UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10−Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2011
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 333-141568
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,
INC.
(Exact Name of Registrant as Specified in Its
Charter)
Delaware
|
20-8468508
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer Identification No.)
|
9 North West Fourth Ring Road
Yingu Mansion Suite 1708
Haidian District, Beijing
Peoples Republic of China 100190
(Address of principal executive offices, Zip Code)
+86 10 82525361
(Registrants telephone
number, including area code)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [_]
No [X]
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
Yes [X]
No [_]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer [_]
|
Accelerated Filer [_]
|
|
|
Non-Accelerated Filer [_]
|
Smaller reporting company [X]
|
(Do not check if a smaller reporting company)
|
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_]
No [X]
The number of shares outstanding of each of the issuers
classes of common equity, as of November 14, 2011 is as follows:
Class of Securities
|
Shares Outstanding
|
Common Stock, $0.001 par value
|
17,821,054
|
TABLE OF CONTENTS
PART I
|
FINANCIAL INFORMATION
|
|
|
PAGE
|
ITEM 1.
|
FINANCIAL STATEMENTS (UNAUDITED)
|
2
|
ITEM 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
25
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
36
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
36
|
|
|
|
PART II
|
OTHER INFORMATION
|
|
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
36
|
ITEM 1A.
|
RISK FACTORS
|
37
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
|
37
|
ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
|
37
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ITEM 4.
|
(REMOVED AND RESERVED)
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37
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ITEM 5.
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OTHER INFORMATION
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37
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ITEM 6.
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EXHIBITS
|
38
|
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
Condensed Consolidated Balance Sheets as of
September 30, 2011 and June 30, 2011
|
3
|
|
|
Condensed Consolidated Statements of Income
and Comprehensive Income for the three Months Ended September 30, 2011 and
2010
|
4
|
|
|
Condensed Consolidated Statements of Cash
Flows for the three Months Ended September 30, 2011 and 2010
|
5
|
|
|
Notes to Unaudited Condensed Consolidated
Financial Statements
|
6
|
2
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(UNAUDITED)
|
|
|
September 30,
|
|
|
June 30,
|
|
ASSETS
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
$
|
3,231,634
|
|
$
|
1,610,699
|
|
Restricted cash
|
|
1,126,080
|
|
|
928,200
|
|
Accounts receivable, net of allowance for doubtful accounts
of $12,712,880 and $5,627,049, respectively
|
|
100,666,920
|
|
|
84,793,355
|
|
Inventories
|
|
2,211,207
|
|
|
1,474,728
|
|
Investment
|
|
5,036,080
|
|
|
12,221,300
|
|
Other receivables
|
|
2,423,219
|
|
|
2,226,803
|
|
Prepayments
|
|
3,987,967
|
|
|
5,089,935
|
|
Total current assets
|
|
118,683,107
|
|
|
108,345,020
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
28,558,313
|
|
|
29,279,440
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
Advances on equipment purchases
|
|
4,559,060
|
|
|
4,509,505
|
|
Prepayments
|
|
2,278,793
|
|
|
2,702,409
|
|
Total other assets
|
|
6,837,853
|
|
|
7,211,914
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
154,079,273
|
|
$
|
144,836,374
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Short term loans, banks
|
$
|
4,316,640
|
|
$
|
15,470,000
|
|
Accounts payable
|
|
55,257,948
|
|
|
41,320,769
|
|
Customer deposits
|
|
575,494
|
|
|
391,550
|
|
Other payables
|
|
2,675,317
|
|
|
488,022
|
|
Other payables - shareholders
|
|
802,859
|
|
|
790,592
|
|
Accrued liabilities
|
|
1,685,472
|
|
|
1,921,582
|
|
Taxes payable
|
|
1,179,393
|
|
|
747,165
|
|
Total current liabilities
|
|
66,493,123
|
|
|
61,129,680
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
|
|
Warrants liability
|
|
423,181
|
|
|
618,657
|
|
Total liabilities
|
|
66,916,304
|
|
|
61,748,337
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 1,000,000 shares
authorized; no shares issued or outstanding
|
|
-
|
|
|
-
|
|
Common stock, $0.001 par value, 74,000,000
shares authorized, 17,806,887 and 17,794,387 shares issued and outstanding
as of September 30, 2011 and June 30, 2011, respectively
|
|
17,807
|
|
|
17,795
|
|
Additional paid-in capital
|
|
35,027,281
|
|
|
34,981,023
|
|
Retained earnings
|
|
38,010,078
|
|
|
35,240,851
|
|
Statutory reserves
|
|
6,571,196
|
|
|
6,248,357
|
|
Accumulated other comprehensive income
|
|
7,536,607
|
|
|
6,600,011
|
|
Total shareholders equity
|
|
87,162,969
|
|
|
83,088,037
|
|
Total liabilities and shareholders equity
|
$
|
154,079,273
|
|
$
|
144,836,374
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC AND
SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
|
(UNAUDITED)
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
REVENUE
|
|
|
|
|
|
|
Sales of concrete
|
$
|
40,085,039
|
|
$
|
25,320,947
|
|
Manufacturing services
|
|
4,499,968
|
|
|
4,471,777
|
|
Technical services
|
|
-
|
|
|
1,159,060
|
|
Other
|
|
-
|
|
|
5,298
|
|
Total revenue
|
|
44,585,007
|
|
|
30,957,082
|
|
|
|
|
|
|
|
|
COST OF REVENUE
|
|
|
|
|
|
|
Concrete
|
|
30,137,524
|
|
|
23,508,683
|
|
Manufacturing services
|
|
3,692,937
|
|
|
3,217,125
|
|
Technical services
|
|
-
|
|
|
106,010
|
|
Total cost of revenue
|
|
33,830,461
|
|
|
26,831,818
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
10,754,546
|
|
|
4,125,264
|
|
|
|
|
|
|
|
|
PROVISION FOR DOUBTFUL ACCOUNTS
|
|
7,001,540
|
|
|
167,058
|
|
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
|
|
2,709,440
|
|
|
2,026,730
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
1,043,566
|
|
|
1,931,476
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE), NET
|
|
|
|
|
|
|
Other subsidy income
|
|
2,685,390
|
|
|
1,787,563
|
|
Non-operating (expense), net
|
|
(54,205
|
)
|
|
169,227
|
|
Change in fair value of warrants liability
|
|
195,476
|
|
|
154,258
|
|
Interest income
|
|
222,644
|
|
|
4,929
|
|
Interest expense
|
|
(299,176
|
)
|
|
(12,906
|
)
|
TOTAL OTHER INCOME (EXPENSE), NET
|
|
2,750,129
|
|
|
2,103,071
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
3,793,695
|
|
|
4,034,547
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
701,629
|
|
|
726,226
|
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
$
|
3,092,066
|
|
$
|
3,308,321
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
Net Income
|
|
3,092,066
|
|
|
3,308,321
|
|
Foreign currency translation adjustment
|
|
936,596
|
|
|
1,070,182
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
$
|
4,028,662
|
|
$
|
4,378,503
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE ALLOCATED TO
COMMON SHAREHOLDERS
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
Basic
|
|
17,806,072
|
|
|
17,518,544
|
|
Diluted
|
|
17,828,572
|
|
|
18,022,815
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
$
|
0.17
|
|
$
|
0.19
|
|
Diluted
|
$
|
0.17
|
|
$
|
0.18
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(UNAUDITED)
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
$
|
3,092,066
|
|
$
|
3,308,321
|
|
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
1,082,560
|
|
|
862,140
|
|
Stock-based compensation expense
|
|
46,268
|
|
|
178,302
|
|
Deferred tax provision
|
|
-
|
|
|
128,261
|
|
Provision for doubtful accounts
|
|
7,001,540
|
|
|
167,058
|
|
Change in fair value of warrants liability
|
|
(195,476
|
)
|
|
(154,258
|
)
|
Loss realized from disposal of property,
plant, and equipment
|
|
3,989
|
|
|
-
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Accounts receivable
|
|
(21,817,592
|
)
|
|
(15,630,594
|
)
|
Notes receivable
|
|
(77,950
|
)
|
|
-
|
|
Inventories
|
|
(717,970
|
)
|
|
454,016
|
|
Other receivables
|
|
(171,396
|
)
|
|
(181,162
|
)
|
Prepayments
|
|
1,154,199
|
|
|
(844,255
|
)
|
Long term prepayment
|
|
451,864
|
|
|
428,676
|
|
Accounts payable
|
|
13,440,000
|
|
|
7,967,380
|
|
Customer deposits
|
|
179,067
|
|
|
660,301
|
|
Other payables
|
|
2,175,686
|
|
|
32,377
|
|
Accrued liabilities
|
|
(255,984
|
)
|
|
211,575
|
|
Taxes payable
|
|
422,662
|
|
|
617,851
|
|
Net cash provided by (used in) operating activities
|
|
5,813,533
|
|
|
(1,794,011
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from disposal of property, plant,
and equipment
|
|
6,236
|
|
|
648,496
|
|
Purchases of property, plant and equipment
|
|
(53,240
|
)
|
|
(58,252
|
)
|
Proceeds from sale of investments
|
|
7,296,120
|
|
|
-
|
|
Net cash provided by investing activities
|
|
7,249,116
|
|
|
590,244
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from short term loan
|
|
795,090
|
|
|
10,485,440
|
|
Payments for short term loan
|
|
(12,082,250
|
)
|
|
-
|
|
Rent payment to shareholder
|
|
11,792
|
|
|
43,725
|
|
Restricted cash
|
|
(187,080
|
)
|
|
57,580
|
|
Net cash (used in) provided by financing
activities
|
|
(11,462,448
|
)
|
|
10,586,745
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGE ON CASH
|
|
20,734
|
|
|
34,723
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
1,620,935
|
|
|
9,417,701
|
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
1,610,699
|
|
|
3,300,820
|
|
|
|
|
|
|
|
|
CASH, end of period
|
$
|
3,231,634
|
|
$
|
12,718,521
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Note 1 Organization and description of business
China Advanced Construction Materials Group, Inc. (China ACM)
was incorporated in the State of Delaware on February 15, 2007. China ACM
through its 100% owned subsidiaries and its variable interest entities (VIEs)
(collectively, the Company), 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). China
ACM has a wholly-owned subsidiary in the British Virgin Islands, XinAo
Construction Materials, Inc. (BVI-ACM), which is a holding company with no
operations. BVI-ACM has a wholly-owned foreign enterprise, Beijing Ao Hang
Construction Material Technology Co., Ltd. (China-ACMH), and China-ACMH has
contractual agreements with an entity which is considered a VIE.
In March and April 2010, the VIE established five 100% owned
subsidiaries in the PRC for consulting, concrete mixing and equipment rental
services: (1) Beijing Heng Yuan ZhengKe Technical Consulting Co., Ltd (Heng
Yuan ZhengKe), (2) Beijing Hong Sheng An Construction Materials Co., Ltd (Hong
Sheng An), (3) Beijing Heng Tai Hong Sheng Construction Materials Co., Ltd
(Heng Tai), (4) Da Tong Ao Hang Wei Ye Machinery, Equipment Rental Co., Ltd
(Da Tong) and (5) Luan Xian HengXin Technology Co., Ltd (HengXin). The purpose
of these subsidiaries is to support the Companys future growth.
On September 20, 2010, China ACM established a 100% owned
subsidiary, Advance Investment Holdings Co., Inc. (AIH) in the State of
Nevada. AIH has no operations as of September 30, 2011, and was dissolved on
August 30, 2011.
Note 2 Summary of significant accounting policies
Basis of presentation
The Companys 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.
Principles of consolidation
The consolidated financial statements reflect the activities of
the following subsidiaries and VIEs. All material intercompany transactions have
been eliminated.
|
|
Ownership
|
Subsidiaries and VIEs
|
Place Incorporated
|
Percentage
|
AIH
|
Nevada, USA
|
100%
|
BVI-ACM
|
British Virgin Island
|
100%
|
China-ACMH
|
Beijing, China
|
100%
|
XinAo
|
Beijing, China
|
VIE
|
Heng Yuan ZhengKe
|
Beijing, China
|
VIE
|
Hong Sheng An
|
Beijing, China
|
VIE
|
Heng Tai
|
Beijing, China
|
VIE
|
Da Tong
|
Datong, China
|
VIE
|
HengXin
|
Luanxian, China
|
VIE
|
VIEs are generally entities that lack sufficient equity to
finance their activities without additional financial support from other parties
or whose equity holders lack adequate decision making ability. 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.
Management makes ongoing assessment of whether China ACM is the
primary beneficiary of XinAo and its subsidiaries.
