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: December 31, 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:
001-34515
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 Securities Exchange
Act of 1934 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
[X]
No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 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 February 12, 2012 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
|
2
|
ITEM 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
27
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|
40
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
40
|
|
PART II
|
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
40
|
ITEM 1A.
|
RISK FACTORS
|
41
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
|
41
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
41
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
41
|
ITEM 5.
|
OTHER INFORMATION
|
41
|
ITEM 6.
|
EXHIBITS
|
41
|
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
December 31, 2011 and June 30, 2011
|
3
|
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three and Six Months Ended December 31, 2011
and 2010
|
4
|
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended December 31, 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)
|
|
December 31,
|
|
|
June 30,
|
|
ASSETS
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
$
|
3,431,812
|
|
$
|
1,610,699
|
|
Restricted cash
|
|
8,369,015
|
|
|
928,200
|
|
Accounts and notes receivable, net of
allowance for doubtful accounts of $16,049,479 and $5,627,049,
respectively
|
|
100,547,582
|
|
|
84,793,355
|
|
Inventories
|
|
2,101,683
|
|
|
1,474,728
|
|
Investments
|
|
6,449,300
|
|
|
12,221,300
|
|
Other receivables
|
|
2,286,316
|
|
|
2,226,803
|
|
Prepayments
|
|
5,946,187
|
|
|
5,089,935
|
|
Deferred tax assets
|
|
1,761,377
|
|
|
-
|
|
Total current assets
|
|
130,893,272
|
|
|
108,345,020
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
27,775,235
|
|
|
29,279,440
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
Advances on equipment
purchases
|
|
4,585,295
|
|
|
4,509,505
|
|
Prepayments
|
|
1,978,550
|
|
|
2,702,409
|
|
Total other assets
|
|
6,563,845
|
|
|
7,211,914
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
165,232,352
|
|
$
|
144,836,374
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Short term loans, banks
|
$
|
22,037,730
|
|
$
|
15,470,000
|
|
Accounts payable
|
|
47,943,905
|
|
|
41,320,769
|
|
Customer deposits
|
|
541,305
|
|
|
391,550
|
|
Other payables
|
|
761,256
|
|
|
488,022
|
|
Other payables - shareholders
|
|
803,158
|
|
|
790,592
|
|
Accrued liabilities
|
|
1,396,761
|
|
|
1,921,582
|
|
Taxes payable
|
|
2,779,408
|
|
|
747,165
|
|
Total current liabilities
|
|
76,263,523
|
|
|
61,129,680
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
|
|
Warrants liability
|
|
820,155
|
|
|
618,657
|
|
Total liabilities
|
|
77,083,678
|
|
|
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, 17,821,054 and 17,794,387 shares issued and
outstanding as of December 31, 2011 and June 30, 2011, respectively
|
|
17,821
|
|
|
17,795
|
|
Additional paid-in
capital
|
|
35,066,357
|
|
|
34,981,023
|
|
Retained earnings
|
|
38,271,093
|
|
|
35,240,851
|
|
Statutory reserves
|
|
6,754,825
|
|
|
6,248,357
|
|
Accumulated other comprehensive income
|
|
8,038,578
|
|
|
6,600,011
|
|
Total shareholders equity
|
|
88,148,674
|
|
|
83,088,037
|
|
Total liabilities and shareholders equity
|
$
|
165,232,352
|
|
$
|
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
|
|
|
For the six
months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of concrete
|
$
|
39,981,717
|
|
$
|
26,205,792
|
|
$
|
80,066,756
|
|
$
|
51,526,739
|
|
Manufacturing services
|
|
2,578,178
|
|
|
7,108,447
|
|
|
7,078,146
|
|
|
11,580,224
|
|
Technical services
|
|
-
|
|
|
1,207,396
|
|
|
-
|
|
|
2,366,456
|
|
Other
|
|
-
|
|
|
4,311
|
|
|
-
|
|
|
9,609
|
|
Total revenue
|
|
42,559,895
|
|
|
34,525,946
|
|
|
87,144,902
|
|
|
65,483,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Concrete
|
|
32,675,610
|
|
|
22,835,629
|
|
|
62,813,134
|
|
|
46,344,312
|
|
Manufacturing services
|
|
2,350,816
|
|
|
4,913,916
|
|
|
6,043,753
|
|
|
8,131,041
|
|
Technical services
|
|
-
|
|
|
94,291
|
|
|
-
|
|
|
200,301
|
|
Total cost of revenue
|
|
35,026,426
|
|
|
27,843,836
|
|
|
68,856,887
|
|
|
54,675,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
7,533,469
|
|
|
6,682,110
|
|
|
18,288,015
|
|
|
10,807,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR DOUBTFUL ACCOUNTS
|
|
3,359,502
|
|
|
509,639
|
|
|
10,361,042
|
|
|
676,697
|
|
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
|
|
5,276,670
|
|
|
2,122,579
|
|
|
