased accordingly.

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

	Average unit cost
	CWM
	Hauling		Recycled Aggregates		Recycled Bricks		Waste Processing Services		Waste Processing Services
	Truckload		m³		m³		Jobsite		m³
Nine months ended March 31, 2015	$	-	$	-	$	-	$	-	$	-
Nine months ended March 31, 2016		35.24		2.46		32.48		114.26		0.44
Increase	$	35.24	$	2.46	$	32.48	$	114.26	$	0.44
Increase in %		N/A		N/A		N/A		N/A		N/A

Gross Profit

Gross profit was $14,546,153, an increase of $2,305,263 or 18.8% from a year ago. Gross profit margin increased to approximately 39.0% from 36.0% for the nine months ended March 31, 2016.

Gross profit attributable to bricks was $6,027,188, a decrease of $1,078,816 or 15.2%, from a year ago. Gross profit margin was 55.3%, a decrease of 5.1%, from 60.4% a year ago. The reduced margin is consistent with lower average selling price affected by the imposition of the VAT discussed earlier.

Gross profit attributable to concrete was $5,340,289, an increase of $205,403 or 4.0%, from a year ago. Gross profit margin was 25.7%, an increase of 2.2%, from 23.5% a year ago. The increased margin is consistent with decreased average unit cost affected by lower costs for raw materials and lower sales volume.

Gross profit attributable to CWM was $3,178,676 for the nine months ended March 31, 2016. Gross profit margin was 58.3%.

Operating Expenses

Operating expenses were $3.1 million, an increase of $0.3 million or 9.0% as compared to a year ago. G&A expenses increased by $0.4 million or 18.2% to $2.8 million, including $0.2 million increase in stock-based compensation and $0.1 million increase in professional fees, $0.1 million increase in office expense, $0.4 million increase in salary expense, $0.4 million increase in business development expense, and $0.1 million increase in travel expense, offset by a decrease of $1.0 million in start-up costs related to Yulong Renewable’s CWM facilities. Selling expense, however, decreased by $0.2 million or 34.0%, to $0.34 million, due to a $0.08 million decrease in fuel expense as average gasoline price decreased by approximately $0.16 (RMB 1.00) per kiloliter during the period, and a $0.1 million decrease in depreciation expense when some of our concrete trucks were completely depreciated in the fourth quarter of fiscal 2014.

Other Expense, Net

We had other expense of $309,664, as compared to other expense of $1,047,912 a year ago. Other expense consisted of $176,717 in other finance and non-operating income, $179,437 gain on change in fair value of warrant liabilities and $74,409 in interest income, offset by $737,042 in interest expense and $3,185 in foreign currency exchange translation loss.

Provision for Income Taxes

Provision for income taxes increased by $767,924 to $2,865,311, as compared to a year ago, due to higher income before tax.

Net Income

Net income for the nine months ended March 31, 2016 was $8,222,432, as compared to $6,206,561 for the same period last year.

Liquidity and Capital Resources

Capital Resources

To date, we have financed our daily operations and capital investment in connection with our CWM facilities primarily through cash flow from operations, bank financing and financial support from our founder and chief executive officer, including through some of his relatives and another company that he owns. We also completed the initial public offering of our ordinary shares (“IPO”) on July 1, 2015, with gross proceeds of approximately $14 million before deducting underwriting discounts and commissions and offering expenses payable by us.

We will require cash of approximately $25.0 million within the next twelve months, including $7.4 million to repay outstanding short-term bank loans, $8.2 million to satisfy accounts payable and other payables, $4.2 million to satisfy capital lease obligations and the purchase of a land use right, and $5.2 million to complete the renovation of our research and development center and office building for our CWM business. As of March 31, 2016, we had cash and cash equivalents of approximately $31.8 million (including net proceeds of approximately $11.5 million from our IPO) and accounts receivable of $14.1 million. As a result, we believe that our current working capital is sufficient to support our operations for the next 12 months.

Short-term Loans – Banks

We had $7.4 million and $8.0 million in short-term bank loans as of March 31, 2016 and June 30, 2015, respectively. Such loans mature in one year or less and must be repaid in full upon maturity. Based on our borrowing history, we believe the banks that we work with will renew our loans after they mature, as they had done in the past.