Based upon a series of contractual arrangements, The Company
determined that XinAo and its subsidiaries are VIEs subject to consolidation and
that the Company is the primary beneficiary. Accordingly, the financial
statements of XinAo and its subsidiaries are consolidated into the financial
statements of the Company.
6
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
The carrying amount of the VIEs assets and liabilities are as
follows:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Current assets
|
$
|
117,644,963
|
|
$
|
107,996,610
|
|
Property, plant and equipment
|
|
27,872,818
|
|
|
28,576,830
|
|
Other noncurrent assets
|
|
4,468,393
|
|
|
4,868,209
|
|
Total assets
|
|
149,986,174
|
|
|
141,441,649
|
|
|
|
|
|
|
|
|
Liabilities
|
|
(65,544,713
|
)
|
|
(60,206,978
|
)
|
|
|
|
|
|
|
|
Intercompany payables*
|
|
(8,992,230
|
)
|
|
(9,808,542
|
)
|
|
|
|
|
|
|
|
Total liabilities
|
|
(74,536,943
|
)
|
|
(70,015,520
|
)
|
|
|
|
|
|
|
|
Net assets
|
$
|
75,449,231
|
|
$
|
71,426,129
|
|
* Payables to China - ACMH and BVI-ACMH are eliminated upon
consolidation.
Use of estimates and assumptions
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. The significant
estimates and assumptions made in the preparation of the Companys consolidated
financial statements include the valuation of share-based payments, deferred
income taxes, allowance for doubtful accounts, and the useful lives of property,
plant and equipment. 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 US GAAP guidance on Foreign Currency
Translation, the Companys results of operations and cash flows are translated
at the average exchange rates during the period, assets and liabilities are
translated at the exchange rates at the balance sheet dates, and equity is
translated at historical exchange rates. As a result, amounts related to assets
and liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
Asset and liability accounts at September 30, 2011 and June 30,
2011 were translated at RMB 6.39 and RMB 6.46 to $1.00, respectively. The
average translation rates applied to the consolidated statements of income and
cash flows for the three months ended September 30, 2011 and 2010 were RMB
6.41andRMB 6.78to $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. The effects of foreign
currency translation adjustments are included in stockholders equity as a
component of accumulated other comprehensive income.
Revenue recognition
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 sellers price to the buyer is fixed or determinable;
and
-
Collectability of payment is reasonably
assured.
7
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED 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
delivered into the location specified by the contract and accepted by the
customer. The Company recognizes revenue when title and ownership of the goods
are transferred upon shipment to the customer or services are provided by the
Company.
Sales revenue represents the invoiced value of goods, net of a
value added tax (VAT). All of the Companys concrete products that are sold in
the PRC are subject to a Chinese VAT at the rate of 6% of the gross sales price.
The Company includes shipping and handling fee in both revenue
and cost of revenue.
Financial instruments
The US GAAP accounting standards regarding fair value of
financial instruments and related fair value measurements define fair value,
establish a three-level valuation hierarchy that requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.
The three levels of inputs are defined as follows:
-
Level 1 inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active
markets.
-
Level 2 inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.
-
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value
measurement.
Cash, restricted cash, investment, accounts receivable, other
assets, short term loans, accounts payable, and accrued expenses qualify as
financial instruments, and their carrying amounts are reported in the
consolidated balance sheets for accounts receivable, other assets, short term
loans, accounts payable and accrued expenses, at face value or cost, which
approximate fair value because of the short period of time between the
origination of such instruments and their expected realization and their current
market rates of interest.
The fair value of cash, restricted cash and investment were
derived from the quoted prices of the similar financial institutions, as Level 1
inputs. The fair value of the warrants liability was determined using the
Cox-Ross-Rubinstein (CRR) Binomial Model, as Level 2 inputs, and recorded the
unrealized gains and loss in earnings at each reporting period (see Note 9).
Stock-based compensation
The Company records stock-based compensation expense at fair
value on the grant date and recognize the expense over the employees requisite
service period. The Companys expected volatility assumption is based on the
historical volatility of Companys 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. The expected dividend yield is based on
the Companys current & expected dividend policy.
8
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Concentration of credit risk
For the three months ended September 30, 2011, no customer
represented more than 10% of the Companys total revenue. For the three months
ended September 30, 2010, one customer represented 13% of the Companys total
revenue. As of September 30, 2011 and June 30, 2011, no customer accounted for
more than 10% of the Companys accounts receivable balance.
Cash and cash equivalents
The Company considers all highly liquid investments with
maturity of three months or less at the date of purchase to be cash equivalents.
The Company currently maintains substantially all of its day-to-day operating
cash balances with major financial institutions within PRC and US. As of
September 30, 2011 and June 30, 2011, the Company had deposits in excess of
federally insured limits totaling $2,627,784 and $767,963, respectively.
Restricted cash
Restricted cash represents $938,400 cash deposits for short
term loans collateral and $187,680 cash deposits in connection with sales
agreements.
Other receivables
Other receivables primarily include advances to employees, an
unrelated entity, and receivables from insurance company, VAT tax refund and
other deposits.
Accounts receivable
During the normal course of business, the Company extends
unsecured credit to its customers. Accounts are considered past due after 30
days. In establishing the required allowance for doubtful accounts, management
considers the historical experience, economy, trend in the construction
industry, the expected collectability of amount receivable that past due and the
expected collectability of overdue receivable. 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. Accounts balances are
charged off against the allowance after all means of collection have been
exhausted and the potential for recovering is considered remote. There were no
write offs for each of the three months ended September 30, 2011 and 2010.
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 compare 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. As of September 30, 2011 and June 30, 2011, the Company determined no
reserves for obsolescence were necessary.
Investment
During October, 2010, the Company entered into a one-year
investment agreement with a financial investment company, whereby the Company
may invest up to approximately RMB 100,000,000. The financial investment company
will then invest the Companys funds in certain financial instruments including
bonds, mortgage trust or mutual funds. The rate of return on this investment is
guaranteed at 7% per annum. The Companys investment is not subject to market
fluctuation; therefore, the Company will not experience gain or loss on its
investment. However, the Companys funds deposited with the financial investment
company are not insured. The investment contract with the financial investment
company was terminated at expiration in October, 2011. The Company received
approximately $1.6 million cash proceeds from investment on October 9, 2011, and
expects to receive approximately $2 million by November 18, 2011 and
approximately $1.4 million by December 30, 2011 plus interest.
Prepayments and advances
The Company advances monies to certain suppliers for raw
materials, plant and equipment, and factory rent. These advances are interest
free and unsecured.
Property, plant and equipment
Property, plant and equipment are stated at cost. Expenditures
for maintenance and repairs are charged to operations as incurred while additions, renewals and 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. Leasehold improvements are amortized over the lesser of
estimated useful lives or lease terms, as appropriate.
9
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED 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
|
Buildings and improvements
|
3-20 years
|
Accounting for long-lived assets
Long-lived assets such as, property, plant and equipment are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. The Company did not
recognize any impairment charges for the three months ended September 30, 2011
and 2010.
Income taxes
The Company accounts for income taxes in accordance with ASC
740, Income Taxes, 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 and operating loss and tax credit carry forward.
Under this accounting standard, the effect on deferred income taxes of a change
in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recognized if it is more likely than not that
some portion, or all of, a deferred tax asset will not be realized.
ASC 740-10, Accounting for Uncertainty in Income Taxes defines
uncertainty in income taxes and the evaluation of a tax position 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.
Penalties and interest incurred related to underpayment of
income tax are classified as income tax expense in the period incurred.
United States federal, state and local income tax returns prior
to 2009 are not subject to examination by tax authority.
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 Companys
industry. A credit is available whereby VAT paid on the purchases of raw
materials used in the production of the Companys finished products can be used
to offset the VAT due on sales of finished products. Since the Company uses
recycled raw materials to manufacture its products, the State Administration of
Taxation has granted the Company VAT exemption through June 2013.
Research and development, advertising and repair and
maintenance
Research and development, advertising and repair and
maintenance 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 for the
three months ended September 30, 2011 and 2010 were $300,735 and $147,900,
respectively. Advertising costs for the three months ended September 30, 2011
and 2010 were $31,533 and $16,517, respectively. Repair and maintenance costs
for the three months ended September 30, 2011 and 2010 were $351,410 and
$289,417, respectively.
10
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Earnings per share
The Company reports earnings per share in accordance with the
US GAAP, 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, restricted stock based grants and
convertible preferred stock, to issue common stock were exercised and converted
into common stock. Common stock equivalents having an anti-dilutive effect on
earnings per share are excluded from the calculation of diluted earnings per
share.
Comprehensive income
Comprehensive income consists of net income and foreign
currency translation adjustments.
Reclassifications
Certain amounts from prior periods have been reclassified to conform to the
current periods presentation.
Note 3 Change in accounting estimate
Expecting longer collection period on accounts receivable and
higher probability of uncollectable accounts receivable, the Company changed the
accounting estimate on allowance for doubtful accounts within one year from
historical default rate 2% to 5% based on peers comparable rate in domestic
construction industry during the three months ended September 30, 2011. The
allowance for doubtful accounts increased to approximately $12.7 million at
September 30, 2011, compared to approximately $5.6 million at June 30, 2011. The
new estimate of peers comparable rate on allowance for doubtful accounts
increased provision for doubtful accounts for approximately $3 million compared
to the previous estimate of historical default rates. If the new accounting
estimate on allowance for doubtful accounts was adopted at June 30, 2011 or
September 30, 2010, the provision for doubtful accounts would have been
increased approximately $2.5 million or $1.5 million for the year ended June 30,
2011and the three months ended September 30, 2010, respectively.
Note 4 Supplemental disclosure of cash flow information
For the three months ended September 30, 2011 and 2010, the
Company paid interest in the amount of $297,869 and $898, respectively.
Cash payments for income taxes for the three months ended
September 30, 2011 and 2010were $254,607 and $51,282,respectively.
Non-cash investing and financing activities
For the three months ended September 30, 2011 and 2010, the
Company recognized $46,268 and $178,302 of compensation expenses related to
restricted stock grants, respectively.
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 Companys customers and other
concrete companies with which the Company conducts business. The payment terms
are defined in the respective contracts.
Accounts receivable and allowance for doubtful accounts
consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Accounts receivable, current
|
$
|
113,379,800
|
|
$
|
90,420,404
|
|
Less: allowance for doubtful accounts, current
|
|
(12,712,880
|
)
|
|
(5,627,049
|
)
|
Total accounts receivable, net
|
$
|
100,666,920
|
|
$
|
84,793,355
|
|
11
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Note 6 Property, plant and equipment
Property, plant and equipment consist of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Plant and machinery
|
$
|
21,958,551
|
|
$
|
21,687,400
|
|
Transportation equipment
|
|
20,577,875
|
|
|
20,354,203
|
|
Office equipment
|
|
1,286,581
|
|
|
1,269,255
|
|
Buildings and improvements
|
|
348,641
|
|
|
344,852
|
|
Total
|
|
44,171,648
|
|
|
43,655,710
|
|
Less: accumulated depreciation
|
|
(15,613,335
|
)
|
|
(14,376,270
|
)
|
Plant and equipment, net
|
$
|
28,558,313
|
|
$
|
29,279,440
|
|
Depreciation expense for the three months ended September 30,
2011and 2010 amounted to $1,082,560 and $862,140, respectively.
Note 7 Prepayments
Prepayments are comprised of plant factory rental prepayments
the Company made (see Note 16 for more information on the plant rental) and
advances on inventory purchases. Prepayments consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Advances on inventory purchases
|
$
|
2,032,967
|
|
$
|
3,156,185
|
|
Rent prepayments
|
|
4,233,793
|
|
|
4,636,159
|
|
Total prepayments
|
$
|
6,266,760
|
|
$
|
7,792,344
|
|
Minus: Current portion of prepayments
|
|
(3,987,967
|
)
|
|
(5,089,935
|
)
|
Total long-term prepayments
|
$
|
2,278,793
|
|
$
|
2,702,409
|
|
Note 8 Short term loans, banks
Short term loans represent amounts due to banks and the
Companys employees that are due within one year or on demand. As of September
30, 2011 and June 30, 2011, the outstanding balances on these loans consisted of
the following:
12
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Loan from Huaxia Bank. interest rate of
5.84% per annum, due February 2, 2012, guaranteed by Mr. Han Xian Fu,
Beijing Jinshengding Mineral Products Co., LTD and Beijing Xinhang
Construction Material Co., LTD
|
$
|
782,000
|
|
$
|
2,320,500
|
|
|
|
|
|
|
|
|
Loan from Shanghai Pudong Development Bank,
was fully repaid on September 29, 2011.
|
|
-
|
|
|
9,282,000
|
|
|
|
|
|
|
|
|
Loan from Citibank, interest rate of 5.83%
per annum, due February 8, 2012, guaranteed by Beijing Xinhang
Construction Group, Mr. Han XianFu and Mr. He Weili
|
|
1,173,000
|
|
|
2,320,500
|
|
|
|
|
|
|
|
|
Loan from Zhaoshang Bank, interest rate of
6.12% per annum, due November 4, 2011, guaranteed by Mr. Han Xian Fu and
Beijing Jinshengding Mineral Co., LTD, and Beijing Xinhang Construction
Material Co., LTD.
|
|
1,564,000
|
|
|
1,547,000
|
|
|
|
|
|
|
|
|
Loan from Industrial & Commercial Bank,
interest rate of 6.01% per annum, due April 6, 2012, collateral by
accounts receivable from China Construction 1st Bureau.
|
|
797,640
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
4,316,640
|
|
$
|
15,470,000
|
|
The above guarantor companies are the suppliers and unrelated
to the Company.