7,986,110
|
|
|
4,149,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
(1,102,703
|
)
|
|
4,049,892
|
|
|
(59,137
|
)
|
|
5,981,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE), NET
|
|
|
|
|
|
|
|
|
|
|
|
|
Other subsidy income
|
|
2,553,633
|
|
|
1,998,855
|
|
|
5,239,023
|
|
|
3,786,418
|
|
Non-operating income
(expense), net
|
|
15,296
|
|
|
(357,201
|
)
|
|
(38,909
|
)
|
|
(187,974
|
)
|
Change in fair value of warrants
liability
|
|
(396,974
|
)
|
|
(1,414,408
|
)
|
|
(201,498
|
)
|
|
(1,260,150
|
)
|
Interest income
|
|
112,807
|
|
|
157,220
|
|
|
335,451
|
|
|
162,149
|
|
Interest expense
|
|
(400,039
|
)
|
|
(224,136
|
)
|
|
(699,215
|
)
|
|
(237,042
|
)
|
TOTAL OTHER INCOME, NET
|
|
1,884,723
|
|
|
160,330
|
|
|
4,634,852
|
|
|
2,263,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR
INCOME TAXES
|
|
782,020
|
|
|
4,210,222
|
|
|
4,575,715
|
|
|
8,244,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
337,376
|
|
|
978,233
|
|
|
1,039,005
|
|
|
1,704,459
|
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
$
|
444,644
|
|
$
|
3,231,989
|
|
$
|
3,536,710
|
|
$
|
6,540,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
444,644
|
|
|
3,231,989
|
|
|
3,536,710
|
|
|
6,540,309
|
|
Foreign currency translation adjustment
|
|
501,972
|
|
|
693,572
|
|
|
1,438,568
|
|
|
1,763,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
$
|
946,616
|
|
$
|
3,925,561
|
|
$
|
4,975,278
|
|
$
|
8,304,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE ALLOCATED TO COMMON
SHAREHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
17,815,900
|
|
|
17,651,620
|
|
|
17,810,986
|
|
|
17,585,082
|
|
Diluted
|
|
17,838,400
|
|
|
18,202,555
|
|
|
17,833,486
|
|
|
18,067,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.02
|
|
$
|
0.18
|
|
$
|
0.20
|
|
$
|
0.37
|
|
Diluted
|
$
|
0.02
|
|
$
|
0.18
|
|
$
|
0.20
|
|
$
|
0.36
|
|
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 six
months ended
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
3,536,710
|
|
$
|
6,540,309
|
|
Adjustments to reconcile net income to
cash used in operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
2,191,189
|
|
|
1,819,065
|
|
Stock-based
compensation expense
|
|
85,359
|
|
|
462,189
|
|
Deferred tax provision (benefit)
|
|
(1,761,377
|
)
|
|
129,354
|
|
Provision
for doubtful accounts
|
|
10,361,042
|
|
|
676,697
|
|
Change in fair value of warrants liability
|
|
201,498
|
|
|
1,260,150
|
|
Loss
realized from disposal of property, plant, and equipment
|
|
4,004
|
|
|
252,727
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
(24,617,295
|
)
|
|
(25,411,159
|
)
|
Inventories
|
|
(599,107
|
)
|
|
(217,625
|
)
|
Other
receivables
|
|
(21,976
|
)
|
|
(2,135,501
|
)
|
Prepayments
|
|
(766,787
|
)
|
|
(886,350
|
)
|
Long term
prepayment
|
|
765,365
|
|
|
864,656
|
|
Accounts payable
|
|
5,898,517
|
|
|
12,598,938
|
|
Customer
deposits
|
|
142,446
|
|
|
125,331
|
|
Other payables
|
|
264,800
|
|
|
50,438
|
|
Accrued
liabilities
|
|
(553,924
|
)
|
|
202,793
|
|
Taxes payable
|
|
2,018,372
|
|
|
1,234,213
|
|
Net cash used in operating activities
|
|
(2,851,164
|
)
|
|
(2,433,775
|
)
|
|
|
|
|
|
|
|
Proceeds
from disposal of property, plant, and equipment
|
|
6,260
|
|
|
742,242
|
|
Purchases of property, plant and equipment
|
|
(215,310
|
)
|
|
(890,859
|
)
|
Proceeds
from sale of investments
|
|
12,363,500
|
|
|
-
|
|
Purchase of investments
|
|
(6,416,500
|
)
|
|
(11,880,800
|
)
|
Net cash provided by (used in)
investing activities
|
|
5,737,950
|
|
|
(12,029,417
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from short term loan
|
|
22,537,570
|
|
|
12,285,820
|
|
Payments
for short term loan
|
|
(16,178,660
|
)
|
|
(74,580
|
)
|
Rent payment to shareholder
|
|
11,838
|
|
|
(5,775
|
)
|
Restricted
cash
|
|
(7,387,451
|
)
|
|
57,580
|
|
Net cash (used in)
provided by financing activities
|
|
(1,016,703
|
)
|
|
12,263,045
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE
CHANGE ON CASH
|
|
(48,970
|
)
|
|
2,052,476
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
CASH
|
|
1,821,113
|
|
|
(147,671
|
)
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
1,610,699
|
|
|
3,300,820
|
|
|
|
|
|
|
|
|
CASH, end of period
|
$
|
3,431,812
|
|
$
|
3,153,149
|
|
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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, Xin Ao
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 Zheng Ke Technical Consulting Co., Ltd (Heng
Yuan Zheng Ke), (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 Heng Xin Technology Co., Ltd (Heng Xin). 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 never commenced operations following its incorporation and was
thereafter dissolved on August 30, 2011.
