CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 – Organization and description of business
China Advanced Construction Materials Group, Inc. (“China ACM” or the “Company”) was incorporated in the State of Delaware on February 15, 2007. The Company through its 100% owned subsidiaries and its variable interest entity (“VIE”), is engaged in producing general ready-mix concrete, customized mechanical refining concrete, and other concrete-related products that are mainly sold in the Peoples Republic of China (“PRC”).
Current Development
In March 2010, Xin Ao established four 100% owned subsidiaries in China for consulting, concrete mixing and equipment rental services. They are Beijing Heng Yuan Zheng Technical Consulting Co., Ltd (“Heng Yuan Zheng”), Beijing Hong Sheng An Construction Materials Co., Ltd (“Hong Sheng An”), Beijing Heng Tai Hong Sheng Construction Materials Co., Ltd (“Heng Tai”) and Ta Dong Ao Hang Wei Ye Machinery and Equipment Rental Co., Ltd (“Ta Tong”). Total registered capital for these four subsidiaries is approximately $1.9 million (RMB 13 million) and there are no actual operations as of March 31, 2010.
Note 2 – Summary of significant accounting policies
Basis of presentation
The Company’s accounting policies used in the preparation of the accompanying consolidated financial statements conform to accounting principles generally accepted in the United States of America ("US GAAP") and have been consistently applied.
Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2009 annual report filed on Form 10-K.
Principles of consolidation
The consolidated financial statements reflect the activities of the following subsidiaries and VIEs. All material intercompany transactions have been eliminated.
| | | Place incorporated | | Ownership percentage | |
| BVI-ACM | | British Virgin Island | | | 100 | % |
| China-ACMH | | Beijing, China | | | 100 | % |
| Xin Ao | | Beijing, China | | VIE | |
| Heng Yuan Zheng | | Beijing, China | | VIE | |
| Hong Sheng An | | Beijing, China | | VIE | |
| Heng Tai | | Beijing, China | | VIE | |
| Ta Tong | | Beijing, China | | VIE | |
In accordance with the interpretation of US GAAP, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
ASC 810, addresses whether certain types of entities referred to as variable interest entities (“VIEs”), should be consolidated in a company’s consolidated financial statements.
Based upon a series of Contractual Arrangements, The Company determined that Xin Ao and its subsidiaries are VIEs subject to consolidation and that the Company is the primary beneficiary. Accordingly, the financial statements of Xin Ao and its subsidiaries are consolidated into the financial statements of the Company.
The carrying amount of the VIEs’ assets and liabilities are as follows:
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | March 31, 2010 | | | June 30, 2009 | |
| | | | (Unaudited) | | | | | |
| Current assets | | $ | 40,498,778 | | | $ | 24,769,527 | |
| Property, plant and equipment | | | 24,591,947 | | | | 22,089,717 | |
| Other noncurrent assets | | | 14,898,856 | | | | 8,927,452 | |
| Total assets | | | 79,989,581 | | | | 55,786,696 | |
| | | | | | | | | |
| Liabilities | | | (27,587,882 | ) | | | (19,062,845 | ) |
| Intercompany payables* | | | (35,151,246 | ) | | | (20,554,895 | ) |
| Total liabilities | | | (62,739,128 | ) | | | (39,617,740 | ) |
| Net assets | | $ | 17,250,453 | | | $ | 16,168,956 | |
* Intercompany payables are payables to China-ACMH, BVI-ACMH, and China ACM and are eliminated upon consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made in the preparation of the Company’s consolidated financial statements relate to the assessment of the fair value of share-based payments and the collectability of accounts receivable. Actual results could be materially different from those estimates, upon which the carrying values were based.
Foreign currency translation
The reporting currency of the Company is the U.S. dollar. The functional currency of China ACM and BVI-ACM is the U.S. dollar. China-ACMH and its VIEs use their local currency Chinese Renminbi (“RMB”) as their functional currency. In accordance with the FASB’s guidance on Foreign Currency Translation, the Company’s results of operations and cash flows are translated at the average exchange rates during the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at historical exchange rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Accumulated other comprehensive income in the consolidated statements of shareholders’ equity amounted to $2,628,288 and $2,705,267 as of March 31, 2010 and June 30, 2009, respectively. Asset and liability accounts at March 31, 2010 and June 30, 2009 were translated at RMB 6.836 and RMB 6.83 to $1.00, respectively. The average translation rates applied to the consolidated statements of income and cash flows for the nine months ended March 31, 2010 and 2009 were RMB 6.84 and RMB 6.83 to $1.00, respectively.
Translation 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. Gains and losses from foreign currency transactions are included in the results of operations. There were no material transaction gains or losses for the three and nine months ended March 31, 2010 and 2009.
Revenue recognition
The Company recognizes revenue in accordance with FASB issued accounting standards regarding revenue recognition which specifies that revenue is realized or realizable and earned when four criteria are met:
| | · | Persuasive evidence of an arrangement exists (the Company considers its sales contracts and technical service agreements to be pervasive evidence of an arrangement); |
| | · | Delivery has occurred or services have been rendered; |
| | | |
| | · | The seller’s price to the buyer is fixed or determinable; and |
| | · | Collectability of payment is reasonably assured. |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company sells its concrete products and provides concrete technical services primarily to major local construction companies. Sales agreements are signed with each customer. The agreements list all terms and conditions with the exception of delivery date and quantity, which are evidenced separately in purchase orders. The purchase price of products is fixed in the agreement and customers are not permitted to renegotiate after the contracts have been signed. The agreements include a cancellation clause if the Company or customers breach the contract terms specified in the agreement.
The Company does not sell products to customers on a consignment basis. There is no right of return after the product has been injected into the location specified by the contract and accepted by the customer. The Company recognizes revenue when the goods and services are provided by the Company and are accepted by the customer.
Sales revenue represents the invoiced value of goods, net of a value added tax (“VAT”). All of the Company’s concrete products that are sold in the PRC are subject to a Chinese VAT at the rate of 6% of the gross sales price.
Due to the fact that the Company uses recycled raw materials to manufacture its products, the State Administration of Taxation has granted the Company VAT tax exemption from August 2005 to August 2009 and a two year extension on the VAT tax exemption from August 2009 to August 2011. The VAT tax collected during the aforementioned period from the Company’s customers is retained by the Company and recorded as other subsidy income.
The Company also provides manufacturing services, technical consulting services and strategic cooperation including market sharing and equipment rental with other independently owned concrete companies. The Company signs a Technical Service Agreement or Strategic Cooperation Agreement with each concrete company, which specifies all terms and conditions including prices to be charged. Once concrete products are produced by the concrete company and supplied to builders referred by the Company or cost savings are realized by the use of technical solutions provided by the Company, the Company has in effect rendered its service pursuant to the agreements. The Company recognizes revenue and invoices the concrete companies monthly for technical service and marketing cooperation on a per-cubic-meter basis and for equipment rental on a per-mixer truck basis.
The Company also earns income from the renting of certain of its vehicles to other non-related concrete companies. The rental amounts are based on pre-determined rental rates on a per cubic meter basis.
Shipping and handling
Shipping and handling costs related to costs of the raw materials purchased is included in cost of revenues. Further, transportation costs incurred in the delivery of the Company’s concrete products are also included in cost of revenues.
Contingencies
From time to time, the Company may be subject to proceedings, lawsuits and other claims. The Company assesses the likelihood of any adverse judgments or outcomes of these matters as well as potential ranges of probable losses. The Company records a loss contingency when an unfavorable outcome and the amount of the loss can be reasonably estimated. Legal expenses incurred related to loss contingencies are classified as general and administrative expenses in the period incurred. No significant legal expenses related to any potential loss contingencies have been incurred during the three months and nine months ended March 31, 2010 and 2009.