The Company paid off the loan from Zhaoshang Bank on November
8, 2011.
Interest expense on short-term loans for the three months ended
September 30, 2011 and 2010amounted to $290,018 and $11,446, respectively.
Note 9 Warrants liability
A contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Companys own stock and (b) classified
in stockholders equity in the statement of financial position is not considered
a derivative financial instrument. This accounting standard provides a two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuers own stock and thus able to qualify for the
scope exception.
The Companys warrants have downward ratchet provision on the
exercise price. As a result, the warrants are not considered indexed to the
Companys own stock, and are classified as liabilities with all future changes
in the fair value of these warrants recognized in earnings until such time as
the warrants are exercised or expired.
These common stock purchase warrants do not trade in an active
securities market, and as such, their fair value is estimated by using the
Cox-Ross-Rubinstein (CRR) Binomial Model using the following assumptions:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Annual dividend yield
|
|
-
|
|
|
-
|
|
Expected life (years)
|
|
1.70
|
|
|
1.98
|
|
Risk-free interest rate
|
|
0.21%
|
|
|
0.44%
|
|
Expected volatility
|
|
70%
|
|
|
75%
|
|
13
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Expected volatility is based on the historical volatility of
the Companys 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 Companys current and expected dividend
policy.
The following table sets forth by level within the fair value
hierarchy the warrants liability that was accounted at fair value on a recurring
basis.
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
September
|
|
|
Fair Value
Measurement at
|
|
|
|
30, 2011
|
|
|
September 30, 2011
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrants liability
|
$
|
423,181
|
|
$
|
-
|
|
$
|
423,181
|
|
$
|
-
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Fair Value Measurement at
|
|
|
|
2011
|
|
|
June 30, 2011
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrants liability
|
$
|
618,657
|
|
$
|
-
|
|
$
|
618,657
|
|
$
|
-
|
|
The following is a reconciliation of the beginning and ending
balances:
Beginning balance, June 30, 2011
|
$
|
618,657
|
|
|
|
|
|
Change in fair value for the three months ended September 30, 2011
|
|
(195,476
|
)
|
|
|
|
|
Ending balance, September 30, 2011
|
$
|
423,181
|
|
Note 10 Related party transactions
Other payables shareholders
Mr. He Weili, an approximately 17.0% shareholder, leased office
space to the Company at approximately the current fair market value from July
2009 to June 2012 with annual payments of approximately $176,000. The lease with
Mr. He was terminated on September 30, 2011. For the three months ended
September 30, 2011 and 2010, the Company recorded rent expense to the
shareholder in the $46,090 and $43,725, respectively. As of September 30, 2011
and June 30, 2010, approximately $52,000 and $40,000, respectively, remained
unpaid, and is included in other payables - shareholders.
The Companys 32.5% and 17.0% shareholders, Mr. Han Xianfu and
Mr. He Weili, respectively, together loaned $750,900 to BVI-ACM on March 12,
2008 for working capital purposes. The loan is non-interest bearing, unsecured,
and is payable in cash on demand.
14
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Total other payables - shareholders consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Han Xianfu, shareholder
|
$
|
450,540
|
|
$
|
450,540
|
|
He Weili, shareholder
|
|
352,319
|
|
|
340,052
|
|
|
$
|
802,859
|
|
$
|
790,592
|
|
Note 11 Income taxes
(a) Corporate income tax
China ACM and AIH were organized in the United States. China
ACM has incurred a tax loss of $61,000 for income tax purposes for the three
months ended September 30, 2011, which excludes $46,268 stock based compensation
expenses and gain in fair value of warrant liabilities of $195,476. As of
September 30, 2011, net operating loss carry forward for United States income
taxes purpose was approximately $1,709,000. The net operating loss carry
forwards may be available to reduce future years taxable income through year
2031. Management believes that the realization of the benefits from these losses
appears uncertain due to the Companys limited operating history and continues
losses for United States income tax purpose. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset to reduce the
asset to zero. The net changes in the valuation allowance for the three months
ended September 30, 2011 and 2010 were an increase of approximately $20,000 and
$86,000, respectively. Management reviews this valuation allowance periodically
and makes adjustments accordingly. AIH has no operation since incorporated and
no income tax incurred and was dissolved on August 30, 2011.
BVI-ACM was incorporated in the British Virgin Islands (BVI)
and is not subject to income taxes under the current laws of the British Virgin
Islands.
China-ACMH and VIEs-Chinese operations
All of the Companys income is generated in the PRC, through
VIEs. The Companys VIE entities have cumulative undistributed earnings of
approximately $47.8 million and $44.5 million as of September 30, 2011 and June
30, 2011, respectively, included in consolidated retained earnings and will
continue to be indefinitely reinvested in the PRC. Accordingly, no provision has
been made for U.S. deferred taxes related to future repatriation of these
earnings.
China-ACMH and VIEs are governed by the income tax laws of the
PRC and the income tax provision in respect to operations in the PRC is
calculated at the applicable tax rates on the taxable income for the periods
based on existing legislation, interpretations and practices in respect thereof.
After January 1, 2008, under the Chinese Enterprise Income Tax (EIT) law, the
statutory corporate income tax rate applicable to most companies is 25% instead
of the former tax rate of 33%. During the fourth quarter of 2009, XinAo has
applied and received the Enterprise High-Tech Certificate. The certificate was
awarded based on XinAos involvement in producing high-tech products, its
research and development, as well as its technical services. As granted by the
State Administration of Taxation of the PRC, XinAo was entitled to an income tax
reduction from 25% to 15% from January 1, 2009 to December 31, 2011.
In accordance with the EIT Law, enterprises established under
the laws of foreign countries or regions and whose place of effective
management is located within the PRC territory are considered PRC resident
enterprises and subject to the PRC income tax at the rate of 25% on worldwide
income. The definition of place of effective management refers to an
establishment that exercises, in substance, and among other items, overall
management and control over the production and business, personnel, accounting,
and properties of an enterprise. No detailed interpretation of guidance has been
issued to define place of effective management. Furthermore, the
administrative practice associated with interpreting and applying the concept of
place of effective management is unclear. If the Companys non-PRC
incorporated entities are deemed PRC tax residents, such entities would be
subject to PRC tax under the EIT Law. The Company has analyzed the
applicability of this law, and for each of the applicable periods presented, the
Company has not accrued for PRC tax on such basis. The Company continues to monitor changes in the interpretation
and/or guidance of this law.
15
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
The EIT Law also imposes a 10% withholding income tax, subject
to reduction based on tax treaty where applicable, for dividends distributed by
a foreign invested enterprise to its immediate holding company outside China.
Such dividends were exempted from PRC tax under the previous income tax law and
regulations. The Company considers permanently reinvested undistributed earnings
of Chinese operations in the PRC. As a result, there is no deferred tax expense
related to withholding tax on the future repatriation of these earnings.
Income (loss) before provision for income taxes consisted of:
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
USA
|
$
|
(122,934
|
)
|
$
|
(339,819
|
)
|
China
|
|
3,916,629
|
|
|
4,374,366
|
|
|
$
|
3,793,695
|
|
$
|
4,034,547
|
|
Provision for income taxes consisted of:
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Current provision:
|
|
|
|
|
|
|
USA
|
$
|
-
|
|
$
|
-
|
|
China
|
|
701,629
|
|
|
597,965
|
|
Total current provision
|
|
701,629
|
|
|
597,965
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
USA
|
|
-
|
|
|
-
|
|
China
|
|
-
|
|
|
128,261
|
|
Total deferred provision (benefit)
|
|
-
|
|
|
128,261
|
|
Total provision for income taxes
|
$
|
701,629
|
|
$
|
726,226
|
|
Significant components of deferred tax assets were as follows:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Deferred tax assets - non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward in the U.S.
|
$
|
581,060
|
|
$
|
560,660
|
|
|
|
|
|
|
|
|
Net operating loss carryforward in China
|
|
-
|
|
|
-
|
|
Total deferred tax assets - non-current
|
|
581,060
|
|
|
560,660
|
|
Valuation allowance
|
|
(581,060
|
)
|
|
(560,660
|
)
|
|
$
|
-
|
|
$
|
-
|
|
16
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Taxes payable consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Income taxes payable
|
$
|
1,157,721
|
|
$
|
701,556
|
|
Other taxes payable
|
|
21,672
|
|
|
45,609
|
|
Total taxes payable
|
$
|
1,179,393
|
|
$
|
747,165
|
|
(b) Uncertain tax positions
There were no unrecognized tax benefits for the three months
ended September 30, 2011 and 2010. Management does not anticipate any potential
future adjustments in the next twelve months which would result in a material
change to its tax positions. For the three months ended September 30, 2011 and
2010, the Company did not incur any interest and penalties.
Note 12 Shareholders equity
The value of the warrants issued to a placement agent from a
private placement which occurred in June 2008 was $169,345 calculated by using
the Cox-Ross-Rubinstein (CRR) Binomial option price 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
Companys 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 Companys 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 Companys current and expected dividend policy and the
expected term is equal to the contractual life of the warrants.
Following is a summary of the investor warrants activity issued
in connection with a private placement which occurred in June 2008:
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual Life
|
|
|
|
Number
|
|
|
Price
|
|
|
(Years)
|
|
Outstanding as of June 30, 2011
|
|
616,375
|
|
$
|
2.40
|
|
|
1.94
|
|
Granted
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2011
|
|
616,375
|
|
$
|
2.40
|
|
|
1.72
|
|
17
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Stock Option Plan
Under the employee stock option plan, the Companys stock
options expire ten years from the date of grant. On October 3, 2008, the Company
entered into a one-year agreement with one of the Companys board of directors.
In connection with his services, the Company issued an aggregate of 50,000
options of the Companys 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 June 30, 2011, all of the 50,000 options have been fully
vested.
On December 1, 2008, the Company entered into a three-year
agreement with the Companys former Chief Financial Officer. In connection with
his services, the Company issued a total of 200,000 options of the Companys
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 CFO who is also the
President of the Company. In connection with his services, the Company granted
12,500 options which vested on February 23, 2010 with an exercise price of
$4.64, 35,000 options which vested on March 5, 2010 with an exercise price
$5.38, 15,000 options which were scheduled to vest on June 30, 2010 contingent
upon a performance condition and exercise price at $5.38, and 50,000 options
which were scheduled to vest on July 15, 2010 contingent upon a performance
condition and exercise price at $5.38. As of June 30, 2011, the 15,000 and
50,000 contingent options were forfeited due to failure to meet performance
condition.
The Company valued the stock options using 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
|
|
5.50
|
|
|
44%
|
|
|
0%
|
|
|
1.70%
|
|
$
|
5.95
|
|
The following is a summary of the stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
Stock options
|
|
Shares
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
Outstanding as of June 30, 2011
|
|
97,500
|
|
$
|
4.01
|
|
$
|
-
|
|
Granted
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2011
|
|
97,500
|
|
$
|
4.01
|
|
$
|
-
|
|
Exercisable as of September 30, 2011
|
|
97,500
|
|
$
|
4.01
|
|
$
|
-
|
|
18
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Following is a summary of the status of stock options
outstanding and exercisable at September 30, 2011:
Outstanding options
|
|
|
Exercisable options
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
Average
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Remaining
|
Exercise
|
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
|
Contractual Life
|
Price
|
|
Number
|
|
(Years)
|
|
|
Price
|
|
Number
|
|
(Years)
|
2.9
|
|
50,000
|
|
7.02
|
|
$
|
2.9
|
|
50,000
|
|
7.02
|
4.64
|
|
12,500
|
|
8.40
|
|
$
|
4.64
|
|
12,500
|
|
8.40
|
5.38
|
|
35,000
|
|
8.43
|
|
$
|
5.38
|
|
35,000
|
|
8.43
|
|
|
97,500
|
|
|
|
|
|
|
97,500
|
|
|
For the three months ended September 30, 2011 and 2010, the
Company recognized $0 as compensation expenses under its stock option plan.