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

Cash Flows

As of March 31, 2016, our cash was $31,412,559 as compared to $16,470,299 as of June 30, 2015. The following table presents a summary of our cash flows for the periods indicated:

	For the nine months ended March 31,
	2016			2015
Net cash provided by operating activities	$	6,555,423		$	5,993,463
Net cash used in investing activities		(437,963	)		(1,874,213	)
Net cash provided by (used in) financing activities		10,171,943			(7,957,342	)

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended March 31, 2016, was primarily attributable to $8.2 million of net income, $1.9 million in non-cash adjustments for depreciation of our plant and equipment, deferred tax benefit pertaining to an increase in our deferred tax assets, change in fair value of warrant liabilities and stock based compensation expense, $1.0 million in accounts payable from slower payments to our vendors, $0.1 million in other payables and accrued liabilities for expenses in connection with our IPO and interest on our capital leases, $0.5 million in customer deposits and $1.3 million in taxes payable due to increased income before tax and the VAT imposed on our bricks, offset by cash outflows of a $5.3 million increase in accounts receivable due to slower collection when we extended credit terms for customers with long-term relationships, a $1.0 million increase in deposits and other receivables for escrow deposits in connection with our indemnification obligations to the underwriter representative for our IPO, and an increase of $0.2 million in inventories.

Net cash provided by operating activities totaled approximately $6.0 million for the nine months ended March 31, 2015, and was primarily attributable to $6.2 million of net income, $1.0 million in non-cash adjustments for depreciation of our plant and equipment and deferred tax benefit pertaining to an increase in our deferred tax assets, cash inflows of $1.4 million from slower payments of our accounts payable with vendors, $0.8 million in other payables and accrued liabilities as we have incurred more accrued expenses in connection with our initial public offering of ordinary shares, and accrued interest on our capital leases, offset by cash outflows of a $0.3 million increase in deposits and other receivables from the security deposits we made during the period for 30 hauling trucks, a $0.3 million decrease in customer deposits and a $0.2 million decrease in taxes payable, and slower collection from customers that resulted in increased accounts receivable of $2.5 million.

Net Cash Used in Investing Activities

For the nine months ended March 31, 2016, we made prepayments of approximately $0.1 million, and payments of approximately $0.4 million, for construction-in-progress relating to Yulong Renewable’s facilities.

For the nine months ended March 31, 2015, we made prepayments of approximately $1.5 million, and payments of approximately $0.4 million, for construction-in-progress relating to Yulong Renewable’s CWM facilities.

Net Cash Provided by (Used in) Financing Activities

For the nine months ended March 31, 2016, net cash provided by financing activities resulted from $6.2 million in bank loans, $6.3 million in bank loan repayments as they became due, $0.5 million in principal repayments on capital lease obligations, $11.5 million in net proceeds from our IPO, less $0.6 million in repayments to our founder for advancing certain payments on our behalf.

For the nine months ended March 31, 2015, net cash used in financing activities resulted from $3.8 million in bank loan proceeds, $3.5 million in bank loan repayments as they became due, $1.1 million in principal repayments on capital lease obligations, and $7.2 million in repayment of interest-free long-term loan from our founder.

Off-balance Sheet Arrangements

As of March 31, 2016, we guaranteed a bank loan of an unrelated third party in the amount of $1.2 million, which guarantee will expire on December 29, 2016. We did not, however, accrue any liability in connection with such guarantee because the borrower had been current in its repayment obligations and we had not experienced any losses from providing such guarantees in the past. We have evaluated the guarantee and concluded that the likelihood of our having to make payments under the guarantee is remote and that the fair value of the stand-ready obligation under such commitment is not material. We agreed to provide the guarantee due to our long-term relationship with and the credit worthiness of the borrower.

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

Critical Accounting Policies

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

While our significant accounting policies are described in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our management’s discussion and analysis:

Principles of consolidation

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

Variable interest entities

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

(1)

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

(2)

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

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

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

Revenue recognition

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

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

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

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

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

CWM revenue also includes revenue from the following activities:

●

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

●

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

●

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

Accounts and other receivables

We extend unsecured credit to our customers as a normal course of business. Management reviews our accounts and other receivables each reporting period to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Known bad debts are written off against allowance for doubtful accounts after all collection effort has ceased. Our reserves are consistent with historical experience and considered adequate by management. We estimate that most accounts receivable are collected within six months. Accounts receivable are considered past-due after 90 days. For accounts receivable that are past-due for more than one year, we reserve 100% allowance.