Financial instruments
The accounting standards regarding fair value of financial instruments and related fair value measurements 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 follows:
| | · | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| | · | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| | · | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Marketable securities, warrant liabilities, receivables and current liabilities qualify as financial instruments. Marketable securities were determined using Level 1, which are carried on the consolidated balance sheets at fair value, with fair values determined by the financial institution who sold the securities. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities are reasonable estimates of fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
As required by a FASB accounting standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value of the warrants was determined using the CRR Binomial Model, as level 2 inputs, and recorded the change in earnings. As a result, the derivative liability is carried on the balance sheet at its fair value.
The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2010 (unaudited).
| | | Carrying Value at | | | Fair Value Measurement at March 31, 2010 | |
| | | March 31, 2010 | | | Level 1 | | | Level 2 | | | Level 3 | |
| Derivative liability - warrants | | $ | 5,042,716 | | | $ | - | | | $ | 5,042,716 | | | $ | - | |
Other than the derivative liability - warrants carried at fair value, the Company did not identify any other assets and liabilities that are required to be presented on the consolidated balance sheet at fair value in accordance with the FASB accounting standard.
Stock-based compensation
The Company records stock-based compensation expense pursuant to FASB’s accounting standard regarding stock compensation which requires companies to measure compensation cost for stock-based employee compensation plans at fair value at the grant date and recognize the expense over the employee's requisite service period. Under ASC Topic 718, the Company’s expected volatility assumption is based on the historical volatility of Company’s stock or the expected volatility of similar entities. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Stock-based compensation expense is recognized based on awards expected to vest, and there were no estimated forfeitures as the Company has a short history of issuing options. This accounting standard requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
The Company estimates the fair value of the awards using the CRR binomial model. Option pricing models, such as the CRR binomial model, require the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the CRR binomial model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with the accounting standard aforementioned using an option-pricing model, which value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
Concentration of risk
Cash - Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the PRC. The Company considers all highly liquid instruments purchased with original maturities of three months or less, and money market accounts, to be cash equivalents. Total cash in these banks at March 31, 2010 and June 30, 2009 amounted to $2,719, 042 and $3,634,805, respectively, of which $250,000 in deposits were covered by insurance. Also, as of March 31, 2010 and June 30, 2009, the Company held $412,524 and $453,192 in restricted cash in a corporate legal counsel’s trust account respectively, in accordance with an agreement with investors for the restricted use of preferred stock dividend and investor relation related expenses. Nonperformance by these institutions could expose the Company to losses not covered by insurance. Management reviews the financial condition of these institutions on a periodic basis. The Company has not incurred any losses on these accounts from nonperformance by the aforementioned institutions.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Major customers – For the three and nine months ended March 31, 2010 and 2009, no customer was over 10% of the company's total sales. As of March 31, 2010 and June 30, 2009, there was no customer over 10% of the company’s account receivable balance.
Major suppliers – For the three months ended March 31, 2010 and 2009, no supplier was over 10% of the company's total purchases. For the nine months ended March 31, 2010 and 2009, one supplier accounted for approximately 11.8% and 23.3% of the Company total purchases. As of March 31, 2010, no supplier accounted for more than 10% of the Company’s accounts payable balance. As of June 30, 2009, one supplier accounted for 16.0% of the Company’s accounts payable balance.
Political and economic risks - The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environments, and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among others.
Restricted cash
Restricted cash represents a portion of the proceeds received from the June 11, 2008, Private Placement that was deposited in a trust account held by the Company’s legal counsel for payment of dividends, investor relations fees, and other professional fees.
Accounts receivable
During the normal course of business, the Company extends unsecured credit to its customers. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Known bad debts are written off against allowance for doubtful accounts when identified. The Company’s reserves are consistent with its historical experience and considered adequate by management.
The ultimate collection of the Company’s accounts receivable may take more than one year, and any portion of accounts receivable expected to be collected in more than one year is reflected as noncurrent, net of allowance for doubtful accounts relating to that portion of the receivables. The bifurcation between current and noncurrent portions of accounts receivable is based on management’s estimate and predicated on historical collection experience.
Inventories
Inventories consist of raw materials and are stated at the lower of cost or market, as determined using the weighted average cost method. Management compares the cost of inventories with the 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, 2010 and June 30, 2009, the Company determined no reserves for obsolescence were necessary.
Prepayments
The Company advances monies to certain suppliers for raw materials and short term prepaid rent. These advances are interest free and unsecured. In addition, the prepayments also include amounts prepaid for rent.
Plant and equipment
Plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred while additions, renewals and betterments are capitalized. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method with 5% residual value.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The estimated useful lives of assets are as follows:
| | Useful Life |
| Transportation equipment | 10 years |
| Plant and machinery | 10 years |
| Office equipment | 5 years |
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 consolidated statements of income. Construction-in-progress represents labor costs, materials, and capitalized interest incurred in connection with the construction of a new mixer station inside the current plant facility in and outside of Beijing. 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. Maintenance, repairs and minor renewals are charged to expense as incurred. Major additions and betterments to property and equipment are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred. For the three months and nine months ended March 31, 2010 and 2009, no material interest was capitalized into construction in progress.
The Company recognizes an impairment loss when estimated cash flows estimated by those assets are less than the carrying amounts of the asset. Based on management review, the Company believes that there were no impairments as of March 31, 2010 and June 30, 2009.
Accounting for long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We assess the recoverability of the assets based on the undiscounted future cash flow the assets are 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, are 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 values. As of March 31, 2010, management believes there was no impairment.
Redeemable convertible preferred stock
On June 11, 2008, the Company completed the sale to certain accredited investors of 875,000 investment units for gross proceeds of $7,000,000, each unit consisting of one share of the Company’s Series A Convertible Preferred Stock and one warrant to purchase two shares of the Company’s common stock. The preferred stock pays annual dividends of 9% regardless of the Company’s profitability. Each preferred share is convertible into four shares of common stock. The Company received net proceeds of approximately $5.3 million after offering expenses and net of $930,000 restricted cash which was required to be placed in escrow. Upon the two year anniversary of the closing date, the Company is required to redeem for cash the outstanding preferred stock, if not previously converted by the holders, for $8.00 per share plus accrued but unpaid dividends. Because the Company is required to redeem the preferred stock on June 11, 2010, if it has not been previously converted by the holders, in accordance with a FASB accounting standard, the preferred stock is classified outside of shareholders’ equity.
In accordance with an accounting standard issued by the FASB regarding debt with conversion and other options, the Company allocated the proceeds received between the preferred stock and the warrants. The resulting discount from the face amount of the preferred stock is being amortized using the effective interest method over the period to the required redemption date. After allocating a portion of the proceeds to the warrants, the effective conversion price of the preferred stock was higher than the market price at the date of issuance, and therefore, no beneficial conversion feature was recorded. The dividends on the preferred stock, together with the periodic accretion of the preferred stock to its redemption value, are charged to retained earnings.
Income taxes
The Company’s subsidiaries and VIEs are governed by the income tax laws of the PRC. The Company accounts for income taxes in accordance with a FASB accounting standard, which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized. Since the Company’s operations are outside of the U.S., the Company did not have any provision for U.S. income taxes including any deferred income taxes, for the nine months ended March 31, 2010 and 2009, respectively.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accounting standard defines uncertainty in income taxes, 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. There were no material deferred tax amounts as of March 31, 2010 and June 30, 2009, respectively. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the three and nine months ended March 31, 2010 and 2009. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.
The Company has cumulative undistributed earnings of China ACMH of approximately $24.3 million as of March 31, 2010, included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings.