Restricted Stock Grants
Restricted stock grants are measured based on the market price
on the grant date. The Company has granted restricted shares of common stocks to
the board of directors, senior management, and consultant.
The Company didnt grant restricted stocks during the three
months ended September 30, 2011.
For the three months ended September 30, 2011 and 2010, the
Company recognized $46,268 and $178,302 of compensation expenses related to
restricted stock grants, respectively. The total unrecognized share-based
compensation expense as of September 30, 2011 was approximately $190,000, which
is expected to be recognized over a weighted average period of approximately 0.8
years.
Following is a summary of the restricted stock grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
Restricted Stock Grants
|
|
Shares
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of June 30, 2011
|
|
82,500
|
|
$
|
3.95
|
|
$
|
138,600
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
(30,000
|
)
|
|
4.00
|
|
|
|
|
Non-vested as of September 30, 2011
|
|
52,500
|
|
$
|
3.93
|
|
$
|
81,375
|
|
Note 13 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
Companys registered capital. The remaining reserve to fulfill the 50%
registered capital requirement amounted to approximately $1.8 million and $2.1
million as of September 30, 2011 and June 30, 2011.
The transfer to this reserve must be made before distribution
of any dividends to the Companys 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.
19
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
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 14Earnings per share
The following is a reconciliation of the basic and diluted
earnings per share computation for the three months ended September 30, 2011 and
2010:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Basic earnings per share
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
3,092,066
|
|
$
|
3,308,321
|
|
Weighted average shares outstanding-Basic
|
|
17,806,072
|
|
|
17,518,544
|
|
Earnings per share-Basic
|
$
|
0.17
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
3,092,066
|
|
$
|
3,308,321
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-Basic
|
|
17,806,072
|
|
|
17,518,544
|
|
Restricted stock
|
|
22,500
|
|
|
65,000
|
|
Warrants and options
|
|
-
|
|
|
439,271
|
|
|
|
|
|
|
|
|
Weighted shares outstanding-Diluted
|
|
17,828,572
|
|
|
18,022,815
|
|
Earnings per share-Diluted
|
$
|
0.17
|
|
$
|
0.18
|
|
For the three months ended September 30, 2011, 616,375 warrants
and 97,500 options outstanding were excluded in the diluted EPS calculation
because their effect was anti-dilutive. Further, 22,500 shares of
restricted stock vested but not issued were included in the diluted EPS
calculation.
Note 15 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 employees actual salary from the
prior year. The other part, paid by the employee, is 8% of the actual salary.
The Companys contributions of employment benefits, including pension were
approximately $170,000 and $71,000 for the three months ended September 30, 2011
and 2010, respectively.
Note 16 Operating leases
The Company entered into a lease agreement for a manufacturing
plant with an unrelated party which expires on September 30, 2013 with annual
payments of approximately $197,000. Further, the Company agreed to lease office
space from the Companys shareholder and chief operating officer, Mr. He
Weili, from July 2010 to June 2012 with annual payment of approximately
$176,000.The rent is valued at fair value from the main property management. The
lease with Mr. He was terminated on September 30, 2011. On August 31, 2011, The
Company entered a lease agreement to lease office space from a third party,
starting from November 1, 2011 to October 31, 2013 with annual payment of
approximately $363,000.In addition, On October 14, 2011, The Company entered a
lease agreement to lease office space from a third party, starting from October
19, 2011 to January 18, 2014 with annual payment of approximately $73,000.
20
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
The Company entered into three five-year and one four-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 Companys long-term accounts receivable to the lessors in
exchange for agreeing to no increase in the future. One of the lease agreements
was terminated early on November 30, 2010.
Total operating lease expenses for the three months ended
September 30, 2011 and 2010 were $644,007 and $707,070, respectively, and is
included in cost of revenue, selling, general, and administrative expenses.
Future annual lease payments, net of rent prepayment made as of September 30,
2011,under non-cancelable operating leases with a term of one year or more
consist of the following:
Years Ending September 30,
|
|
Amount
|
|
2012
|
$
|
655,000
|
|
2013
|
|
659,000
|
|
2014
|
|
655,000
|
|
Thereafter,
|
|
-
|
|
Note 17 -- Business Segments
The Companys 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 September 30, 2011:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
Concrete
|
|
|
Services
|
|
|
Services
|
|
|
Rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
40,085,039
|
|
$
|
4,499,968
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
44,585,007
|
|
Depreciation
|
|
(372,727
|
)
|
|
(642,760
|
)
|
|
|
|
|
|
|
|
(67,073
|
)
|
|
(1,082,560
|
)
|
Segment profit
|
|
9,689,252
|
|
|
778,038
|
|
|
-
|
|
|
-
|
|
|
(9,423,724
|
)
|
|
1,043,566
|
|
Other income (expenses)
|
|
2,405,102
|
|
|
280,288
|
|
|
-
|
|
|
-
|
|
|
141,271
|
|
|
2,826,661
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
222,644
|
|
|
222,644
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(299,176
|
)
|
|
(299,176
|
)
|
Capital expenditure
|
|
(47,866
|
)
|
|
(5,374
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(53,240
|
)
|
Total assets as of September 30, 2011
|
$
|
138,528,041
|
|
$
|
15,551,232
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
154,079,273
|
|
21
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
For the three months ended September 30, 2010:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
Concrete
|
|
|
Services
|
|
|
Services
|
|
|
Rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
25,320,947
|
|
$
|
4,471,777
|
|
$
|
1,159,060
|
|
$
|
5,298
|
|
$
|
-
|
|
$
|
30,957,082
|
|
Depreciation
|
|
(301,447
|
)
|
|
(526,421
|
)
|
|
(32
|
)
|
|
-
|
|
|
(34,240
|
)
|
|
(862,140
|
)
|
Segment profit
|
|
1,632,899
|
|
|
1,228,893
|
|
|
1,113,444
|
|
|
5,268
|
|
|
(2,049,028
|
)
|
|
1,931,476
|
|
Other income (expenses)
|
|
1,519,257
|
|
|
268,307
|
|
|
-
|
|
|
-
|
|
|
323,484
|
|
|
2,111,048
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,929
|
|
|
4,929
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,906
|
)
|
|
(12,906
|
)
|
Capital expenditure
|
|
(59,554
|
)
|
|
(10,517
|
)
|
|
-
|
|
|
(12
|
)
|
|
-
|
|
|
(70,083
|
)
|
Total assets as of June 30, 2011
|
$
|
114,759,372
|
|
$
|
26,911,329
|
|
$
|
3,153,809
|
|
$
|
11,864
|
|
$
|
-
|
|
$
|
144,836,374
|
|
Note 18Commitments and contingencies
Legal Contingencies
From time to time, the Company is a party to various legal
actions arising in the ordinary course of business. The Company accrues costs
associated with these matters when they become probable and the amount can be
reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred. The Companys management does not expect any liability
from the disposition of such claims and litigation individually or in the
aggregate would have a material adverse impact on the Companys consolidated
financial position or results of operations.
Following is the summary of the current litigation:
Beijing XinAo Concrete Co., Ltd vs. Beijing BodaGuosheng
Investment Co., Ltd. (Beijing District Court, PRC)
In August 2006, XinAo filed a lawsuit against Beijing
BodaGuosheng Investment Co., Ltd (Boda) seeking specific performance of Bodas
obligations under the sales contract to pay approximately $294,600 (RMB
2,000,000) for the cement supplied by XinAo 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 XinAo; however, Boda appealed the
courts rulings. In November 2007, the Appeals Court upheld the original verdict
and again ordered Boda to pay all the damages. As of June 30, 2011, the Company
has factored this amount to an unrelated third party trust company and the trust
company has received the payment from Boda.
On July 26 2011, the Company issued a press release announcing
that its board of directors received a preliminary, non-binding offer from its
Chairman and Chief Executive Officer, Mr. Xianfu Han, and its Vice Chairman and
Chief Operating Officer, Mr. Weili He, to acquire all of the outstanding shares
of the Companys common stock not currently owned by them in a going private
transaction at a proposed price of $2.65 per share in cash (Proposed
Transaction).
From July 29, 2011 to September 1, 2011, seven class action
complaints against the Company and its Board of Directors were filed in the
Court of Chancery of the State of Delaware, The complaints have the following
captions: Kinder v. China Advanced Construction Material Group, Inc., and its Board of Directors et
al., C.A. No. 6729-CS (filed July 29, 2011); McElligott v. China Advanced
Construction Material Group, Inc., and its Board of Directors et al., C.A. No.
6739-CS (filed August 2, 2011); Elias v. China Advanced Construction Material
Group, Inc., and its Board of Directors et al., C.A. No. 6754-CS (filed August 5,
2011); Camitta v. China Advanced Construction Material Group, Inc., and its Board
of Directors et al., C.A. No. 6770-CS (filed August 9, 2011); Jaworski v. China
Advanced Construction Material Group, Inc., and its Board of Directors et al.,
C.A. No. 6765-CS (filed August 11, 2011); Bolen v. China Advanced
Construction Material Group, Inc., and its Board of Directors et al., C.A. No.
6811-CS (filed August 26, 2011); and Mulder v. China Advanced Construction Material Group, Inc., and its Board
of Directors et al., C.A. No. 6830-CS (filed September 1, 2011). The Stockholder Actions generally allege that
the Company and all of our directors breached their fiduciary duties in
connection with the receipt by the Company of a preliminary, non-binding offer
from Xianfu Han, the Companys Chairman and Chief Executive Officer, and Weili
He, the Companys Vice Chairman and Chief Operating Officer, to acquire all of
the outstanding shares of our common stock not currently owned by them in a
going private transaction at a proposed price of $2.65 per share in cash (the
Proposed Transaction). The Stockholder Actions seek, among other things, to
declare that the Proposed Transaction is unfair, unjust and inequitable, to
enjoin the Company from taking any steps necessary to accomplish or implement
the Proposed Transaction, and damages in the event the Proposed Transaction is
consummated.
22
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Note 19 Subsequent Events
Agreement and plan of merger
On October 24, 2011, the Company announced that it has entered
into a definitive agreement and plan of merger with Novel Gain Holdings Limited,
a British Virgin Islands company ("Novel Gain"), CACMG Acquisition, Inc., a
Delaware corporation and a wholly owned, direct subsidiary of Novel Gain
("Merger Sub"), Mr. Xianfu Han and Mr. Weili He, pursuant to which Merger Sub
will merge with and into the Company with the Company continuing as the
surviving corporation and a wholly owned subsidiary of Novel Gain.
Under the terms of the merger agreement, each share of the
Company Common Stock issued and outstanding immediately prior to the effective
time of the merger will be converted into the right to receive $2.65 in cash
without interest, except for (i) shares in respect of which appraisal rights
have been properly exercised under Delaware law, and (ii) shares owned by Novel
Gain and Merger Sub (including shares to be contributed to Novel Gain by Messrs.
Han and He (the "Rollover Investors") pursuant to a rollover agreement between
Novel Gain and the Rollover Investors immediately
prior to the effective time of the merger), which shares will be cancelled
without the Rollover Investors receiving any consideration.
The merger contemplated by the merger agreement is subject to
customary closing conditions set forth in the merger agreement, including
obtaining approval of the existing stockholders of the Company. If completed,
the merger would, under the laws of the State of Delaware, result in the Company
becoming a privately held company and the Company Common Stock would no longer
be listed on the NASDAQ Global Market.
Restricted stock issuances
During May, 2010, the Company entered an agreement with a
communication consultant and agreed to grant 10,000 restricted shares of common
stock on an annual basis with 2,500 restricted shares of common stock vesting
quarterly. The service agreement was terminated on September 30, 2011 and the
Company agreed to issue 4,167 restricted stocks to the consultant for the
service provided from June to September 2011. 2,500 shares were issued on
October 14, 2011 for fair value of $4,125 and 1,667 shares were issued on
October 31, 2011 for fair value of $3,767.
Investments
During October, 2010, the Company entered into a one-year investment agreement with a financial investment company, whereby the Company may invest up to approximately RMB 100,000,000. The financial investment company will then invest the
Company’s funds in certain financial instruments including bonds, mortgage trust or mutual funds. The rate of return on this investment is guaranteed at 7% per annum. The Company’s investment is not subject to market fluctuation;
therefore, the Company will not experience gain or loss on its investment. However, the Company’s funds deposited with the financial investment company are not insured. The investment contract with the financial investment company was
terminated at expiration in October, 2011. The Company received approximately $1.6 million cash proceeds from investment on October 9, 2011, and expects to receive approximately $2 million by November 18, 2011 and approximately $1.4
million by December 30, 2011 plus interest.