Note 2 Summary of significant accounting policies
Basis of presentation
The accompanying condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America for interim financial reporting and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all information and footnotes required by US GAAP for complete
financial statements. The unaudited condensed consolidated financial statements
include all adjustments including normal recurring adjustments necessary to
present fairly the consolidated financial position, results of operations and
cash flows of the Company for the periods presented. The results of operations
for the three and six months ended December 31, 2011 are not necessarily
indicative of operating results expected for the full year or future interim
periods. These unaudited condensed consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Companys Annual Report of Form 10-K for the year ended June 30,
2011, which was originally filed on September 23, 2011, and subsequently amended
on September 26, 2011.
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%
|
|
Xin Ao
|
|
Beijing, China
|
|
|
VIE
|
|
Heng Yuan Zheng Ke
|
|
Beijing, China
|
|
|
VIE
|
|
Hong Sheng An
|
|
Beijing, China
|
|
|
VIE
|
|
Heng Tai
|
|
Beijing, China
|
|
|
VIE
|
|
Da Tong
|
|
Datong, China
|
|
|
VIE
|
|
Heng Xin
|
|
Luanxian, China
|
|
|
VIE
|
|
6
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Xin Ao and its subsidiaries.
Based upon a series of contractual arrangements, The Company
determined that Xin Ao and its subsidiaries are VIEs subject to consolidation
and that the Company is the primary beneficiary. Accordingly, the financial
statements of Xin Ao and its subsidiaries are consolidated into the financial
statements of the Company.
The carrying amount of the VIEs assets and liabilities are as
follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Current assets
|
$
|
129,831,531
|
|
$
|
107,996,610
|
|
Property, plant and equipment
|
|
27,110,775
|
|
|
28,576,830
|
|
Other noncurrent
assets
|
|
4,180,750
|
|
|
4,868,209
|
|
Total assets
|
|
161,123,056
|
|
|
141,441,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
(75,446,018
|
)
|
|
(60,206,978
|
)
|
|
|
|
|
|
|
|
Intercompany
payables*
|
|
(7,960,404
|
)
|
|
(9,808,542
|
)
|
|
|
|
|
|
|
|
Total liabilities
|
|
(83,406,422
|
)
|
|
(70,015,520
|
)
|
|
|
|
|
|
|
|
Net assets
|
$
|
77,716,634
|
|
$
|
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 unaudited
condensed consolidated financial statements include the valuation of share-based
payments, deferred income taxes, income tax payable, 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 December 31, 2011 and June 30,
2011 were translated at RMB 6.36 and RMB 6.46 to $1.00, respectively. The
average translation rates applied to the consolidated statements of income and
cash flows for the six months ended December 31, 2011 and 2010 were RMB 6.39 and
RMB 6.72 to $1.00, respectively.
7
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
|
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.
8
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Concentration of credit risk
For the three months and six months ended December 31, 2011, no
customer represented more than 10% of the Companys total revenue. For the three
months ended December 31, 2010, no customer represented more than 10% of the
Companys total revenue for the six months ended December 31, 2010, one customer
represented 12% of the Companys total revenue. As of December 31, 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
December 31, 2011 and June 30, 2011, the Company had deposits in excess of
federally insured limits totaling $2,962,727 and $767,963, respectively.
Restricted cash
Restricted cash represents $8,180,255 cash deposits for short
term loans collateral and $188,760 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 and six months ended December 31, 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 December 31, 2011 and June 30, 2011, the Company determined no
reserves for obsolescence were necessary.
9
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 ($12,221,300 at June 30, 2011).
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 $12.4 million cash proceeds
from investment with the above financial investment company during the six
months ended December 31, 2011.