China ACM was organized in the United States and have incurred net operating losses for income tax purposes for the three months and nine months ended March 31, 2010 and 2009. The net operating loss carry forwards for United States income taxes amounted to $623,748, which excludes $483,789 stock based compensation expenses and change in fair value of warrant liabilities of $4,389,947 for the nine months ended March 31, 2010 due to temporary and permanent timing differences, respectively. The net operating loss carry forwards may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, starting from 2027. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continues losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The net change in the valuation allowance for the three months and nine months ended March 31, 2010 was an increase of approximately $128,956. Management will review this valuation allowance periodically and make adjustments accordingly.
Chinese income taxes
The Company‘s subsidiary and VIEs are governed by the income tax laws of the PRC concerning FIEs, Foreign Enterprises and various local income tax laws (the “Income Tax Laws”).
Xin Ao use of recycled raw materials in its production since its inception entitled the Company to an income tax exemption from January 1, 2003, through to March 31, 2007 and an income tax reduction from 25% to 15% from January 1, 2009 to December 31, 2011 as granted by the State Administration of Taxation of the PRC. Beginning January 1, 2009, the new Chinese Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic Enterprises (“DEs”) and FIEs. Effective January 1, 2009, the new reduced EIT rate of 15% replaced the existing rates of 25% currently applicable to both DEs and FIEs.
PRC laws require that before a FIE can legally distribute profits to its shareholders, it must satisfy all tax liabilities, provide for losses in previous years, and make allocations in proportions made at the discretion of the board of directors, after the statutory reserve. The statutory reserve includes the surplus reserve fund, the common welfare fund, and represents restricted retained earnings, see note 12 for further discussion.
The Company classifies interest and penalties assessed due to underpayment of income taxes as interest expense and other expenses, respectively. The Company incurred no such expenses for the three and nine months ended March 31, 2010 and 2009, respectively.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Value Added Tax
Enterprises or individuals, who sell commodities, engage in repair and maintenance, or import and export goods in the PRC are subject to a value added tax. The standard VAT rate is 6% of gross sales for the Company’s industry. A credit is available whereby VAT paid on the purchases of raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of finished products. Due to the fact that the Company uses recycled raw materials to manufacture its products, the State Administration of Taxation has granted the Company VAT exemption from August 2005 through to August 2009 and a two year tax, VAT, credit extension from August 2009 through August 2011.
Research and development costs
Research and development costs are expensed as incurred. The cost of materials and equipment that are acquired or constructed for research and development activities, and have alternative future uses, either in research and development, marketing, or sales, are classified as property and equipment, and depreciated over their estimated useful lives. Research and development expenses for the three and nine months ended March 31, 2010 were $5,756 and $46,232, respectively. The Company did not incur any research and development expense for the nine months ended March 31, 2009.
Earnings per share
The Company reports earnings per share in accordance with a FASB accounting standard, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants, options and convertible preferred stock, to issue common stock were exercised and converted into common stock. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.
Comprehensive income
The FASB accounting standard for reporting and display of comprehensive income and its components in its financial statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same providence as other financial statements. The accompanying consolidated financial statements include the provision of this accounting standard, and therefore, comprehensive income consists of net income, unrealized gains and losses from marketable securities, and foreign currency translation adjustments.
Recently issued accounting pronouncements
In June 2009, the FASB issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (“QSPE”). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In June 2009, the FASB also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the company’s financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In November 2009, the FASB issued an ASU regarding accounting for stock dividends, including distributions to shareholders with components of stock and cash. This ASU clarifies that the stock portion of a distribution to shareholders that contains components of cash and stock and allows shareholders to select their preferred form of the distribution (with a limit on the amount of cash that will be distributed in total) should be considered a stock dividend and included in EPS calculations as a share issuance. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The adoption of this ASU did not have a material impact on its consolidated financial statements.
In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. The adoption of this ASU did not have a material impact on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-01– Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The adoption of this ASU did not have a material impact on its consolidated financial statements.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In March 2010, FASB issued ASU No. 2010-10 –Amendments for Certain Investment Funds. This update defers the effective date of the amendments to the consolidation requirements made by FASB Statement 167 to a reporting entity’s interest in certain types of entities. The deferral will mainly impact the evaluation of reporting enterprises’ interests in mutual funds, private equity funds, hedge funds, real estate investment entities that measure their investment at fair value, real estate investment trusts, and venture capital funds. The ASU also clarifies guidance in Statement 167 that addresses whether fee arrangements represent a variable interest for all service providers and decision makers. The ASU is effective for interim and annual reporting periods in fiscal year beginning after November 15, 2009. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In March 2010, FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded Credit Derivatives. Embedded credit-derivative features related only to the transfer of credit risk in the form of subordination of one financial instrument to another are not subject to potential bifurcation and separate accounting as clarified by recently issued FASB guidance. Other embedded credit-derivative features are required to be analyzed to determine whether they must be accounted for separately. This update provides guidance on whether embedded credit-derivative features in financial instruments issued by structures such as collateralized debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and separate accounting. The guidance is effective at the beginning of a company’s first fiscal quarter beginning after June 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.
Note 3 – Supplemental disclosure of cash flow information
During the nine months ended March 31, 2010 and 2009, the Company paid interest in the amount of $23,762 and $637,124, respectively.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Cash payments for income taxes for the nine months ended March 31, 2010 and 2009 were $2,171,366 and $146, 000, respectively.
Non-cash transactions in the nine months ended March 31, 2010
For the nine months ended March 31, 2010, the accretion of the discount on redeemable preferred stock amounted to approximately $521,553, and has been included in the consolidated statements of shareholders’ equity.
For the nine months ended March 31, 2010, 184,437 shares of warrants were converted into 209,469 shares of common stock by the exercise of such warrants on a cashless basis.
For the nine months ended March 31, 2010, 396,250 shares of redeemable convertible preferred stock were converted into 1,585,000 shares of common stock on a cashless basis.
Note 4 – Marketable securities
Marketable securities are the mutual fund that XinAo purchased from CYJA Allianz Fund. All securities are available for sale and therefore are carried at fair value with unrealized gains and losses reported as accumulated other comprehensive income in shareholders’ equity. Realized gains and losses on marketable securities are included in other income or expense in the period they incurred, and when applicable, are reported as a reclassification adjustment in other comprehensive income. Gains and losses on the sale of marketable securities are determined using the specific-identification method. On December 21, 2009, the Company sold marketable securities at a total cash value of $78,207; a gain of $27,008 was recorded as realized gain.
Note 5 – Accounts receivable
Accounts receivable are generated from concrete products sold, vehicle rental services provided to other unrelated concrete companies, and technological consulting services provided to the Company’s customers and other concrete companies with which the Company conducts business. The payment terms are defined in the respective contracts. Over 73% of the Company’s receivables are due within a year by contract and are classified as current assets on the consolidated balance sheets. For certain large construction projects that can take several years to complete, the Company provides extended payment terms to the general contractors. These contractors are usually large state-owned builders with good credit ratings. At the end of each period, the Company evaluates the structure and collectability of accounts receivable and for these receivables that are past due or not being paid according to payment terms, the Company takes appropriate actions including seeking legal resolution in a court of law, for its collection efforts.