Loan Repayment
On November 8, 2011, the Company paid off all amounts owed by the Company under a loan from Zhaoshang Bank.
Termination Agreement
On November 14, 2011, the Company entered into an employee termination agreement
(the Termination Agreement) with Jeremy Goodwin, the Companys President and
Chief Financial Officer, pursuant to which Mr. Goodwins employment with the
Company will terminate on the date of filing of this report. The Termination
Agreement provides that the termination of Mr. Goodwins employment is by mutual
agreement and not for cause or good reason. Pursuant to the Termination
Agreement, the Company shall pay to Mr. Goodwin (i) within five business days
following the termination of Mr. Goodwins
employment, a fee equal to $45,000, and (ii) within five business days after
date that the Form 15 deregistering the common stock of the Company with the SEC
becomes effective under the Securities Exchange Act of 1934, as amended (the
Act), the Company shall pay to Mr. Goodwin an additional fee equal to $45,000.
In addition, the Company agreed to use reasonable efforts to remove Mr. Goodwin
as a defendant in the class action lawsuits identified in Part II, Item 1 Legal
Proceedings, on the basis he was not party either to the management buyout
proposal or to the Board of Directors review of such proposal and so long as
Mr. Goodwin is a named defendant in such suits, and prior to the deregistration
of the Companys common stock under the Act, use commercially reasonable efforts
to obtain and maintain D&O liability insurance which provides Mr. Goodwin the
same rights and benefits as are accorded to the most favorably insured of the
Companys directors (provided that such insurance is not prohibited by the
Merger Agreement).
23
INTRODUCTORY NOTE
In this report, unless indicated otherwise, references to
China, Chinese and PRC, are references to the Peoples Republic of China;
-
BVI are references to the British Virgin Islands
-
China Advanced, China-ACM, the Company, we, us, or our, are
references to the combined business of China Advanced Construction Materials,
Group, Inc. and its wholly-owned subsidiaries, BVI-ACM and China-ACMH, as well
as XinAo, but do not include the stockholders of China Advanced;
-
BVI-ACM are references to XinAo Construction Materials, Inc.
-
China-ACMH are references to Beijing Ao Hang Construction Materials
Technology Co., Ltd.;
-
AIH are references to Advance Investment Holding Co., Inc.
-
XinAo are references to Beijing XinAo Concrete Group;
-
RMB are references to the Renminbi, the legal currency of China; and
-
U.S. dollars, dollars and $ are references to the legal currency of
the United States.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. You can identify such forward-looking
statements by terms such as anticipates, believes, could, estimates,
expects, intends, may, plans, potential, predicts, projects,
should, would and similar expressions intended to identify forward-looking
statements. Forward-looking statements reflect our current views with respect to
future events and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance on
these forward-looking statements. These forward-looking statements include,
among other things, statements relating to:
Also, forward-looking statements represent our estimates and
assumptions only as of the date of this report. You should read this report and
the documents that we reference in this report, or that we filed as exhibits to
this report, in their entirety and with the understanding that our actual future
results may be materially different from what we expect.
Except as required by law, we assume no obligation to update
any forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the future.
24
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Use of Non-GAAP Financial Measures
The Company makes reference to Non-GAAP financial measures in
portions of Managements Discussion of Financial Condition and Results of
Operations. Management believes that investors may find it useful to review our
financial results that exclude the non-cash expenses of $46,268 stock-based
compensation and a gain of $195,476 in change of fair value of warrants
liability, shown in the below chart, due to the adoption of a Financial
Accounting Standards Boards (FASB) ASC 815 (EITF 07-05) accounting standard
as discussed in the section Derivative Liability below.
Management believes that these Non-GAAP financial measures are
useful to investors in that they provide supplemental information to possibly
better understand the underlying business trends and operating performance of
the Company. The Company uses these Non-GAAP financial measures to evaluate
operating performance. However, Non-GAAP financial measures should not be
considered as an alternative to net income or any other performance measures
derived in accordance with GAAP.
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
Net Income available to Common
shareholders -GAAP
|
$
|
3,092,066
|
|
$
|
3,308,321
|
|
$
|
(216,255
|
)
|
Add Back:
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrants (a)
|
$
|
(195,476
|
)
|
$
|
(154,258
|
)
|
$
|
(41,218
|
)
|
Add Back:
|
|
|
|
|
|
|
|
|
|
Change in Equity-Based Compensation (b)
|
$
|
46,268
|
|
$
|
178,302
|
|
$
|
(132,034
|
)
|
Adjusted Net Income available to Common shareholders
-Non-GAAP
|
$
|
2,942,858
|
|
$
|
3,332,365
|
|
$
|
(389,507
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share - GAAP
|
$
|
0.17
|
|
$
|
0.19
|
|
$
|
(0.02
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
|
Change in Equity-Based Compensation
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
Adjusted basic earnings per share
Non-GAAP
|
$
|
0.17
|
|
$
|
0.19
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share-GAAP
|
$
|
0.17
|
|
$
|
0.18
|
|
$
|
(0.01
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
|
Change in Equity-Based Compensation
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
Adjusted diluted earnings per share Non-GAAP
|
$
|
0.17
|
|
$
|
0.18
|
|
$
|
(0.01
|
)
|
Weighted average number of shares
|
|
|
|
|
|
|
|
|
|
Basic
|
|
17,806,072
|
|
|
17,518,544
|
|
|
287,528
|
|
Diluted
|
|
17,828,572
|
|
|
18,022,815
|
|
|
(194,243
|
)
|
25
(a) The Company adopted the provisions of FASB accounting
standard ASC 815 (EITF 07-05), which provides standards with respect to
determining whether an instrument (or embedded feature) is indexed to an
entitys own stock. As a result of adopting this accounting standard, warrants
previously treated as equity pursuant to the derivative treatment exemption are
no longer afforded equity treatment because the warrants have a down-round
ratchet provision on the exercise price. As a result, the warrants are not
considered indexed to the Companys 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. 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 2008. The Company recognized a $195,476 and $154,258 gain
from the change in fair value for the three months ended September 30, 2011 and
2010, respectively.
(b) The Company records stock-based compensation expense
pursuant to FASBs 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 employees requisite service period. For the three months ended
September 30, 2011 and 2010, the Company recognized $46,268 and $178,302as
compensation expense for its restricted stock grants, respectively.
Overview
We are a holding company whose primary business operations are
conducted through our wholly-owned subsidiaries BVI-ACM and China-ACMH, and our
variable interest entity, XinAo and its subsidiaries. We engage in the
production of advanced construction materials for large scale commercial,
residential, and infrastructure developments, and are primarily focused on
producing and supplying a wide range of advanced ready-mix concrete materials
for highly technical, large scale, and environmentally-friendly construction
projects.
During the three months ended September 30, 2011, we supported
materials, services and our high speed railway projects through our network of
ready-mixed concrete plants throughout Beijing (four as of September 30, 2011)
and our portable plants (twenty-four as of September 30, 2011) located in
various provinces throughout China. We own one concrete plant and its related
equipment, and we lease three additional plants in Beijing.
Our manufacturing services are used primarily for our national
high speed railway projects. Typically, the general contractors on the high
speed railway projects supply the raw materials required for the project, which
results in higher gross margins for us and reduces our upfront capital
investments needed to purchase raw materials. We also produce ready-mix concrete
at portable plants, which can be dismantled and moved to new sites for new
projects. Our management believes that we have the ability to capture a greater
share of the Beijing market and further expand our footprint in China via
expanding relationships and networking, signing new contracts, and continually
developing market-leading innovative and eco-friendly ready-mix concrete
products.
Recent Developments
On October 24, 2011, we entered into an Agreement and Plan of
Merger (the Merger Agreement) with Novel Gain Holdings Limited, a British
Virgin Islands company (Novel Gain), CACMG Acquisition, Inc., a Delaware
corporation and a wholly owned, direct subsidiary of Novel Gain (Merger Sub),
Mr. Xianfu Han and Mr. Weili He. Pursuant to the Merger Agreement, Merger Sub
will merge with and into the Company, with the Company continuing as the
surviving corporation and a wholly owned subsidiary of Novel Gain (the
Merger). Mr. Han is our Chief Executive Officer and the Chairman of our Board
of Directors, and beneficially owns approximately 32.5% of our outstanding
common stock. Mr. He is our Chief Operating Officer and Vice-Chairman of our
Board of Directors, and beneficially owns approximately 17.0% of our outstanding
common stock.
Pursuant to the terms of the Merger Agreement, at the effective
time of the Merger (the Effective Time), each share of our common stock issued
and outstanding immediately prior to the Effective Time (other than (i) Rollover
Shares (as defined in the Merger Agreement), (ii) shares owned by Novel Gain and
Merger Sub and (iii) shares in respect of which appraisal rights have been
properly exercised under Delaware law) will be canceled and will be
automatically converted into the right to receive $2.65 in cash (the Merger
Consideration), without interest. In connection with the Merger, each
outstanding share of our common stock that is subject to vesting and/or
forfeiture restrictions will become fully vested immediately prior to the
Effective Time. Each warrant that is outstanding at the Effective Time will be
converted into the right to receive, upon exercise of such warrant after the
Effective Time, a cash amount equal to (i) the total number of shares of our
common stock subject to such warrant immediately prior to the Effective Time
multiplied by (ii) the excess, if any, of (x) the Merger Consideration over (y)
the exercise price payable per share of our common stock issuable under such
warrant. In addition, each option to purchase our common stock pursuant to the
our 2009 Equity Incentive Plan (the Plan) that is then outstanding and
unexercised, whether or not then vested, shall be converted into the right
to receive, upon exercise of such option after the Effective Time, a cash amount
equal to (i) the total number of shares of our common stock subject to such
option immediately prior to the Effective Time multiplied by (ii) the excess, if
any, of (x) the Merger Consideration over (y) the exercise price payable per
share of our common stock issuable under such option. Unless otherwise
determined by Novel Gain, the Plan shall terminate as of the Effective Time.
26
We, Novel Gain and Merger Sub each have made customary
representations and warranties to each other in the Merger Agreement. Completion
of the Merger is subject to customary closing conditions, including, but not
limited to, (i) adoption of the Merger Agreement by our stockholders, (ii) the
absence of any order or injunction prohibiting the consummation of the Merger
and (iii) the truth and correctness of each partys representations and
warranties at closing.
The Merger Agreement may be terminated under certain
circumstances, including, among others, (i) termination by mutual agreement of
the parties, (ii) termination by either party if the Merger is not consummated
on or before June 30, 2012, (iii) termination by the Company if we enter into an
agreement with respect to a Superior Proposal (as defined in the Merger
Agreement), (iv) termination under certain circumstances by the Company or Novel
Gain after an Alternative Transaction Proposal (as defined in the Merger
Agreement) is publicly disclosed and not withdrawn after December 23, 2011 and
receipt of the Facility Agreement (as defined in the Merger Agreement), assuming
that within 12 months of termination we enter into an agreement or transaction
with respect to the Alternative Transaction Proposal, (v) termination by Novel
Gain upon certain breaches of provisions of the Merger Agreement by the Company
or by our Board of Directors, and (vi) termination by the Company after certain
breaches by Novel Gain or Merger Sub. If the agreement is terminated pursuant to
(iii), (iv) or (v), then we will be required to pay to Novel Gain a termination
fee of $500,000. If the agreement is terminated pursuant to (vi) or prior to
Novel Gains execution of a Facility Agreement (as defined in the Merger
Agreement) and following 60 days from the execution of the Merger Agreement,
then Novel Gain, or at our request, Mr. Han and Mr. He, will be required to pay
to us a termination fee of $1,500,000; provided, however, such termination fee
will be increased to $2,500,000 prior to Novel Gains execution of a Facility
Agreement and following 90 days from the execution of the Merger Agreement.
The foregoing description of the Merger Agreement is qualified
in its entirety by reference to the full text of the Merger Agreement, a copy of
which has been filed as Exhibit 10.1 to our current report on Form 8-K dated
October 24, 2011, and which is incorporated herein by reference.
Principal Factors Affecting Our Financial Performance
We believe that the following factors will continue to affect
our financial performance:
Large Scale Contractor
Relationships.
We have contracts with major construction contractors which
are constructing key infrastructure, commercial and residential projects. Our
sales efforts focus on large-scale projects and large customers which place
large recurring orders and present less credit risk to us. For the three months
ended September 30, 2011, five customers accounted for approximately 13.0%of the
Companys sales and 9.4% of our account receivables as of September 30, 2011.
Should we lose any of these customers in the future and are unable to obtain
additional customers, our revenues will suffer.