During November and December 2011, the Company entered into two
two-month agreements with another financial investment company for aggregate
amount of RMB 41,000,000 (approximately $6.4 million). Under the agreements, RMB
26,000,000 (approximately $4.1 million) investment expires on January 23, 2012
and RMB 15,000,000 (approximately $2.3 million) investment expires on February
1, 2012. The interest rates are 9% per annum. The Company received $4.1 million
cash proceeds plus interest from the above financial investment company on
January 21, 2012 and another $2.3 million on February 3, 2012.
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.
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 and six months ended
December 31, 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.
10
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 any applicable tax authorities.
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 costs for the three months
ended December 31, 2011 and 2010 were $1,754,720 and $5,422, respectively.
Research and development costs for the six months ended December 31, 2011 and
2010 were $2,055,455 and $153,322, respectively. Advertising costs for the three
months ended December 31, 2011 and 2010 were $81,692 and $26,028, respectively.
Advertising costs for the six months ended December 31, 2011 and 2010 were
$113,225 and $42,546, respectively. Repair and maintenance costs for the three
months ended December 31, 2011 and 2010 were $303,909 and $313,706,
respectively. . Repair and maintenance costs for the six months ended December
31, 2011 and 2010 were $655,319 and $603,123, respectively.
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
11
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 six months ended December 31, 2011. The
allowance for doubtful accounts increased to approximately $16 million at
December 31, 2011, compared to approximately $5.6 million at June 30, 2011.
Note 4 Supplemental disclosure of cash flow information
For the six months ended December 31, 2011 and 2010, the
Company paid interest in the amount of $462,829 and $190,929 respectively.
Cash payments for income tax for the six months ended December
31, 2011 and 2010 were $755,541 and $419,961, respectively.
Note 5 Accounts and notes receivable
Accounts and notes 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 and notes receivable and allowance for doubtful
accounts consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Accounts receivable, current
|
$
|
116,046,511
|
|
$
|
90,420,404
|
|
Notes receivable, current
|
|
550,550
|
|
|
-
|
|
|
|
116,597,061
|
|
|
90,420,404
|
|
Less: allowance for doubtful accounts, current
|
|
(16,049,479
|
)
|
|
(5,627,049
|
)
|
Total accounts and notes receivable, net
|
$
|
100,547,582
|
|
$
|
84,793,355
|
|
Note 6 Property, plant and equipment
Property, plant and equipment consist of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Plant and machinery
|
$
|
22,212,776
|
|
$
|
21,687,400
|
|
Transportation equipment
|
|
20,696,290
|
|
|
20,354,203
|
|
Office equipment
|
|
1,298,310
|
|
|
1,269,255
|
|
Buildings and improvements
|
|
381,150
|
|
|
344,852
|
|
Construction-in-progress
|
|
-
|
|
|
-
|
|
Total
|
|
44,588,526
|
|
|
43,655,710
|
|
Less: accumulated depreciation
|
|
(16,813,291
|
)
|
|
(14,376,270
|
)
|
Plant and equipment, net
|
$
|
27,775,235
|
|
$
|
29,279,440
|
|
12
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the three months ended December 31,
2011 and 2010 amounted to $1,108,629 and $956,925, respectively. Depreciation
expense for the six months ended December 31, 2011 and 2010 amounted to
$2,191,189 and $1,819,065, 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:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Advances on inventory
purchases
|
$
|
4,122,502
|
|
$
|
3,156,185
|
|
Rent prepayments
|
|
3,802,235
|
|
|
4,636,159
|
|
Total prepayments
|
$
|
7,924,737
|
|
$
|
7,792,344
|
|
Minus: Current portion of prepayments
|
|
(5,946,187
|
)
|
|
(5,089,935
|
)
|
Total long-term prepayments
|
$
|
1,978,550
|
|
$
|
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 December
31, 2011 and June 30, 2011, the outstanding balances on these loans consisted of
the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Loan from Huaxia Bank,
interest rate of 6.94% per annum, due February 9, 2012, guaranteed by Mr.
Han Xian Fu, Beijing Jinshengding Mineral Products Co., LTD and Beijing
Xinhang Construction Group.
|
$
|
786,500
|
|
$
|
2,320,500
|
|
Loan from Shanghai Pudong Development Bank,
interest rate of 8.53% per annum, $2,359,500 due October 27,2012 and
$2,359,500 due November 29, 2012, guaranteed by Beijing Xinhang
Construction Group
|
|
4,719,000
|
|
|
9,282,000
|
|
Loan from Construction bank,
interest rate of 5.83% per annum, due October 20, 2012, guaranteed by
Beijing Jinshengding Mineral Products Co., LTD, Mr. Han XianFu and Mr. He
Weili
|
|
5,505,500
|
|
|
-
|
|
Loan from Hengsheng bank, interest rate of
5.84% per annum, due April 21, 2012, guaranteed by Beijing Xinhang
Construction Group, Mr. Han XianFu and Mr. He Weili
|
|
6,292,000
|
|
|
-
|
|
Loan from Citibank, interest
rate of 5.83% per annum, due October 18, 2012, guaranteed by Beijing
Xinhang Construction Group, Mr. Han XianFu and Mr. He Weili
|
|
2,359,500
|
|
|
2,320,500
|
|
Loan from Zhaoshang Bank, interest rate of 6.12% per annum,
due November 8, 2012, guaranteed by Mr. Han Xian Fu, Beijing Jinshengding
Mineral Products Co., LTD and Beijing Xinhang Construction Group.