As of March 31, 2010 and June 30, 2009, accounts receivable and allowance for doubtful accounts consisted of the following:
| | | March 31, | | | June 30, | |
| | | 2010 (Unaudited) | | | 2009 | |
| Accounts receivable, current | | $ | 27,251,617 | | | $ | 11,936,388 | |
| Less: allowance for doubtful accounts, current | | | (86,293 | ) | | | (120,986 | ) |
| Net accounts receivable, current | | | 27,165,324 | | | | 11,815,402 | |
| | | | | | | | | |
| Accounts receivable, non-current | | | 10,079,648 | | | | 4,461,269 | |
| Less: allowance for doubtful accounts, non-current | | | (233,310 | ) | | | (328,563 | ) |
| Net accounts receivable, non-current | | | 9,846,338 | | | | 4,132,706 | |
| | | | | | | | | |
| Total accounts receivable, net | | $ | 37,011,662 | | | $ | 15,948,108 | |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6 – Plant and equipment
Plant and equipment consist of the following as of March 31, 2010 and June 30, 2009:
| | | March 31, | | | June 30, | |
| | | 2010 (Unaudited) | | | 2009 | |
| Transportation equipment | | $ | 20,376,288 | | | $ | 20,375,873 | |
| Plant and machinery | | | 12,878,451 | | | | 6,246,380 | |
| Office equipment | | | 113,544 | | | | 95,556 | |
| Construction-in-progress | | | 1,322,391 | | | | 3,369,500 | |
| Total | | | 34,690,674 | | | | 30,087,309 | |
| Less: accumulated depreciation | | | (10,098,727 | ) | | | (7,997,592 | ) |
| Plant and equipment, net | | $ | 24,591,947 | | | $ | 22,089,717 | |
Construction-in-progress represents labor costs, materials, and capitalized interest incurred in connection with the construction of a new mixer station inside and outside of the current plant facility in Beijing. No depreciation is provided for construction-in-progress until it is completed and placed into service. Most construction-in-progress is related to assembling of portable machinery the Company purchased with cash and in general the assembling process can be done in less than three weeks. Therefore, no interest expense was capitalized as the capitalized interest was not significant.
Construction of some of the new portable mixing stations was completed and approximately $6.36 million was transferred to fixed assets during the nine months ended March 31, 2010.
Depreciation expense for the three months ended March 31, 2010 and 2009 amounted to $724,627 and $539,885 respectively. Depreciation expense for the nine months ended March 31, 20010 and 2009 amounted to $2,112,510 and $1,611,255, respectively.
Note 7 – Prepayments
Prepayments are comprised of short-term and long-term factory rental prepayments the Company made and also prepayments for inventory purchases. Short-term prepayments as of March 31, 2010 and June 30, 2009 consisted of the following:
| | | March 31, | | | June 30, | |
| | | 2010 (Unaudited) | | | 2009 | |
| Prepayments for inventories | | $ | 2,667,846 | | | $ | 2,431,401 | |
| Short term prepayments-rent | | | 2,413,656 | | | | 1,823,925 | |
| Others | | | 15,000 | | | | - | |
| Total prepayments | | $ | 5,096,502 | | | $ | 4,255,326 | |
Long term prepayments represented advance on equipment purchases and the non-current portion of the factory rental prepayments the Company made. Advance on equipment purchases amounted to $5,161,697 as of March 31, 2010. Long term rental prepayments amounted to $4,718,135 and $4,794,746 as of March 31, 2010 and June 30, 2009, respectively.
Rent prepayments for the next five years ended March 31 consists of the following:
| Years ending March 31, | | Amount | |
| 2011 | | | 2,413,657 | |
| 2012 | | | 1,828,528 | |
| 2013 | | | 1,828,528 | |
| 2014 | | | 914,797 | |
| Thereafter | | | 146,282 | |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 8 – Short term loans
Short term loans represent amounts due to banks and the Company’s employee that are due within one year or on demand. As of March 31, 2010 and June 30, 2009, the outstanding balances on these loans were $146,282 and $4,512,200, respectively, and these loans consisted of the following:
| | | March 31, | | | June 30, | |
| | | 2010 (Unaudited) | | | 2009 | |
| Loan from Beijing International Trust Co, Ltd. interest rate of 15% per annum, due July 15, 2009, guaranteed by Rayland Credit Guarantee Co. Ltd., paid off in July 2009 | | $ | - | | | $ | 4,395,000 | |
| | | | | | | | | |
| Loan from an employee, effective interest rate of 0% per annum, due upon demand, unsecured. | | | 146,282 | | | | 117,200 | |
| | | | | | | | | |
| Total short term loans | | $ | 146,282 | | | $ | 4,512,200 | |
Interest expense on short-term loans for the three months ended March 31, 2010 and 2009 amounted to $0 and $190,563, respectively. Interest expense on short-term loans for the nine months ended March 31, 2010 and 2009 amounted to $23,765 and $636,907, respectively.
Note 9 – Derivative liability
Effective July 1, 2009, the Company adopted a FASB accounting standard, which defines determining whether an instrument (or embedded feature) is 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 own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This FASB accounting standard 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.
As a result of adopting this FASB accounting standard, warrants previously treated as equity pursuant to the derivative treatment exemption are no longer afforded equity treatment because the warrants have downward ratchet provision on the exercise price. As a result, the warrants are not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expired.
As such, effective July 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in June 2009. On July 1, 2009, the Company reclassified from paid-in capital, as a cumulative effect adjustment, $1,965,945 to beginning retained earnings and $3,337,225 to warrant liabilities to recognize the fair value of such warrants. The fair value of the warrants was $5,042,716 on March 31, 2010. Therefore, the Company recognized a $473,302 and $4,389,947 loss from the change in fair value for the three and nine months ended March 31, 2010, respectively.
These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the CRR Binomial Model using the following assumptions:
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | March 31, 2010 | | | July 1, 2009 | |
| | | (Unaudited) | | | | |
| Annual dividend yield | | | - | | | | - | |
| Expected life (years) | | | 3.25 | | | | 4.00 | |
| Risk-free interest rate | | | 1.60 | % | | | 2.07 | % |
| Expected volatility | | | 75 | % | | | 75 | % |
Expected volatility is based on historical volatility of a similar U.S. public company due to limited trading history of the Company’s common stock. The Company has no reason to believe future volatility over the expected remaining life of these 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. The expected dividend yield was based on the Company’s current and expected dividend policy.
The conversion option does not need to be separated from the redeemable convertible preferred stock and accounted for as derivative liability because it has the risks and rewards of an equity instrument and clearly and closely related to the risks and rewards of the redeemable convertible preferred stock, which has been accounted for as an equity instrument.
The redeemable convertible preferred stock contains residual equity interest, which on dissolution and liquidation of the Company, entitle the preferred stockholders to liquidation value and accumulated dividends, and rank equal with the common shareholders on an as if converted basis. A host contract is considered an equity instrument if it encompasses a residual interest in an entity.
Note 10 – Related party transactions
Other payables – shareholders
Beginning in July 2007, Mr. He Weili, a 38.10% shareholder, leased office space to the Company at approximately the current fair market value from July 2009 to June 2010 with annual payments of $172,950. For the three months ended March 31, 2010 and 2009, the Company recorded rent expense from the shareholder in the amount of approximately $43,238 and $43,000, respectively. For the nine months ended March 31, 2010 and 2009, the Company recorded rent expense from the shareholder in the amount of approximately $129,713 and $87,000, respectively. As of March 31, 2010 and June 30, 2009, approximately $289 and $56,046, respectively, remained unpaid, and is included in other payables - shareholders.
The Company’s shareholders Mr. Han Xianfu and Mr. He Weili, who have 57.15% and 38.10% indirect ownership interests in BVI-ACM, respectively, together loaned $750,900 to BVI-ACM on March 12, 2008, for the entity’s cash flow purposes. The loan is non-interest bearing, unsecured, and is payable in cash on demand.