Impairment for long-lived assets

Long-lived assets, including buildings and improvements, equipment and intangible assets with finite live, are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. We assess the recoverability of an asset based on the undiscounted future cash flow such asset is expected to generate, and recognize an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, is less than the carrying value of the asset. When we identify an impairment, we reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market value.

As of March 31, 2016, the fair value of building and improvements, equipment and intangible assets used in connection with the operations of Yulong Bricks, Yulong Concrete, Yulong Transport and Yulong Renewable exceeded their carrying value by approximately 250.8%. We use the cash flow model to determine the fair value of these assets. The key assumption of this model is the revenue generated from existing customers. We believe that such assumption provides us the best estimate of our future projected cash flow from these assets, net of any related cash outflow of cost, expenses and taxes.

The estimated fair value of these assets might be lower than their current fair value, which could result in future impairment charge if we are required to reduce our selling price or increase the costs associated with our revenue. In addition, competitive pricing pressure and changes in interest rates could materially and adversely affect our estimates of future net cash flow to be generated by these assets, which in turn could result in future impairment losses.

Use of estimates and assumptions

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

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this ASU is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of the fiscal year of adoption for public entities if the entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. We do not expect the adoption of ASU 2016-01 to have material impact on our financial position, results of operations or cash flows.

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

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective is to identity, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintain or improving the usefulness of the information provided to users of financial statements. The areas for simplification include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas apply only to nonpublic entities. For public business entities, the ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We do not expect the adoption of ASU 2016-09 to have material impact on our financial position, results of operations or cash flows.

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

●

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

	●	Inability of Yulong Renewable’s newly established Shangqiu branch to timely provide accounting information for the period-end closing for financial statements reporting purpose.

	●	Failure to implement proper internal control for financial statements reporting purpose due to inadequate internal audit resources. While we have developed the scope of our internal audit function, it has not yet been fully implemented as we have not been able to hire sufficient qualified staff to do so. And due to limited availability of qualified personnel in the geographical region where we operate, we may not be able to make sufficient hiring within a reasonably short period of time.

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

Remediation Initiatives

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

●

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

●

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

●

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

In addition, we intend to do the following:

●

continue to closely monitor the above initiatives and fully complete implementation by June 30, 2016.

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

Changes in Internal Control over Financial Reporting

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

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

None.

ITEM 1A.

RISK FACTORS.

There have been no material changes to the Company’s risk factors which are included and described in our Annual Report and in our quarterly report on Form 10-Q for the three months ended September 30, 2015, except for the addition of the following risk factor:

Restrictions on currency exchange are limiting our ability to fund offshore cash requirements.

The RMB is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. While the relevant law states that our PRC subsidiary, which is a wholly-foreign owned enterprise, may purchase foreign currency for settlement of current account transactions, the relevant provincial governmental authorities has nevertheless limited the ability of all WFOEs within Henan to purchase foreign currencies for current account transactions. Since all of our revenue is denominated in RMB, such restriction has limited and will continue to limit our ability to utilize our revenue to fund our offshore cash requirements, such as paying for legal, accounting and other professional services. This could affect our ability to timely meet our reporting and other obligations as a public company.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On January 19, 2016, we issued an aggregate of 127,264 shares of our ordinary shares in reliance upon the exemption from securities registration under Section 4(a)(2) of Securities Act of 1933, as amended, as follows:

●

31,279 shares to a consultant as compensation for two years of business consulting services pursuant to a written agreement; and

●

49,048 shares to another consultant as compensation for services provided pertaining to our financial reporting obligations and internal control implementation, and 46,919 shares as compensation for the same services to be provided, pursuant to a written agreement.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURES

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

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS

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

* Filed herewith.

SIGNATURES

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

	YULONG ECO-MATERIALS LIMITED

Dated: May 16, 2016	By:	/s/ Yulong Zhu
		Yulong Zhu
		Chief Executive Officer
		(Principal Executive Officer)

Dated: May 16, 2016	By:	/s/ Zan Wu
		Zan Wu
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Yulong Eco-Materials Ltd - FORM 10-Q - May 16, 2016

Attached files

Yulong Eco-Materials Ltd Reports