|
|
1,573,000
|
|
|
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.
|
|
802,230
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
22,037,730
|
|
$
|
15,470,000
|
|
13
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company paid off the loan from Huaxia Bank on February 9,
2012.
The above guarantors are the suppliers to the Company.
Interest expense on short-term loans for the three months ended
December 31, 2011 and 2010 amounted to $192,471 and $186,611, respectively.
Interest expense on short-term loans for the six months ended December 31, 2011
and 2010 amounted to $482,489 and $198,057, 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 down-round 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:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Annual dividend yield
|
|
-
|
|
|
-
|
|
Expected life (years)
|
|
1.45
|
|
|
1.98
|
|
Risk-free interest rate
|
|
0.18%
|
|
|
0.44%
|
|
Expected volatility
|
|
60%
|
|
|
75%
|
|
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.
14
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at
|
|
|
|
|
|
|
December
|
|
|
Fair Value
Measurement at
|
|
|
|
31, 2011
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants liability
|
$
|
820,155
|
|
$
|
-
|
|
$
|
820,155
|
|
$
|
-
|
|
|
|
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 six months ended December 31,
2011
|
|
201,498
|
|
Ending balance, December 31, 2011
|
$
|
820,155
|
|
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 until the lease was terminated on December 31, 2011, with annual payments
of approximately $176,000. For the three months ended December 31, 2011 and
2010, the Company recorded rent expense to the shareholder in the amount of
approximately $46,000 and $44,000, respectively. For the six months ended
December 31, 2011 and 2010, the Company recorded rent expense to the shareholder
in the amount of approximately $92,000 and $88,000, respectively. As of December
31and June 30, 2011, 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.
Total other payables - shareholders consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Han Xianfu, shareholder
|
$
|
450,540
|
|
$
|
450,540
|
|
He Weili, shareholder
|
|
352,618
|
|
|
340,052
|
|
|
$
|
803,158
|
|
$
|
790,592
|
|
15
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $65,113 for income tax purposes for the six
months ended December 31, 2011, which excludes $85,359 stock based compensation
expenses and loss in fair value of warrant liabilities of $201,498. As of
December 31, 2011, net operating loss carry forward for United States income
taxes was approximately $1,713,000. 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 continued 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 six months ended December 31,
2011 and 2010 were an increase of approximately $22,000 and $129,310,
respectively. Management reviews this valuation allowance periodically and makes
adjustments accordingly. AIH has had no operations since it was incorporated and
no income tax incurred, it 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 $49.5 million and $44.5 million as of December 31, 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, Xin Ao has
applied and received the Enterprise High-Tech Certificate. The certificate was
awarded based on Xin Aos 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, Xin Ao 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. The Company continues 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 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 before provision for income taxes consisted of:
16
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
$
|
(1,380,985
|
)
|
$
|
(1,994,601
|
)
|
$
|
(1,503,919
|
)
|
$
|
(2,334,420
|
)
|
China
|
|
2,163,005
|
|
|
6,204,823
|
|
|
6,079,634
|
|
|
10,579,188
|
|
|
$
|
782,020
|
|
$
|
4,210,222
|
|
$
|
4,575,715
|
|
$
|
8,244,768
|
|
Provision for income taxes consisted of:
|
|
For the three
months ended
|
|
|
For the six
months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
China
|
|
908,491
|
|
|
978,233
|
|
|
2,800,382
|
|
|
1,576,198
|
|
Total current provision
|
|
908,491
|
|
|
978,233
|
|
|
2,800,382
|
|
|
1,576,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
China
|
|
(571,115
|
)
|
|
-
|
|
|
(1,761,377
|
)
|
|
128,261
|
|
Total deferred provision (benefit)
|
|
(571,115
|
)
|
|
-
|
|
|
(1,761,377
|
)
|
|
128,261
|
|
Total provision for income
taxes
|
$
|
337,376
|
|
$
|
978,233
|
|
$
|
1,039,005
|
|
$
|
1,704,459
|
|
Significant components of deferred tax assets were as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
Provision for doubtful accounts
|
$
|
1,761,377
|
|
$
|
-
|
|
Total deferred tax assets -
current
|
$
|
1,761,377
|
|
$
|
-
|
|
Deferred tax assets - non-current
|
|
|
|
|
|
|
Net operating
loss carryforward in the U.S.