Experienced Management
.
Managements technical knowledge and business relationships gives us the ability
to secure major infrastructure projects, which provides us with leverage to
acquire less sophisticated operators, increase production volumes, and implement
quality standards and environmentally sensitive policies. Significant turnover
in our senior management could significantly deplete the institutional knowledge
held by our existing senior management team.
Innovation Efforts
. We
strive to produce the most technically and scientifically advanced products for
our customers and maintain close relationships with Tsinghua University, Xian
University of Architecture and Technology and Beijing Dongfang Jianyu Institute
of Concrete Science & Technology which assist us with our research and
development activities. During our 5 year agreement with the Institute, we have
realized an advantage over many of our competitors by gaining access to a wide
array of resources and knowledge.
Competition
. Our
competition includes a number of state-owned and large private PRC-based
manufacturers and distributors that produce and sell products similar to ours.
We compete primarily on the basis of quality, technological innovation and
price. Essentially all of the contracts on which we bid are awarded through a
competitive bid process, with awards often being made to the lowest bidder
though other factors such as shorter schedules or prior experience with the
customer are often just as important. Within our markets, we compete with many
national, regional and local state-owned and private construction firms some of
which have achieved greater market penetration or have greater financial and
other resources than us. In addition, there are a number of larger national
companies in our industry that could potentially establish a presence in our markets and compete with us for contracts. If
we are unable to compete successfully in our markets, our relative market share
and profits could be reduced.
27
PRC Taxation
China-ACMH and our VIEs are governed by the income tax laws of
the PRC and the income tax provision in respect to operations in the PRC is
calculated at the applicable tax rates on the taxable income for the periods
based on existing legislation, interpretations and practices in respect thereof.
After January 1, 2008, under the Chinese Enterprise Income Tax (EIT) law, the
statutory corporate income tax rate applicable to most companies is 25% instead
of the former tax rate of 33%. As granted by the State Administration of
Taxation of the PRC, XinAo was entitled to an income tax reduction from 25% to
15% from January 1, 2009 to December 31, 2011.
In accordance with the EIT Law, enterprises established
under the laws of foreign countries or regions and whose place of effective
management is located within the PRC territory are considered PRC resident
enterprises and subject to the PRC income tax at the rate of 25% on worldwide
income. The definition of place of effective management refers to an
establishment that exercises, in substance, and among other items, overall
management and control over the production and business, personnel, accounting,
and properties of an enterprise. No detailed interpretation of guidance has been
issued to define place of effective management. Furthermore, the
administrative practice associated with interpreting and applying the concept of
place of effective management is unclear. If the Companys non-PRC
incorporated entities are deemed PRC tax residents, such entities would be
subject to PRC tax under the New EIT Law. The Company has analyzed the
applicability of this law, and for each of the applicable periods presented, the
Company has not accrued for PRC tax on such basis. We continue to monitor
changes in the interpretation and/or guidance of this law.
The EIT Law also imposes a 10% withholding income tax,
subject to reduction based on tax treaty where applicable, for dividends
distributed by a foreign invested enterprise to its immediate holding company
outside China. Such dividends were exempted from PRC tax under the previous
income tax law and regulations. The foreign investment enterprises are subject
to the withholding tax beginning January 1, 2008. We consider permanently
reinvested undistributed earnings of Chinese operations in the PRC. As a result,
there is no deferred tax expense related to withholding tax on the future
repatriation of these earnings.
Warrants Liability
Effective July 1, 2009, we adopted the provisions of ASC 815,
which determines whether an instrument (or embedded feature) is indexed to an
entitys own stock. This accounting standard specifies that a contract which
would otherwise meet the definition of a derivative but is both (a) indexed to
our own stock and (b) classified as stockholders equity in the statement of
financial position would not be considered a derivative financial instrument.
This 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 issuers own stock and thus able to qualify for the scope exception.
As such, warrants previously treated as equity pursuant to the
derivative treatment exemption are no longer afforded equity treatment because
the warrants have a downward provision on the exercise price. As a result, the
warrants are not considered indexed to our own stock, and, as such, all future
changes in the fair value of these warrants will be recognized as earnings until
such time as the warrants are exercised or expired.
Business Segments and Periods Presented
We have provided a discussion of our results of operations on a
consolidated basis and have also provided certain detailed segment information
for each of our business segments below for the three months ended September 30,
2011 and 2010, in order to provide a meaningful discussion of our business
segments. We have organized our operations into four principal segments: selling
concrete, manufacturing concrete, providing technical support services and
others, which include mixer rental, sales of materials and marketing
cooperation. We present our segment information along the same lines that our
chief executives review our operating results in assessing performance and
allocating resources.
28
For the three months ended September 30, 2011:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
Concrete
|
|
|
Services
|
|
|
Services
|
|
|
Rental
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
40,085,039
|
|
$
|
4,499,968
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
44,585,007
|
|
Depreciation
|
|
(372,727
|
)
|
|
(642,760
|
)
|
|
|
|
|
|
|
|
(67,073
|
)
|
|
(1,082,560
|
)
|
Segment profit
|
|
9,689,252
|
|
|
778,038
|
|
|
-
|
|
|
-
|
|
|
(9,423,724
|
)
|
|
1,043,566
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(expenses)
|
|
2,405,102
|
|
|
280,288
|
|
|
-
|
|
|
-
|
|
|
141,271
|
|
|
2,826,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
222,644
|
|
|
222,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(299,176
|
)
|
|
(299,176
|
)
|
Capital expenditure
|
|
(47,866
|
)
|
|
(5,374
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(53,240
|
)
|
Total assets as of September 30, 2011
|
$
|
138,528,041
|
|
$
|
15,551,232
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
154,079,273
|
|
For the three months ended September 30, 2010:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
Concrete
|
|
|
Services
|
|
|
Services
|
|
|
Rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
25,320,947
|
|
$
|
4,471,777
|
|
$
|
1,159,060
|
|
$
|
5,298
|
|
$
|
-
|
|
$
|
30,957,082
|
|
Depreciation
|
|
(301,447
|
)
|
|
(526,421
|
)
|
|
(32
|
)
|
|
-
|
|
|
(34,240
|
)
|
|
(862,140
|
)
|
Segment profit
|
|
1,632,899
|
|
|
1,228,893
|
|
|
1,113,444
|
|
|
5,268
|
|
|
(2,049,028
|
)
|
|
1,931,476
|
|
Other income (expenses)
|
|
1,519,257
|
|
|
268,307
|
|
|
-
|
|
|
-
|
|
|
323,484
|
|
|
2,111,048
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,929
|
|
|
4,929
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,906
|
)
|
|
(12,906
|
)
|
Capital expenditure
|
|
(59,554
|
)
|
|
(10,517
|
)
|
|
-
|
|
|
(12
|
)
|
|
-
|
|
|
(70,083
|
)
|
Total assets as of June 30, 2011
|
$
|
114,759,372
|
|
$
|
26,911,329
|
|
$
|
3,153,809
|
|
$
|
11,864
|
|
$
|
-
|
|
$
|
144,836,374
|
|
Concrete Sales Business
Our concrete sales business segment is comprised of the
formulation, production and delivery of the Companys line of C10-C100 concrete
mixtures primarily through our current fixed plant network of 4 ready mix
concrete batching plants in Beijing. For this segment of our business, we
procure all of our own raw materials, mix them according to our measured mixing
formula, ship the final product in mounted transit mixers to the destination
work site, and, for more sophisticated structures, will pump the mixture and set
it into structural frame molds as per structural design parameters.
Manufacturing Services Business
Our manufacturing services business segment is comprised of the
formulation, production and delivery of project-specific concrete mixtures
primarily through our current portable plant network of 24 rapid assembly and
deployment batching plants, located in various provinces throughout China. Our
clients will purchase and provide the raw materials in volume on a separate
account which we will then proportion and mix according to our formulation for a
given projects specifications. At present, our manufacturing services business
segment is primarily dedicated to various high-speed rail projects in China
which demand very high quality standards on a time sensitive work schedule.
29
Technical Services Business
Our technical services business segment is comprised of our
production management services, including chemical engineering and ready-mix
consulting services for independently owned concrete plants and their associated
projects. We manage the production and receive a percentage of our client
contractors profits based on cost savings generated.
Other Services
Our final business segment is comprised of other services which
we engage in from time to time, including marketing cooperation and mixer
rentals. When we are unable to service projects due to geographic limitations,
we refer projects to several other independently-owned mixture stations as part
of our marketing cooperation and existing relationships with contractors. We are
paid a percentage of the sales price of the business that is referred. The
marketing cooperation allows us to capture business that might otherwise be
uneconomical due to capital requirements. We also generate revenues by renting
our mixing trucks to other mixer stations.
Consolidated Results of Operations
Comparison of the Three Months Ended September 30, 2011 and
2010
The following table sets forth key components of our results of
operations for the three months ended September 30, 2011 and 2010, in US
dollars:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
44,585,007
|
|
$
|
30,957,082
|
|
$
|
13,627,925
|
|
|
44 %
|
|
Total cost of revenue
|
|
33,830,461
|
|
|
26,831,818
|
|
|
6,998,643
|
|
|
26 %
|
|
Gross profit
|
|
10,754,546
|
|
|
4,125,264
|
|
|
6,629,282
|
|
|
161 %
|
|
Provision for doubtful accounts
|
|
7,001,540
|
|
|
167,058
|
|
|
6,834,482
|
|
|
4,091 %
|
|
Selling, general and administrative
expenses
|
|
2,709,440
|
|
|
2,026,730
|
|
|
682,710
|
|
|
34 %
|
|
Other income, net
|
|
2,750,129
|
|
|
2,103,071
|
|
|
647,058
|
|
|
31 %
|
|
Income before provision for income taxes
|
|
3,793,695
|
|
|
4,034,547
|
|
|
(240,852
|
)
|
|
(6) %
|
|
Income taxes expense
|
|
701,629
|
|
|
726,226
|
|
|
(24,597
|
)
|
|
(3) %
|
|
Net income available to Common shareholders
|
$
|
3,092,066
|
|
$
|
3,308,321
|
|
$
|
(216,255
|
)
|
|
(7) %
|
|
Revenue
. Our revenue is primarily generated from sales
of our advanced ready-mix concrete products, manufacturing services and
technical consulting services. For the three months ended September 30, 2011, we
generated revenue of approximately $44.6 million compared to $31.0 million
during the three months ended September 30, 2010, an increase of approximately
$13.6 million or 44%. Such increase is due to our sales generated from the
concrete division for the three months ended September 30, 2011. In addition, on
November 15, 2010, we announced a 25% average price increase across our various
concrete grade sales to keep in line with an average raw material cost increase
of 19.8%. As a result, our concrete sales revenue was approximately $40.1
million for the three months ended September 30, 2011, an increase of
approximately $14.8 million, or 58% compared to the three months ended September
30, 2010. The increase in revenues attributable to concrete sales was
principally due to greater capacity utilization at our Beijing fixed plants
coupled with higher prices and organic growth to include a broader client base.
During the three months ended September 30, 2011, we continued
to supply concrete products to ten railway projects throughout China through our
portable plants, specifically our projects located in Shaanxi Province, Jiangxi
Province, Hebei Province, Guangxi Province, Zhejiang Province, Guangdong
Province, Liaoning Province, and Anhui Province. These ten projects contributed
approximately $4.5 million to our total revenue for the three months ended
September 30, 2011, an increase of approximately $28,000, or 1%, compared to the
three months ended September 30, 2010. The increase in revenues attributable to
our manufacturing services was principally due to the addition of new portable
plants resulting in greater output capacity as compared to the three months
ended September 30, 2010. For these railway projects, the general contractors
generally supplied their own raw materials while we provided manufacturing and
transportation services.
30
Revenue generated through our technical consulting
services was $0 during the three months ended September 30, 2011, a decrease of
approximately $1.2 million, compared to the three months ended September 30,
2010. The decrease was due to the service term expiration of two technically
serviced contract plants in Datong, Shaanxi and one technically serviced
contract plant in Mianyang, Sichuan. Unless we add additional concrete plants or
experience continual pricing increases or an improvement in capacity utilization
at our portable plants currently dedicated to high-speed rail, we anticipate
that our overall sales revenue will remain flat and may even decrease due to constraints in finding
additional capacity utilization going forward and the suspension of HSR project
pending completion of government safety inspection of existing lines. We do, however, anticipate that
we will continue to be a beneficiary of additional construction spending coming
from Chinas 12th Five Year Plan which will offset to some degree the completion
of 2009 government stimulus infrastructure projects. In addition when capital
permits, we plan to continue expanding our business into new geographical
markets by leveraging our strong relationships with major contractors throughout
China.