Total other payables - shareholders as of March 31, 2010 and June 30, 2009 is as follows:
| | | March 31, | | | June 30, | |
| | | 2010 (Unaudited) | | | 2009 | |
| Han Xianfu, shareholder | | $ | 450,550 | | | $ | 450,550 | |
| He Weili, shareholder | | | 300,639 | | | | 356,396 | |
| Total other payable – shareholders | | $ | 751,189 | | | $ | 806,946 | |
Monies advanced to an entity that was in part formerly owned by Mr. He Weili. Prior to the reverse acquisition, the Company and this related entity were engaged in joint contracts, business licenses, and other partnership agreements. Pursuant to the reverse acquisition, the Company and this related entity began separate operations and the process of obtaining separate contracts, business licenses, and other partnership agreements were initiated. To date, the Company and this related entity are finalizing the aforementioned process of obtaining separate contracts, business licenses, and agreements. Due to the relationship of the two companies, certain monies were exchanged as part of their joint contracts. For the nine months ended March 31, 2010, the Company advanced approximately $5.04 million to this entity, and approximately $4.33 million was repaid. As of March 31, 2010 and June 30, 2009, the balance of other receivable for related party transaction was approximately $710,000 and $0, respectively.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 11 – Other receivables
As of March 31, 2010, other receivables mainly includes advances to employees, monies to another entity, receivables from insurance company, VAT tax refund and other deposits paid. The company paid VAT tax of approximately $532,310 and $0 as of March 31, 2010 and June 30, 2009 while waiting for VAT tax exemption extension and the amount paid is now due for a refund. Monies advanced to other entities, employees, and auction deposit amounted to $1.06 million and $0.28 million as of March 31, 2010 and June 30, 2010, respectively.
Monies to individual entities were short term in nature, due on demand and free of interest. Monies advanced to an entity that was in part formerly owned by Mr. He Weili, as described in Note 10 above, amounted to $710,000 and $0, as of March 31, 2010 and June 30, 2009, respectively.
As of June 30, 2009, other receivables consisted of receivables that were factored to a trust company, employee advances, station advances, and bidding deposits. For the fiscal year ended June 30, 2009, the Company had a factoring agreement with a third party unrelated trust company wherein it transferred its receivables for cash during the fourth quarter of 2009. As of June 30, 2009, the Company had not collected $3.6 million from the trust company and recorded the uncollected balances as other receivable. The Company received its remaining balances in July 2009.
Note 12 – Income taxes
Corporate income taxes for China
Companies, established before March 16, 2007, will continue to enjoy tax holiday treatment approved by the local Chinese government for a grace period of either for the next five years or until the tax holiday term is completed, whichever is sooner. These companies will pay the standard tax rate when the grace period expires. The Company had received its tax holiday treatment until December 2007. During the fourth quarter of the year, the Company has applied and received the Enterprise High-Tech Certificate. The certificate was awarded based on the Company's involvement in producing high-tech products, its research and development, as well as its technical services. As a result of this certification, the Company's effective income tax rate for China has been reduced to 15% from 25%. The new tax rate will be retroactive to January 1, 2009 and will be effective for three years, through December 31, 2011.
The Company was granted income tax exemption from January 1, 2003 to March 31, 2007. Beginning on January 1, 2009, the Company and its subsidiaries were subject to an EIT rate of 25%. The Company was granted a 10% tax deduction on 90% of the total sales revenue by the local authority due to the Company’s utilization of recycled raw materials. Beginning on January 1, 2009, the Company and its subsidiaries were subject to an EIT rate of 15%. For the nine months ended March 31, 2010 and 2009, the provision for income taxes amounted to $1,952,633 and $2,516,707, respectively.
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March 31, 2010 and 2009:
| | | March 31, | | | March 31, | |
| | | 2010 (Unaudited) | | | 2009 (Unaudited) | |
| U.S. statutory rates | | | 34 | % | | | 34 | % |
| Foreign income not recognized in the U.S. | | | (34 | )% | | | (34 | )% |
| China income taxes | | | 25 | % | | | 25 | % |
| China income tax exemption | | | (10 | )% | | | - | |
| Other | | | 5 | %(a) | | | 4 | %(a) |
| Effective income tax rates | | | 20 | % | | | 29 | % |
(a)The 5% represents expenses (such as change in fair value of warrants in the amount of $473,302 and certain expenses in the amount of $483,700 incurred in the U.S. entity) incurred by the Company that are not deductible for PRC income tax for the three months ended March 31, 2010. The 4% represents the expenses incurred in the U.S entity that were not subjected to PRC income tax for the three months ended March 31, 2009.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended March 31, 2010 and 2009:
| | | March 31, | | | March 31, | |
| | | 2010 (Unaudited) | | | 2009 (Unaudited) | |
| U.S. statutory rates | | | 34 | % | | | 34 | % |
| Foreign income not recognized in the U.S. | | | (34 | )% | | | (34 | )% |
| China income taxes | | | 25 | % | | | 25 | % |
| China income tax exemption | | | (10 | )% | | | - | |
| Other | | | 10 | %(a) | | | 3 | %(a) |
| Effective income tax rates | | | 25 | % | | | 28 | % |
| (a) | The 10% represents the expenses (such as change in fair value of warrants in the amount of $4,389,947 and certain expenses in the amount of $863,100 incurred in the U.S. entity) incurred by the Company that are not deductible for PRC income tax for the nine months ended March 31, 2010. The 3% represents the expenses incurred in the U.S entity that were not subjected to PRC income tax for the nine months ended March 31, 2009. |
Taxes payable consisted of the following:
| | | March 31, | | | June 30, | |
| | | 2010 (Unaudited) | | | 2009 | |
| Income taxes payable | | $ | 3,161,635 | | | $ | 3,039,905 | |
| Other taxes payables | | | 59,786 | | | | 8,274 | |
| Total taxes payable | | $ | 3,221,421 | | | $ | 3,048,179 | |
Note 13 – Shareholders’ equity
On June 11, 2008, the Company completed an offering (the “Offering”) on the sale of 875,000 of investment units for a total of $7,000,000, each unit consisting of one share of the Company’s Series A Convertible Preferred Stock, $0.001 par value per share, and one (1) five year warrant to purchase two shares of Common Stock (the “Warrants”). Each preferred share is convertible into four shares of common stock. Additionally, each holder is entitled to cumulative dividends equal to 9% annually, payable in cash, irrespective of the profitability of the Company.
The Company received net proceeds of approximately $5,223,291 with $930,000 in an escrow and after payment of certain fees and expenses. $497,500 was paid to Maxim Group LLC (“Maxim”) who served as the placement agent for the transaction, $9,500 was paid to American Stock Transfer & Trust Company as a transfer agent fee, $60,000 was paid to the attorney, and $45,000 was paid for a finance fee for the purchasers in connection with the transaction. These offering costs approximating $602,500 were charged to paid-in capital. The allocation of the proceeds from the investment to a relative fair value basis which resulted in the allocation of $5,798,000 to the Series A Preferred and $1,202,000 to the warrants.