|
$
|
582,760
|
|
$
|
560,660
|
|
Net operating loss carryforward
in China
|
|
-
|
|
|
-
|
|
|
|
582,760
|
|
|
560,660
|
|
Valuation allowance
|
|
(582,760
|
)
|
|
(560,660
|
)
|
Total deferred tax assets -
non-current
|
$
|
-
|
|
$
|
-
|
|
Taxes payable consisted of the following:
17
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Income taxes payable
|
$
|
2,759,636
|
|
$
|
701,556
|
|
Other taxes payable
|
|
19,772
|
|
|
45,609
|
|
Total taxes payable
|
$
|
2,779,408
|
|
$
|
747,165
|
|
(b) Uncertain tax positions
There were no unrecognized tax benefits for the three months
ended December 31, 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 December 31, 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
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
Outstanding as of June 30,
2011
|
|
616,375
|
|
$
|
2.40
|
|
|
1.94
|
|
Granted
|
|
-
|
|
|
-
|
|
|
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
|
|
Outstanding as of December
31, 2010
|
|
616,375
|
|
$
|
2.40
|
|
|
1.94
|
|
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.
18
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In January, 2010, the Company appointed a CFO who was 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. On November 14, 2011, the Company entered into an employee
termination agreement with the President and CFO. Upon termination of his
service, all of his vested 97,500 option were forfeited.
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
|
|
(97,500
|
)
|
|
4.01
|
|
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding as of December
31, 2011
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Exercisable as of December 31, 2011
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
For the three and six months ended December 31, 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 stock to
the board of directors, senior management, and consultants. The Company did not
grant any restricted stock during the six months ended December 31, 2011.
During May, 2010, the Company entered into 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 December 31, 2011 and the
Company agreed to issue 4,167 restricted shares 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.
19
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended December 31, 2011 and 2010, the
Company recognized $39,090 and $283,887 of compensation expenses related to
restricted stock grants, respectively. For the six months ended December 31,
2011 and 2010, the Company recognized $85,359 and $462,189 of compensation
expenses related to restricted stock grants, respectively. The total
unrecognized share-based compensation expense as of December 31, 2011 was
approximately $33,000, which is expected to be recognized over a weighted
average period of approximately 0.3 years.
Following is a summary of the restricted stock grants:
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
Restricted stock grants
|
|
Shares
|
|
|
Fair Value
|
|
|
Value
|
|
Nonvested as of June 30, 2011
|
|
82,500
|
|
$
|
3.95
|
|
$
|
138,600
|
|
Granted
|
|
4,167
|
|
|
1.89
|
|
|
|
|
Forfeited
|
|
(25,000
|
)
|
|
5.04
|
|
|
|
|
Vested
|
|
(44,167
|
)
|
|
3.59
|
|
|
84,242
|
|
Nonvested as of December 31,
2011
|
|
17,500
|
|
$
|
2.82
|
|
$
|
41,650
|
|
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 $1.6 million and $2.1
million as of December 31, 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.
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 December 31, 2011 and
2010:
20
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Basic earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
444,644
|
|
$
|
3,231,989
|
|
|
3,536,710
|
|
$
|
6,540,309
|
|
Weighted average shares
outstanding-Basic
|
|
17,815,900
|
|
|
17,651,620
|
|
|
17,810,986
|
|
|
17,585,082
|
|
Earnings per share-Basic
|
$
|
0.02
|
|
$
|
0.18
|
|
|
0.20
|
|
$
|
0.37
|
|
Diluted earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
444,644
|
|
$
|
3,231,989
|
|
|
3,536,710
|
|
$
|
6,540,309
|
|
Weighted average shares
outstanding-Basic
|
|
17,815,900
|
|
|
17,651,620
|
|
|
17,810,986
|
|
|
17,585,082
|
|
Restricted stock
|
|
22,500
|
|
|
5,000
|
|
|
22,500
|
|
|
5,000
|
|
Warrants and options
|
|
-
|
|
|
545,935
|
|
|
-
|
|
|
477,842
|
|
Weighted shares outstanding-Diluted
|
|
17,838,400
|
|
|
18,202,555
|
|
|
17,833,486
|
|
|
18,067,924
|
|
Earnings per share-Diluted
|
$
|
0.02
|
|
$
|
0.18
|
|
|
0.20
|
|
$
|
0.36
|
|
For the three and six months ended December 31, 2011, 616,375
warrants 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
$125,989 and $114,357 for the three months ended December 31, 2011 and 2010,
respectively. The Companys contributions of employment benefits, including
pension were $296,334 and $185,610 for the six months ended December 31, 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 December 31, 2011. On August 31, 2010, The Company
entered a lease agreement to lease office space from a third party, starting
from November 1, 2010 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.