Cost of Revenue.
Cost of Revenue, which consists of
direct labor, rentals, depreciation, other overhead and raw materials, including
inbound freight charges, was approximately $33.8 million for the three months
ended September 30, 2011, as compared to approximately $26.8 million for the
three months ended September 30, 2010, an increase of approximately $7.0
million, or 26%. The increase of cost of revenue was due to the overall increase
in production from our fixed concrete plants in the Beijing area and increased
production on manufacturing services compared to the three months ended
September 30, 2010. The increase in cost of revenue was also due to the addition
of new portable plants, as well as increases in labor and crude oil prices,
which increased the costs of raw materials and transportation during this
quarter compared to the prior fiscal year. We are uncertain whether crude oil
prices or raw material prices will maintain at the current level in the near
future. We intend to raise our concrete prices to keep pace with increases in
raw material pricing in particular the price of cement.
The cost of revenue on concrete increased approximately $6.6
million, or 28%, for the three months ended September 30, 2011, as compared to
the three months ended September 30, 2010. Such increase was due to an increase
in our concrete production leading to a larger base of raw material purchases
supporting a higher overall volume of traditional concrete sales for a resulting
broader client base, as well as the increased labor costs and crude oil prices
and raw materials as indicated above.
Cost of revenue with respect to our manufacturing services
increased approximately $0.5 million or 15%, during the three months ended
September 30, 2011, as compared to the three months ended September 30, 2010.
The increase in our cost of sales is due primarily to the greater operational
fixed cost base associated with the addition of new portable plants which have
not yet reached production economies of scale and their associated optimal
capacity utilization levels, as well as slowing production at portable plants
nearing project completion and delayed municipal government resident relocation
efforts for land development and overall project delays associated with
leadership transition at the Ministry of Rail and suspension of approval for new
related railway projects stemming from the State Planning Commission.
Gross Profit
. Our gross profit is equal to the
difference between our revenue and cost of sales. Gross profit was approximately
$10.8 million for the three months ended September 30, 2011, as compared to
approximately $4.1 million for the three months ended September 30, 2010. Our
gross profit for sale of concrete was approximately $9.9 million, or 25% of
revenue, for the three months ended September 30, 2011, compared to
approximately $1.8 million, or 7% of revenue for the three months ended
September 30, 2010, an increase of approximately $8.1 million. The higher gross
profit for concrete sales for the three months ended September 30, 2011,
compared with the three months ended September 30, 2010, reflects higher demand
and higher prices for our concrete products in Beijing. The primary reason for
the margin increase in concrete sales from 6% in the three months ended
September 30, 2010 is due to a 25% average price increase in the second fiscal
quarter of our 2011 fiscal year across our various concrete grade sales to keep
in line with an average raw material cost increase of 19.8% in addition to
improving overall operational efficiencies at our Beijing fixed plants. We
intend to continue to adjust our concrete sales prices in tandem with price
fluctuations in cement.
Our gross profit with respect to our manufacturing services was
approximately $0.8 million, or 18% for the three months ended September 30, 2011,
a decrease of approximately$0.4 million from the three months ended September
30, 2010. Such decrease was principally due to the net addition of 4 new
portable plants since September 30, 2010. The primary reasons for the margin
drop compared to the same period last year are an increase of fixed costs
incurred as a result of the addition of a large number of new portable plants
before they commenced production, as well as slowing production rates at plants
nearing project completion and extended project delays stemming from delayed
municipal government resident relocation efforts, increase in costs of transportation, a larger employee base and suspended
operations due to ongoing government quality and audit inspections at high speed
rail construction sites around the country related to leadership transition at
the Ministry of Rail and a deadly train crash accident which occurred in July
2011.
31
Provision for doubtful accounts
. Provision for doubtful
accounts was approximately $7.0 million for the three months ended September 30,
2011, an increase of approximately $6.8 million, compared to approximately $0.2
million for the three months ended September 30, 2010. After a deadly train
crash accident occurred in July 2011, China Ministry of Railways (MOR) has
been implementing policies to strengthen safety procedures and halt some
high-speed railway constructions in line with public concerns. The MOR has
launched the nation-wide safety inspections and payments chain audits since the
former minister of MOR was arrested for corruption allegations and new minister
was installed. Furthermore, The MOR is under pressure to repay debt during the
expansion of recent years. The MORs outstanding debt increased to 2.1 trillion
RMB (approximately $328 billion) in the first half of 2011 from 1.3 trillion RMB
(approximately $191 billion) at the end of 2009. As a result, the MOR has
delayed payments to construction companies and adversely affected contracted
construction companies accounts receivable collection. In addition, Chinese
government has tightened monetary policies on credit loans concerning the
running high inflations and imposed certain restrictions mandates on real estate
purchase in order to cool down Chinas red hot housing market. Expecting longer
collection period on accounts receivable and higher probability of uncollectable
accounts receivable, the Company changed the accounting estimate on allowance
for doubtful accounts within one year from historical default rate of 2% to 5% based
on peers comparable rate in domestic construction industry during the three
months ended September 30, 2011. The allowance for doubtful accounts increased
to approximately $12.7 million at September 30, 2011, compared to approximately
$5.6 million at June 30, 2011. The new estimate of peers comparable rate on
allowance for doubtful accounts increased provision for doubtful accounts for
approximately $3 million compared to the previous estimate of historical default
rates.
Selling, General and Administrative Expenses
. Selling,
general and administrative expenses consist of sales commissions, advertising
and marketing costs, office rent and expenses, costs associated with staff and
support personnel who manage our business activities, professional and legal
fees paid to third parties, and research and development expenses. We incurred
selling, general and administrative expenses of approximately $2.7 million for
the three months ended September 30, 2011, an increase of approximately $0.7
million, or 34%, as compared to approximately $2.0 million for the three months
ended September 30, 2010. The increase was principally due to salary and
employment benefit expense, research and development expenses and other business
expenses resulting from higher production and a larger base of operations during
the year, and professional and consulting expenses from being a public company
and resulting from our overall production expansion.
Other Income (Expense), net
. Our other income (expense)
consists of valued added tax exemption from the PRC government, interest income
(expense), change in fair value of warrants, and other non-operating income
(expense). We recorded net other income of approximately $2.8 million for three
months ended September 30, 2011, as compared to net other income of $2.1 million
for the three months ended September 30, 2010, an increase of approximately $0.6
million, or 31%. The increase in net other income was primarily due to an
increase in other subsidy income to approximately $2.7 million for the three
months ended September 30, 2011, as compared to approximately $1.8 million for
the three months ended September 30, 2010, an increase of approximately $0.9
million, or 50%. Due to the fact that we use recycled raw materials to
manufacture our products, the State Administration of Taxation granted us VAT
tax exemption from August 2005 to August 2009, and thereafter a two year
extension on the VAT tax exemption from June 2009 to June 2011. The Company has
applied for VAT tax exemption extension and just received an extension through
June 2013. The VAT tax collected during the aforementioned period from our
customers is retained by the Company and recorded as other subsidy income. We
also experienced a decrease in change in fair value of warrants income to a
credit of $195,476 for the three months ended September 30, 2011, as compared to
a charge of $154,258 for the three months ended September 30, 2010, a net
decrease of $349,734, or 227%. In addition, we had interest expense of
$299,176 for the three months ended September 30, 2011, as compared to $12,906 for
the three months ended September 30, 2010, an increase of $286,270 related to
short term loans. The Company also had Interest income of $22,644 for the three
months ended September 30, 2011, as compared to $4,929 in the three months ended
September 30, 2010, an increase of $217,715. The interest income increase was
due to the interest income from short term investment.
Provision for Income Taxes.
Provision for income taxes
amounted to approximately $0.7 million for the three months ended September 30,
2011 and 2010, respectively. We have used recycled raw materials in our concrete
production since our inception, which entitled us to an income tax rate
reduction through December 31, 2011, as granted by the State Administration of
Taxation, PRC. Since January 1, 2009, we are subject to a 15% income tax rate.
In the past, XinAo has paid the corporate income tax on behalf of China-ACMH,
and there could be a potential liability for additional taxes for China-ACMH,
though at present the Company is unable to determine the extent of such
liability, if any.
Net Income available to Common shareholders.
We
recognized net income of approximately $3.1 million for the three months ended
September 30, 2011, as compared to net income of approximately $3.3 million for
the three months ended September 30, 2010, a decrease of $0.2 million. Such decrease in net
income was primarily due to increase in provision of doubtful accounts, and
selling, general, and administrative expense on an increased labor base of
larger scale operations offset by higher prices and organic growth to include a
broader client base driving a yearly increase in our plant production capacity
across our Beijing concrete plant network. See the section Use of Non-GAAP Financial Measures above for a
discussion regarding the presentation of net income excluding non-cash gain
(loss).
32
Liquidity and Capital Resources
As of September 30, 2011, we had cash and cash equivalents of
approximately $3.2 million and restricted cash of approximately $1.1 million.
The following table provides detailed information about our net cash flow for
financial statement periods presented in this report:
|
|
Summary of Cash Flow
Statements
|
|
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by (used in) operating
activities
|
$
|
5,813,533
|
|
$
|
(1,794,011
|
)
|
Net cash provided by investing activities
|
|
7,249,115
|
|
|
590,244
|
|
Net cash (used in ) provided by financing
activities
|
|
(11,462,448
|
)
|
|
10,586,745
|
|
Effect of foreign currency translation on cash and cash
equivalents
|
|
20,735
|
|
|
34,723
|
|
Net increase in cash and cash equivalent
|
$
|
1,620,935
|
|
$
|
9,417,701
|
|
Principal demands for liquidity are for construction or
acquisition of concrete mixture stations, purchases of concrete mixers and pump
trucks, working capital and general corporate purposes.
Operating Activities
. Net cash provided by operating
activities totaled approximately $5.8 million for the three months ended
September 30, 2011, as compared to net cash used in operating activities of
approximately $1.8 million for the three months ended September 30, 2010. The
increase in net cash provided by operating activities was primarily due an
increase in prepayments, accounts payable and other payables during the three
months ended September 30, 2011. We aim to make improvements in our cash flow
from operating activities stemming from increases in construction industry
activity in Beijing, combined with winning more favorable terms with our
suppliers and customers which will be offset by greater working capital needs
for our expanding operations.
Investing Activities
. Net cash provided by investing
activities was approximately $7.2 million for the three months ended September
30, 2011, as compared to approximately $0.6 million net cash provided by
investing activities for the three months ended September 30, 2010. The increase
in cash provided by investing activities was we received approximately $7.3
million proceeds from sale of investment in a financial investment guaranty
company. During October, 2010, the Company entered into an investment agreement
with financial investment guaranty company, whereby the Company may invest up to
RMB 100,000,000. The financial investment company then will invest the Companys
funds in financial instruments including bonds, mortgage trust and mutual funds.
The return on this investment is guaranteed at 7% per annum. Our funds deposited
with the financial investment company are not insured. As of September 30, 2011,
we invested a total of RMB 32 million (approximately $5 million). Investment
income of approximately $0.2 million was recognized and included in the
non-operating income. The investment contract with the financial investment
company was terminated at expiration in October, 2011. The Company received approximately $1.6 million cash
proceeds from investment on October 9, 2011, and expects to receive
approximately $2 million by November 18, 2011 and approximately $1.4 million by
December 30, 2011 plus interest. We also spent approximately $0.1 million on
equipment associated with our new quality control system.
33
Financing Activities
. Net cash used in financing
activities totaled approximately $11.5 million for the three months ended
September 30, 2011, as compared to net cash provided by financing activities of
$10.1 million during the three months ended September 30, 2010. The $11.5
million net cash used in financing activities was due to a $12.1 million of loan
repayments and a $0.2 million increase in restricted cash offset by a $0.8
million of proceeds from short term loan for the three months ended September
30, 2011.The $10.1 million net cash provided by financing activities was due to
a $10.4 million of proceeds from short term loan and $0.1 million changes in
restricted cash and rent payment to shareholders for the three months ended
September 30, 2010.
Cash.
As of September 30, 2011, we had cash of
approximately $3.2 million as compared to approximately $1.6 million as of June
30, 2011.We believe that our cash and revenues from ongoing operations, in
addition to closely managing our accounts payable and accounts receivable, is
sufficient to meet our liquidity and capital requirements for all of our ongoing
operations. However, we may need to raise additional capital in order to
undertake our plans for expansion.