The following is a summary of our current Redeemable Convertible Preferred Stock issued and outstanding net of discount:
| | | As of March 31, | | | As of June 30, | |
| | | 2010 (Unaudited) | | | 2009 | |
| Numbers of Redeemable Convertible Preferred shares outstanding in the beginning of the fiscal year | | | 851,125 | | | | 875,000 | |
| Redeemable Convertible Preferred shares converted to Common share during the fiscal year | | | (396,250 | ) | | | (23,875 | ) |
| Current Redeemable Convertible Preferred shares outstanding | | | 454,875 | | | | 851,125 | |
| | | | | | | | | |
| Per share conversion price from Redeemable Convertible Preferred shares to Common shares | | $ | 8 | | | $ | 8 | |
| | | | | | | | | |
| Current Redeemable Convertible Preferred Stock outstanding before discount | | $ | 3,639,000 | | | $ | 6,809,000 | |
| Discount on Redeemable Convertible Preferred shares outstanding | | $ | (46,027 | ) | | $ | (567,581 | ) |
| Total Current Redeemable Convertible Preferred stocks net of discount | | $ | 3,592,973 | | | $ | 6,241,419 | |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company also issued to the placement agent a warrant to purchase an aggregate of 245,000 shares of common stock with an exercise price of $2.40 per share with a term of five years. The warrants are exercisable on a cashless basis, in whole or in part, at an exercise price equal to $2.40 per share. The Company may call the warrants for redemption at any time after the warrants become exercisable (i) at a price of $.01 per warrant; (ii) upon not less than 30 days’ prior written notice of redemption to each warrant holder; and (iii) if, and only if, the last sale price of the common stock equals or exceeds $5.00 per share, for any twenty (20) trading days within a thirty (30) consecutive trading day period ending on the third business day prior to the notice of redemption to warrant holders.
The value of the warrants issued to the placement agent was $169,345 calculated by using the Cox-Ross-Rubinstein (“CRR”) Binomial Model. The fair value of these warrants of $169,345 was recognized as offering expense and charged to additional paid-in capital. The value of the warrants was determined using the CRR Binomial Model using the following assumptions: volatility 75%; risk-free interest rate of 3.49% of the Investor Warrants, the Placement and Advisory Warrants; dividend yield of 0%, and expected term of 5 years of the Investor Warrants and the Placement and Advisory Warrants. The volatility of the Company’s common stock was estimated by management based on the historical volatility of a similar U.S. public company due to limited trading history of the Company’s common stock. The risk-free interest rate was based on the Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the expected life of the warrants. The expected dividend yield was based on the Company’s current and expected dividend policy and the expected term is equal to the contractual life of the warrants.
Following is a summary of the status of warrants outstanding:
Outstanding Common Stocks Underlying Warrants
| Exercise Price | | Number | | Average Remaining Contractual Life |
| US $2.40 | | | 710,000 | | 3.19 years |
Following is a summary of the warrant activity:
| | | Number of Common stock underlying Warrants | |
| Outstanding as of June 30, 2008 | | | 1,995,000 | |
| Granted | | | - | |
| Forfeited | | | - | |
| Exercised | | | - | |
| Outstanding as of June 30, 2009 | | | 1,995,000 | |
| Granted | | | - | |
| Forfeited | | | - | |
| Exercised | | | (575,000 | ) |
| Outstanding as of March 31, 2010 (unaudited) | | | 1,420,000 | |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In connection with the private placement, the Company agreed to file a registration statement to register the warrants and common stock issuable upon conversion of the preferred stock and exercise of the warrants, as defined. The registration statement was declared effective in January 2009; the Company incurred $140,000 in penalties for late registration and was paid based on the contract in connection with the private placement.
On July 16, 2009, the Company issued 650,988 shares of its common stock, at a price of $2.30 per share, to its employees. The Company received net proceeds of approximately $1.5 million.
On March 1, 2010, the Company closed an offering of 2,000,000 shares of its common stock, at a price of $4.6 per share, less than 1% underwriting commission. The Company received net proceeds of approximately $8.4 million after deducting a total of $0.82 million underwriting commission, legal counsel, and other expenses directly related to the offering. Also, the Company issued an additional 300,000 shares of common stock to cover over-allotments on March 22, 2010 and received net proceeds of $1.2 million less $0.14 million underwriter commission and other direct expenses.
Employee Stock Options
On May 1, 2008, the Company issued 25,000 common shares to a Company executive, par value $0.001 for services the executive renders to the Company. The shares become fully vested after one year from the date of grant. On July 31 2008, the executive’s employment with the Company terminated, and the 25,000 shares were forfeited upon resignation.
On October 3, 2008, the Company entered into a one-year agreement with one of the Company’s board of directors. In connection with his services, the Company issued an aggregate of 50,000 options of the Company’s common stock at an exercise price of $2.90 per share. The options vest in equal quarterly installments over the first year of the agreement. As of March 31, 2010, all of the 50,000 options have been fully vested.
On December 1, 2008, the Company entered into a three-year agreement with the Company’s previous Chief Financial Officer. In connection with his services, the Company issued a total of 200,000 options of the Company’s common stock from the option bonus pool. The option bonus pool consists of four equal tranches of 50,000 options, with the first tranche of 50,000 options carrying an exercise price of $3.00, the second tranche of 50,000 options carrying an exercise price of $3.50, the third tranche of 50,000 options carrying an exercise price of $4.00, and the fourth tranche of 50,000 options carrying an exercise price of $4.50. A quarter (25%) of each tranche of options will vest at the end of each twelve-month period of the agreement. Upon termination of his service in the third quarter, in addition to the 50,000 vested options per the vesting schedule described above, the Company agreed to vest additional 50,000 shares of options (12,500 shares from each tranche) immediately.
In January, 2010, the Company appointed a new CFO officer whom is also the President of the Company. In connection with his services, the Company granted 12,500 option vesting on February 23, 2010 with an exercise price of $4.64, 35,000 share options vesting on March 5, 2010 with an exercise price $5.38, 15,000 option vesting on March 31, 2010 contingent upon a performance condition and exercise price at $5.38, and 50,000 options vesting on July 15, 2010 contingent upon a performance condition and exercise price at $5.38. As of March 31, 2010, the 15,000 contingent options were forfeited due to failure to meet performance condition.
The Company valued the stock options by the CRR binomial model with the following assumptions:
| | | Expected | | | Expected | | | Dividend | | | Risk Free | | | Grant Date | |
| | | Term | | | Volatility | | | Yield | | | Interest Rate | | | Fair Value | |
| Director | | | 5.31 | | | | 75 | % | | | 0 | % | | | 1.41 | % | | $ | 2.90 | |
| CFO and president | | | 5.07 | | | | 75 | % | | | 0 | % | | | 1.70 | % | | $ | 5.95 | |
The following is a summary of the option activity:
| | | Number of options | | | Intrinsic Value | |
| Outstanding as of June 30, 2008 | | | - | | | | | |
| Granted | | | 250,000 | | | | | |
| Forfeited | | | - | | | | | |
| Exercised | | | - | | | | | |
| Outstanding as of June 30, 2009 | | | 250,000 | | | | | |
| Granted | | | 112,500 | | | | | |
| Forfeited | | | (115,000 | ) | | | | |
| Exercised | | | (100,000 | ) | | | | |
| Outstanding as of March 31, 2010 (unaudited) | | | 147,500 | | | $ | 118,875 | |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Following is a summary of the status of options outstanding at March 31, 2010:
| | Outstanding options | | | Exercisable options | |
| | | | | | | Average | | | | | | | | | Weighted | |
| | | | | | | remaining | | | | | | | | | average | |
Average | | | | | contractual life | | | Exercise | | | | | | exercise | |
Exercise price | | Number | | | (years) | | | price | | | Number | | | price | |
| $ | 2.90 | | | 50,000 | | | | 8.52 | | | $ | 2.90 | | | | 50,000 | | | $ | 2.90 | |
| $ | 4.64 | | | 12,500 | | | | 9.91 | | | $ | 4.64 | | | | 12,500 | | | $ | 4.64 | |
| $ | 5.38 | | | 35,000 | | | | 9.91 | | | $ | 5.38 | | | | 35,000 | | | $ | 5.38 | |
| $ | 5.38 | | | 50,000 | | | | 9.91 | | | | | | | | | | | | | |
For the three months ended March 31, 2010 and 2009, the Company recognized approximately $264,342 and $40,409, respectively, as compensation expenses for its stock option plan. For the nine months ended March 31, 2010 and 2009, the Company recognized approximately $327,738 and $66,619, respectively, as compensation expenses for its stock option plan.