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
December 31, 2011 and 2010 were $663,606 and $792,155, respectively. Total
operating lease expenses for the six months ended December 31, 2011 and 2010
were $1,307,613 and $1,499,225, respectively. Operating lease expense is
included in cost of revenue, selling, general, and administrative expenses.
21
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Future annual lease payments, net of rent prepayment made as of
December 31, 2011, under non-cancelable operating leases with a term of one year
or more consist of the following:
Years ending
December 31,
|
|
Amount
|
|
2012
|
$
|
662,000
|
|
2013
|
|
610,000
|
|
2014
|
|
262,000
|
|
Thereafter,
|
|
-
|
|
Note 17 -- Business Segment
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
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
concrete
|
|
|
services
|
|
|
services
|
|
|
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
39,981,717
|
|
$
|
2,578,178
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
42,559,895
|
|
Depreciation
|
|
(397,887
|
)
|
|
(632,723
|
)
|
|
|
|
|
|
|
|
(78,019
|
)
|
|
(1,108,629
|
)
|
Segment profit
|
|
6,819,244
|
|
|
190,484
|
|
|
-
|
|
|
-
|
|
|
(8,112,430
|
)
|
|
(1,102,702
|
)
|
Other income (expenses)
|
|
2,438,515
|
|
|
141,858
|
|
|
-
|
|
|
-
|
|
|
(408,418
|
)
|
|
2,171,955
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
112,807
|
|
|
112,807
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(400,039
|
)
|
|
(400,039
|
)
|
Capital expenditure
|
|
(149,956
|
)
|
|
(12,115
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(162,071
|
)
|
Total assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
$
|
151,811,731
|
|
$
|
13,420,621
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
165,232,352
|
|
For the six months ended December 31, 2011:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
concrete
|
|
|
services
|
|
|
services
|
|
|
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
80,066,756
|
|
$
|
7,078,146
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
87,144,902
|
|
Depreciation
|
|
(766,657
|
)
|
|
(1,277,076
|
)
|
|
|
|
|
|
|
|
(147,456
|
)
|
|
(2,191,189
|
)
|
Segment profit
|
|
16,508,496
|
|
|
968,522
|
|
|
-
|
|
|
-
|
|
|
(17,536,155
|
)
|
|
(59,137
|
)
|
Other income (expenses)
|
|
4,843,618
|
|
|
422,146
|
|
|
-
|
|
|
-
|
|
|
(267,148
|
)
|
|
4,998,616
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
335,451
|
|
|
335,451
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(699,215
|
)
|
|
(699,215
|
)
|
Capital expenditure
|
|
(197,822
|
)
|
|
(17,488
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(215,310
|
)
|
Total assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
$
|
151,811,731
|
|
$
|
13,420,621
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
165,232,352
|
|
22
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended December 31, 2010:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
concrete
|
|
|
services
|
|
|
services
|
|
|
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
26,205,792
|
|
$
|
7,108,447
|
|
$
|
1,207,396
|
|
$
|
4,311
|
|
$
|
-
|
|
$
|
34,525,946
|
|
Depreciation
|
|
(296,245
|
)
|
|
(644,991
|
)
|
|
(1,394
|
)
|
|
-
|
|
|
(14,295
|
)
|
|
(956,925
|
)
|
Segment profit
|
|
1,807,073
|
|
|
1,776,332
|
|
|
1,041,106
|
|
|
4,051
|
|
|
(578,670
|
)
|
|
4,049,892
|
|
Other income (expenses)
|
|
1,636,091
|
|
|
362,763
|
|
|
-
|
|
|
-
|
|
|
(1,771,608
|
)
|
|
227,246
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
157,220
|
|
|
157,220
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(224,136
|
)
|
|
(224,136
|
)
|
Capital expenditure
|
|
(2,706,519
|
)
|
|
(741,112
|
)
|
|
-
|
|
|
(442
|
)
|
|
-
|
|
|
(3,448,073
|
)
|
Total assets as of June 30, 2011
|
$
|
114,759,372
|
|
$
|
26,911,329
|
|
$
|
3,153,809
|
|
$
|
11,864
|
|
$
|
-
|
|
$
|
144,836,374
|
|
For the six months ended December 31, 2010:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
concrete
|
|
|
services
|
|
|
services
|
|
|
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
51,526,739
|
|
$
|
11,580,224
|
|
$
|
2,366,456
|
|
$
|
9,609
|
|
$
|
-
|
|
$
|
65,483,028
|
|
Depreciation
|
|
(597,692
|
)
|
|
(1,171,412
|
)
|
|
(1,426
|
)
|
|
-
|
|
|
(48,535
|
)
|
|
(1,819,065
|
)
|
Segment profit
|
|
2,229,451
|
|
|
2,785,525
|
|
|
2,030,535
|
|
|
9,059
|
|
|
(1,073,203
|
)
|
|
5,981,367
|
|
Other income (expenses)
|
|
3,155,348
|
|
|
631,070
|
|
|
-
|
|
|
-
|
|
|
(1,448,124
|
)
|
|
2,338,294
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,149
|
|
|
162,149
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(237,042
|
)
|
|
(237,042
|
)
|
Capital expenditure
|
|
(2,766,073
|
)
|
|
(751,629
|
)
|
|
-
|
|
|
(454
|
)
|
|
-
|
|
|
(3,518,156
|
)
|
Total assets as of June 30, 2011
|
$
|
114,759,372
|
|
$
|
26,911,329
|
|
$
|
3,153,809
|
|
$
|
11,864
|
|
$
|
-
|
|
$
|
144,836,374
|
|
23
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Xin Ao Concrete Co., Ltd vs. Beijing Boda Guosheng
Investment Co., Ltd. (Beijing District Court, PRC)
In August 2006, Xin Ao filed a lawsuit against Beijing Boda
Guosheng Investment Co., Ltd (Boda) seeking specific performance of Bodas
obligations under the sales contract to pay approximately $294,600 (RMB