Loan Facilities
We had a total of approximately $4.3 million outstanding on
loans and credit facilities as of September 30, 2011. The loans consisted of the
following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Loan from Huaxia Bank. interest rate of
5.84% per annum, due February 2, 2012, guaranteed by Mr. Han Xian Fu,
Beijing Jinshengding Mineral Products Co., LTD and Beijing Xinhang
Construction Material Co., LTD
|
$
|
782,000
|
|
$
|
2,320,500
|
|
|
|
|
|
|
|
|
Loan from Shanghai Pudong Development Bank,
was fully repaid on September 29, 2011.
|
|
-
|
|
|
9,282,000
|
|
Loan from Citibank, interest rate of 5.83% per annum, due
February 8, 2012, guaranteed by Beijing Xinhang Construction Group, Mr.
Han XianFu and Mr. He Weili
|
|
1,173,000
|
|
|
2,320,500
|
|
Loan from Zhaoshang Bank, interest rate of
6.12% per annum, due November 4, 2011, guaranteed by Mr. Han Xian Fu and
Beijing Jinshengding Mineral Co., LTD, and Beijing Xinhang Construction
Material Co., LTD.
|
|
1,564,000
|
|
|
1,547,000
|
|
Loan from Industrial & Commercial Bank, interest rate
of 7.2% per annum, due April 6, 2012, collateral by accounts receivable
from China Construction 1st Bureau.
|
|
797,640
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
4,316,640
|
|
$
|
15,470,000
|
|
The Company paid off the loan from Zhaoshang Bank on November
8, 2011.
Seasonality
Our manufacturing operations are primarily located in
northeastern China, which is extremely cold during the winter months. During
such time, we are able to manufacture our advanced ready-mix concrete materials,
however many construction projects operate on an abbreviated work schedule, if
at all.
34
Critical Accounting Policies and Estimates
As discussed in Part II, Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, of our Annual Report
in Form 10-K for the fiscal year ended June 30, 2011, we consider our estimates
on accounting for (i) revenue recognition, (ii) accounts receivable, (iii)
accounting for long-lived assets, (iv) income taxes, (v) value-added tax, (vi)
financial instruments, (vii) stock-based compensation, and (viii) investments to
be the most critical in understanding the judgments that are involved in
preparing our consolidated financial statements. There have been no significant
changes to these estimates in the three months ended September 30, 2011.
Contingencies
Management assesses the probability of loss for certain
contingencies and accrues a liability and/or discloses the relevant
circumstances, as appropriate. Management believes that any liability to the
Company that may arise as a result of having to pay out additional expenses that
may have a material adverse effect on the financial condition of the Company
taken as a whole should be disclosed. Refer to Note 17 to the Notes to Condensed
Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to our stockholders.
Interest Rate Risk
At times when we have short-term loans outstanding, we are
exposed to interest rate risk due primarily to our short-term bank loans.
Although the interest rates for our short-term loans are typically fixed for the
terms of the loans, the terms are typically twelve months and interest rates are
subject to change upon renewal. The new interest rates are approximately 5.31%
for Renminbi bank loans with a term of 12 months. The change in interest rates
has minimum impact on our bank loans. Our total borrowings were
approximately$4.3 million as of September 30, 2011.
Credit Risk
We are exposed to credit risk from its cash in bank and fixed
deposits, investments and accounts receivable. The credit risk on cash in bank
and fixed deposits is limited because the counterparties are recognized
financial institutions. However, our cash deposited in the financial
institutions in PRC is not insured. The rate of return on $5 million investment
with a financial investment company is guaranteed at 7% per annum. Our
investment is not subject to market fluctuation, and therefore, we will not
experience gain or loss on our investment. However, our funds deposited with the
financial investment company are not insured. Accounts receivable are subjected
to credit evaluations. An allowance has been made for estimated unrecoverable
amounts which have been determined by reference to past default experience and
the current economic environment. The investment contract with the financial
investment company was terminated at expiration in October, 2011. The Company
received approximately $1.6 million cash proceeds from investment on October 9,
2011, and expects to receive approximately $2 million by November 18, 2011 and
approximately $1.4 million by December 30, 2011 plus interest.
Foreign Exchange Risk
The value of the Renminbi against the U.S. dollar and other
currencies is affected by, among other things, changes in Chinas political and
economic conditions. The Renminbi does not fluctuate with the U.S. Dollar.
Although the Peoples Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, the
Renminbi may appreciate or depreciate significantly in value against the U.S.
dollar in the medium to long term. Moreover, it is possible that in the future,
PRC authorities may lift restrictions on fluctuations in the Renminbi exchange
rate and lessen intervention in the foreign exchange market.
Because substantially all of our earnings and cash assets are
denominated in Renminbi, but our reporting currency is the U.S. dollar,
fluctuations in the exchange rate between the U.S. dollar and the Renminbi will
affect our balance sheet and our earnings per share in U.S. dollars. In
addition, appreciation or depreciation in the value of the Renminbi relative to
the U.S. dollar would affect our financial results reported in U.S. dollar terms
without giving effect to any underlying change in our business or results of
operations. Fluctuations in the exchange rate will also affect the relative
value of any dividend we issue in the future that will be exchanged into U.S.
dollars and earnings from, and the value of, any U.S. dollar-denominated
investments we make in the future.
Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign
currency exchange risk. While we may enter into hedging transactions in the future, the availability
and effectiveness of these transactions may be limited, and we may not be able
to successfully hedge our exposure at all. In addition, our foreign currency
exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert Renminbi into foreign currencies.
35
Most of our transactions are settled in Renminbi and U.S.
dollars. In the opinion of our Board of Directors, we are not exposed to
significant foreign currency risk.
Inflation
Inflationary factors, such as increases in the cost of raw
materials and overhead costs, could impair our operating results. Although we do
not believe that inflation has had a material impact on our financial position
or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin
and selling, general and administrative expenses as a percentage of sales
revenue if the selling prices of our products do not increase with these
increased costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures. The
term disclosure controls and procedures, as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that we file or submit to the SEC under
the Exchange Act, is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit to the SEC under the Exchange Act is accumulated and communicated
to our management, including our principal executive officer and our principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of our
Chief Executive Officer and our Chief Financial Officer have evaluated the
design and operating effectiveness of our disclosure controls and procedures as
of September 30, 2011. Based upon their evaluation, these executive officers
have concluded that our disclosure controls and procedures are effective as of
September 30, 2011.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting during the three months
ended September 30, 2011.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may have disputes that arise in the
ordinary course of our business. Currently, there are no material legal
proceedings to which we are a party, or to which any of our property is subject,
that we expect to have a material adverse effect on our financial condition,
except as follows:
The Company and the members of our board of directors are named
as defendants in purported class action lawsuits (the Stockholder Actions)
brought in the Delaware Court of Chancery by several stockholders: Kinder v.
China Advanced Construction Material Group, Inc., and its Board of Directors et
al., C.A. No. 6729-CS (filed July 29, 2011); McElligott v. China Advanced
Construction Material Group, Inc., and its Board of Directors et al., C.A. No.
6739-CS (filed August 2, 2011); Elias v. China Advanced Construction Material
Group, Inc., and its Board of Directors et al., C.A. No. 6754-CS (filed August
5, 2011); Camitta v. China Advanced Construction Material Group, Inc., and its
Board of Directors et al., C.A. No. 6770-CS (filed August 9, 2011); Jaworski v.
China Advanced Construction Material Group, Inc., and its Board of Directors et
al., C.A. No. 6765-CS (filed August 11, 2011); Bolen v. China Advanced
Construction Material Group, Inc., and its Board of Directors et al., C.A. No.
6811-CS (filed August 26, 2011), and Mulder v. China Advanced Construction
Material Group, Inc., and its Board of Directors et al., C.A. No. 6830-CS (filed
September 1, 2011). The Stockholder Actions generally allege that the Company
and all of our directors breached their fiduciary duties in connection with the
receipt by the Company of a preliminary, non-binding offer from Xianfu Han, the
Companys Chairman and Chief Executive Officer, and Weili He, the Companys Vice
Chairman and Chief Operating Officer, to acquire all of the outstanding shares
of our common stock not currently owned by them in a going private transaction
at a proposed price of $2.65 per share in cash (the Proposed Transaction). The
Stockholder Actions seek, among other things, to declare that the Proposed
Transaction is unfair, unjust and inequitable, to enjoin the Company from taking
any steps necessary to accomplish or implement the Proposed Transaction, and
damages in the event the Proposed Transaction is consummated.
36
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in Part I, "Item 1A. Risk
Factors" in our Annual Report on Form 10-K for the year ended June 30, 2011,
which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only
risks facing our Company. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES OR USE OF
PROCEEDS
There were no unregistered sales of equity securities during
the fiscal quarter ended September 30, 2011.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the fiscal
quarter ended September 30, 2011.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
On November 14, 2011, the Company entered into an employment
termination agreement (the Termination Agreement) with Jeremy Goodwin, the
Companys President and Chief Financial Officer, pursuant to which Mr. Goodwins
employment with the Company will terminate effective as of 11:59 P.M. New York
local time on the date of filing of this Report. The Termination Agreement
provides that the termination of Mr. Goodwins employment is by mutual agreement
and not for cause or good reason. Pursuant to the Termination Agreement, the
Company shall pay to Mr. Goodwin (i) within five business days following the
termination of Mr. Goodwins employment, an amount equal to $45,000, and
(ii) within five business days following the date the Form 15 filed by the Company
to deregister the Companys common stock under the Securities Exchange Act of
1934 becomes effective, an additional
amount equal to $45,000. In addition, the Company agreed to use
reasonable efforts to remove Mr. Goodwin as a defendant in the class action
lawsuits identified in Part II, Item 1 Legal Proceedings, and so long as Mr.
Goodwin is a named defendant in such suits, and prior to the deregistration of
the Companys common stock under the Act, use commercially reasonable efforts to
obtain and maintain D&O liability insurance which provides Mr. Goodwin the
same rights and benefits as are accorded to the most favorably insured of the
Companys directors (provided that such insurance is not prohibited by the
Merger Agreement). The foregoing description of the Termination Agreement is
qualified in its entirety by reference to the full text of the Termination
Agreement, a copy of which is attached hereto as Exhibit 10.1 and is
incorporated herein by reference.
On November 14, 2011, the Company appointed Mr. Yanwei He, the
Companys Financial Manager, as Interim Chief Financial
Officer, effective immediately upon the effectiveness of the termination of Mr.
Goodwins employment.
Mr. He has over 15 years of finance management experience. He is the Certified Internal Auditor and Chinese Certified Tax Agent. Mr. He served as Finance Manager with Jiangsu Hongtu High Technology Co. Ltd from March 2000 to July 2004, as Finance
Manager with Beijing Aceway Telecom Technology Co., Ltd. from August 2004 to September 2006, and as Finance Manager with Beijing Xinao Concrete Co., Ltd from September 2006 to April 2009. Mr. He was the Financial Controller of Guangdong FAB Group
Co., Ltd July 2009 to June 2010. Most recently, from August 2010 to October 2011, Mr. He was the Financial Controller with the Company’s subsidiary, Beijing Xinao Concrete Co., Ltd.
At present, Mr. He has not entered into an employment agreement with the Company or come to any arrangement regarding his service as Interim Chief Financial Officer.
Mr. He is not related to the Company’s Vice Chairman and Chief Operating Officer, Weili He.
37
ITEM 6. EXHIBITS
The following exhibits are filed with this report, except those
indicated as having previously been filed with the SEC and are incorporated by
reference to another report, registration statement or form. As to any
shareholder of record requesting a copy of this report, we will furnish any
exhibit indicated in the list below as filed with this report upon payment to us
of our expenses in furnishing the information.
Exhibit No.
|
|
Description
|
2.1
|
|
Agreement and Plan of Merger,
dated as of October 24, 2011, by and among the Company, Novel Gain
Holdings Limited, CACMG Acquisition, Inc., Mr. Xianfu Han and Mr. Weili He
(incorporated to Exhibit 2.1 of the Companys Current Report on Form 8-K
filed on October 24, 2011).
|
|
|
|
10.1
|
|
Employment
Termination Agreement between the Company and Jeremy Goodwin, dated November
14, 2011.
|
|
|
|
31.1
|
|
Certifications of Principal
Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
31.2
|
|
Certifications of Principal
Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
32.1
|
|
Certifications of Principal
Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certifications of Principal
Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
99.1
|
|
Press Release dated November
14, 2011.
|
38
SIGNATURES
In accordance with Section 13 or
15(d) of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 14, 2011
|
CHINA ADVANCED CONSTRUCTION
MATERIALS GROUP, INC.
|
|
|
|
|
|
By:
/s/ Xianfu
Han
|
|
Xianfu
Han, Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
|
By:
/s/ Jeremy
Goodwin
|
|
Jeremy
Goodwin, Chief Financial Officer
|
|
(Principal Financial Officer and Principal
|
|
Accounting Officer)
|
39
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