Restricted Stock Awards
On August 15, 2009, the Company issued 10,000 shares of restricted stock to each of its three board of directors for one year of service. On January 4, 2010, the Company issued 50,000 shares of restricted stock to its new Chief Financial Officer for one year of service. On February 7, 2010, the Company issued 10,000 shares of restricted stock to a new board of director for one year of service. The restricted stocks vest in equal quarterly installments over the first year of the agreement
For the three months ended March 31, 2010, the Company recognized $98,669 of the restricted stock as compensation expense. For the nine months ended March 31, 2010, the Company recognized approximately $156,051 of the restricted stock as compensation expense. As of March 31, 2010, $273,298 of total unrecognized compensation expense was related to the unvested restricted stock based compensation arrangements.
Note 14 – Contribution receivable
On July 8, 2005, Xin Ao’s board of directors passed a resolution to increase the registered capital from $3,630,000 (RMB 30 million) to $12,100,000 (RMB 100 million). The increase in registered capital of $8,470,000 (RMB 70 million) was funded by the undistributed profits as of June 30, 2005. Based on the PRC government’s regulations, all companies are required to record its capital in accordance with the business license, and since Xin Ao did not have sufficient undistributed profits as of June 30, 2005, the unfunded amount has been recorded as contribution receivable. Since the capital should be contributed by the shareholders of the Company, the contribution receivable was recorded as part of the equity transaction.
Further, pursuant to BVI-ACM’s establishment of China-ACMH in November 2007, BVI-ACM was required to pay 15% of $5,000,000 by February 22, 2009, and the remaining balance by November 22, 2009, in accordance with the laws of the PRC.
On March 30, 2009, Xin Ao’s board of directors approved to transfer $7,260,000 from undistributed retained earnings into registered capital of the Company. Contemporaneously, China-ACMH made a payment of $5,000,000 and BVI-ACM made a payment of $100 to the Company. On October 9, 2009, the Company has transferred $1,210,000 (RMB 10,000,000) from unrestricted retained earnings to registered capital.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 15 – Reserves and dividends
The laws and regulations of the PRC require that before a foreign invested enterprise can legally distribute profits, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, after the statutory reserves. The statutory reserves include the surplus reserve fund and the common welfare fund.
The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. As of March 31, 2010, the Company is required to reserve $8.1 million to the statutory reserves.
The transfer to this reserve must be made before distribution of any dividends to the Company’s shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
The Chinese government restricts distributions of registered capital and the additional investment amounts required by foreign invested enterprises. Approval by the Chinese government must be obtained before distributions of these amounts can be returned to the shareholders.
Note 16 – Earnings per share
The following is a reconciliation of the basic and diluted earnings per share computation for the three and nine months ended March 31, 2010 and 2009:
| | | Three months ended | | | Nine months ended | |
| | | March 31, | | | March 31, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| Basic earnings per share | | | | | | | | | | | | |
| Net income available to common shareholders | | $ | 2,182,264 | | | $ | 1,988,549 | | | $ | 4,944,710 | | | $ | 5,474,258 | |
| Weighted average shares outstanding-Basic | | | 13,941,654 | | | | 10,525,000 | | | | 12,424,000 | | | | 10,525,066 | |
| Earnings per share-Basic | | $ | 0.16 | | | $ | 0.19 | | | $ | 0.40 | | | $ | 0.52 | |
| | | | | | | | | | | | | | | | | |
| Diluted earnings per share | | | | | | | | | | | | | | | | |
| Net income available to common shareholders | | $ | 2,182,264 | | | $ | 1,988,549 | | | $ | 4,944,710 | | | $ | 5,474,258 | |
| Add: Dividends on preferred stock | | | 87,712 | | | | 155,200 | | | | 347,681 | | | | 472,850 | |
| Add: Accretion on preferred stock | | | 121,823 | | | | 150,243 | | | | 521,553 | | | | 450,725 | |
| Net income for diluted EPS | | $ | 2,391,799 | | | $ | 2,293,992 | | | $ | 5,813,944 | | | $ | 6,397,833 | |
| | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding-Basic | | | 13,941,654 | | | | 10,525,000 | | | | 12,424,000 | | | | 10,525,066 | |
| Restricted stock | | | 15,000 | | | | - | | | | 15,000 | | | | - | |
| Warrants and options | | | 643,752 | | | | - | | | | 1,385,927 | | | | - | |
| Preferred stock | | | 1,819,500 | | | | 3,496,632 | | | | 1,819,500 | | | | 3,499,015 | |
| | | | | | | | | | | | | | | | | |
| Weighted shares outstanding-Diluted | | | 16,419,906 | | | | 14,021,832 | | | | 15,644,427 | | | | 14,024,081 | |
| Earnings per share-Diluted | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.37 | | | $ | 0.46 | |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June 11, 2008, the Company issued 875,000 shares of preferred stock, each of which can be converted into four shares of common stock. The convertible preferred stock is mandatorily redeemable for cash at the end of two years if not yet converted. As of March 31, 2010, 396,250 of the preferred stock had been converted into 1,585,000 of common stock. Dividends on the preferred stock and accretion of the initial discount from the redemption value of the preferred stock, both of which are charged to retained earnings, are subtracted from net income to determine net income available to common shareholders for the purposes of computing basic earnings per share. In calculating diluted earnings per share, the convertible preferred stock is treated as common stock equivalents on an as-converted basis. The dividends and accretion on the preferred stock are added back to the net income available to common shareholders for calculating diluted earnings per share, as if the preferred stock were converted at the beginning of the period. For the nine months ended March 31, 2010 and 2009, total dividend and accretion were $869,234 and $923,573, respectively. For nine months ended March 31, 2010, 410,000 warrants were converted into 447,534 shares of common stock. For the nine months ended March 31, 2010, 710,000 warrants at an exercise price of $2.40 per share were included in the diluted EPS calculation, which under treasury stock method resulted in an additional 1,714,201 shares of common stocks.
Note 17 – Employee pension
The Company offers a discretionary pension fund, a defined contribution plan, to qualified employees. The pension includes two parts: the first to be paid by the Company is 20% of the employee’s actual salary in the prior year. The other part, paid by the employee, is 8% of the actual salary. The Company’s contributions of employment benefits, including pension were approximately $50,674 and $21,582 for the three months ended March 31, 2010 and 2009, respectively. The Company’s contributions of employment benefits, including pension were approximately $107,496 and $55,316 the nine months ended March 31, 2010 and 2009, respectively.
Note 18 – Operating leases
The Company entered into a lease agreement for a manufacturing plant with an unrelated party from October 1, 2008 to September 30, 2013 with annual payments of $197,052. Further, the Company agreed to lease office space from the Company’s shareholder, Mr. He Weili, from July 2009 to June 2010 with annual payment of $172,946. The rent is valued at fair value from the main property management.
The Company entered into four different five-year operating lease agreements during the fourth quarter of 2009. The lease payments are for four manufacturing plants with various unrelated parties for a total monthly payment of $213,000. Certain lease payments have been pre-paid by transferring the Company’s long-term accounts receivable to the lessors as the Company believes that a lump-sum pre-payment from aging receivable in exchange for agreeing to no increase in the future lease will benefit its future operation.
Total operating lease expense for the three months ended March 31, 2010 and 2009 was $703,245 and $92,705, respectively. Total operating lease expense for the nine months ended March 31, 2010 and 2009 was $2,094,615 and $277,884, respectively, and is included in cost of revenue, selling, general, and administrative expenses. Future minimum annual lease expense under non-cancelable operating leases with a term of one year or more consist of the following:
| Period ending March 31, | | Amount | |
| 2011 | | $ | 2,756,371 | |
| 2012 | | $ | 2,756,371 | |
| 2013 | | $ | 2,604,735 | |
| 2014 | | $ | 633,135 | |
| 2015 | | $ | - | |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 19 — Business Segments
The Company’s operations are classified into four principal reportable segments that provide different products or services. The Company is engaged in the business of selling concrete, manufacturing concrete, providing technical support services and others, which include mixer rental, sales of materials and marketing cooperation. Separate segment is required because each business unit is subject to different production and technology strategies.
For the three months ended March 31, 2010 (unaudited):
| | | Sales of concrete | | | Manufacturing services | | | Technical services | | | Others | | | Corporate | | | Total | |
| Net sales | | $ | 11,556,117 | | | $ | 4,060,284 | | | $ | 587,507 | | | $ | 246,858 | | | $ | - | | | $ | 16,450,766 | |
| Depreciation | | | (181,552 | ) | | | (487,801 | ) | | | (1,682 | ) | | | (46,074 | ) | | | (7,518 | ) | | | (724,627 | ) |
| Operating income | | | 1,015,670 | | | | 2,381,649 | | | | 500,298 | | | | 178,384 | | | | (1,452,399 | ) | | | 2,623,602 | |
| Other income (expenses) | | | 601,917 | | | | 240,615 | | | | - | | | | - | | | | - | | | | 842,532 | |
| Interest income | | | - | | | | - | | | | - | | | | - | | | | 2,985 | | | | 2,985 | |
| Interest expenses | | | - | | | | - | | | | - | | | | - | | | | (12 | ) | | | (12 | ) |
| Capital expenditure | | | (21,210 | ) | | | (28,084 | ) | | | - | | | | - | | | | (5,630 | ) | | | (58,924 | ) |
For the nine months ended March 31, 2010 (unaudited):
| | | Sales of concrete | | | Manufacturing services | | | Technical services | | | Others | | | Corporate | | | Total | |
| Net sales | | $ | 46,759,376 | | | $ | 10,529,012 | | | $ | 3,067,162 | | | $ | 1,740,644 | | | $ | - | | | $ | 62,096,194 | |
| Depreciation | | | (751,539 | ) | | | (1,198,643 | ) | | | (4,228 | ) | | | (136,027 | ) | | | (22,073 | ) | | | (2,112,510 | ) |
| Operating income | | | 3,209,690 | | | | 4,987,866 | | | | 2,828,678 | | | | 1,286,084 | | | | (3,219,334 | ) | | | 9,092,984 | |
| Other income (expenses) | | | 2,455,431 | | | | 620,355 | | | | - | | | | - | | | | 5,513 | | | | 3,081,299 | |
| Interest income | | | - | | | | - | | | | - | | | | - | | | | 6,006 | | | | 6,006 | |
| Interest expenses | | | - | | | | - | | | | - | | | | - | | | | (23,765 | ) | | | (23,765 | ) |
| Capital expenditure | | | (158,372 | ) | | | (4,756,574 | ) | | | - | | | | - | | | | (29,022 | ) | | | (4,943,968 | ) |
For the three months ended March 31, 2009 (unaudited):
| | | Sales of concrete | | | Manufacturing services | | | Technical services | | | Others | | | Corporate | | | Total | |
| Net sales | | $ | 6,544,484 | | | $ | 1,304,615 | | | $ | 431,456 | | | $ | 995,971 | | | $ | - | | | $ | 9,276,526 | |
| Depreciation | | | (347,476 | ) | | | (110,804 | ) | | | (1,273 | ) | | | (78,768 | ) | | | - | | | | (538,321 | ) |
| Operating income | | | 1,904,455 | | | | 784,945 | | | | 406,287 | | | | 723,338 | | | | (742,921 | ) | | | 3,076,104 | |
| Other income (expenses) | | | 392,694 | | | | 78,277 | | | | - | | | | - | | | | (118,343 | ) | | | 352,628 | |
| Interest income | | | - | | | | - | | | | - | | | | - | | | | 937 | | | | 937 | |
| Interest expenses | | | - | | | | - | | | | - | | | | - | | | | (194,200 | ) | | | (194,200 | ) |
| Capital expenditure | | | - | | | | (18,724 | ) | | | - | | | | - | | | | - | | | | (18,724 | ) |
For the nine months ended March 31, 2009 (unaudited):
| | | Sales of concrete | | | Manufacturing services | | | Technical services | | | Others | | | Corporate | | | Total | |
| Net sales | | $ | 16,382,049 | | | $ | 5,301,154 | | | $ | 1,471,583 | | | $ | 2,086,687 | | | $ | - | | | $ | 25,241,473 | |
| Depreciation | | | (1,171,143 | ) | | | (248,302 | ) | | | (3,818 | ) | | | (187,992 | ) | | | - | | | | (1,611,255 | ) |
| Operating income | | | 4,113,938 | | | | 3,458,629 | | | | 1,340,968 | | | | 1,430,063 | | | | (1,892,752 | ) | | | 8,450,846 | |
| Other income (expenses) | | | 982,923 | | | | 318,069 | | | | - | | | | - | | | | (201,531 | ) | | | 1,099,461 | |
| Interest income | | | - | | | | - | | | | - | | | | - | | | | 4,777 | | | | 4,777 | |
| Interest expenses | | | - | | | | - | | | | - | | | | - | | | | (640,544 | ) | | | (640,544 | ) |
| Capital expenditure | | | (22,155 | ) | | | (18,724 | ) | | | - | | | | - | | | | (9,487 | ) | | | (50,366 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets as of: | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2010 | | $ | 68,896,321 | | | $ | 15,513,684 | | | $ | - | | | $ | 2,564,705 | | | $ | | | | $ | 86,974,710 | |
| June 30, 2009 | | $ | 41,905,192 | | | $ | 10,512,222 | | | $ | - | | | $ | 3,902,359 | | | $ | - | | | $ | 56,319,773 | |
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 20 – Commitments and contingencies
Litigation
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company’s management does not expect the legal matters involving the Company would have a material impact on the Company’s consolidated financial position or results of operations.
Following is the summary of the current litigation:
Beijing Xin’Ao Concrete Co., Ltd vs. Beijing Boda Guosheng Investment Co., Ltd. (Beijing District Court, PRC)
In August 2006, Xin Ao filed a lawsuit against Beijing Boda Guosheng Investment Co., Ltd (“Boda”) seeking specific performance of Boda’s obligations under the sales contract to pay approximately $275,380 (RMB 2,000,000) for the cement supplied by Xin Ao between March 2005 and June 2005 and compensatory damages of approximately $23,500 (RMB 171,000) to cover the interest incurred on the unpaid balance. The Court ruled against Boda and ordered Boda to pay the amounts requested by Xin Ao; however, Boda appealed the court’s rulings. In November 2007, the Appeals Court upheld the original verdict and again ordered Boda to pay all the damages. Management does not believe that the ultimate outcome of this case will have a material adverse effect on the Company’s consolidated financial position or results of operations. As of March 31, 2010, the Company has factored this amount to an unrelated third party trust company and the trust company has received the payment from Boda.
Note 21 – Subsequent Events
On April 19, 2010, Xin Ao established a 100% owned subsidiary, Qi Xian Heng Xing Technology Co., Ltd in China for technology consulting services. The registered capital for the new subsidiary is $146,700 (RMB 1million).
The Company has performed an evaluation of subsequent events through the date these consolidated financial statements were issued to determine whether the circumstances warranted recognition and disclosure of those events or transactions in the consolidated financial statements as of March 31, 2010.