2,000,000) for the cement supplied by Xin Ao between March 2005 and June 2005
and compensatory damages of approximately $23,500 (RMB 171,000) to cover the
interest incurred on the unpaid balance. The Court ruled against Boda and
ordered Boda to pay the amounts requested by Xin Ao; however, Boda appealed the
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).
Since July 29, 2011, multiple class action complaints (the
Stockholder Actions) have been filed against the Company and its Board of
Directors in the Court of Chancery of the State of Delaware, generally alleging
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 have been consolidated under
the caption In re China Advanced Construction Materials Group Litigation,
Consolidated C.A. No. 6729-CS. 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
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.
24
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Termination Agreement
On November 14, 2011, the Company entered into an employee
termination agreement (the Termination Agreement), the Companys President and
Chief Financial Officer, pursuant to which his employment with the Company
terminated on the date of filing of its quarterly report on Form 10-Q for the
fiscal quarter ended September 30, 2011. 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 is
required to pay (i) within five business days following the termination of his
employment, a fee equal to $45,000, and (ii) within five business days after the
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), an additional fee equal to $45,000. In addition, the Company agreed to
use reasonable efforts to remove the former officer as a defendant in the class
action lawsuits identified in Part II, Item 1 Legal Proceedings, on the basis
that he was not party either to the management buyout proposal or to the Board
of Directors review of such proposal and so long as 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 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).
25
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:
-
our expectations regarding the market for our concrete products and
services;
-
our expectations regarding the continued growth of the concrete industry;
-
our beliefs regarding the competitiveness of our products;
-
our expectations regarding the expansion of our manufacturing capacity;
-
our expectations with respect to increased revenue growth and our ability
to maintain profitability resulting from increases in our production volumes;
-
our future business development, results of operations and financial
condition;
-
competition from other manufacturers of concrete products;
-
the loss of any member of our management team;
-
our ability to integrate acquired subsidiaries and operations into
existing operations;
-
market conditions affecting our equity capital;
-
our ability to successfully implement our selective acquisition strategy;
-
changes in general economic conditions and the regulatory environment; and
-
changes in accounting rules or the application of such rules.
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.
26
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
|
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 six months ended December 31, 2011, we supported
materials, services and our high speed railway projects through our network of
ready-mixed concrete plants throughout Beijing (four as of December 31, 2011)
and our portable plants (twenty as of December 31, 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.
Going-Private Transaction
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.
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.
27
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 six months ended December 31, 2011, five
customers accounted for approximately 13.0%of the Companys sales and 9.4% of
our account receivables as of December 31, 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.
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.
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.
28
In accordance with the New 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 New 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 have been
subject to the withholding tax since 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 are not afforded equity treatment because the
warrants have a down-round provision on the exercise price. As a result, the
warrants are not considered indexed to our own stock, and, as such, all changes
in the fair value of these warrants are 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 and six months ended
December 31, 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.
For the three months ended December 31, 2011:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
concrete
|
|
|
services
|
|
|
services
|
|
|
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
39,981,717
|
|
$
|
2,578,178
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
42,559,895
|
|
Depreciation
|
|
(397,887
|
)
|
|
(632,723
|
)
|
|
|
|
|
|
|
|
(78,019
|
)
|
|
(1,108,629
|
)
|
Segment profit
|
|
6,819,244
|
|
|
190,484
|
|
|
-
|
|
|
-
|
|
|
(8,112,430
|
)
|
|
(1,102,702
|
)
|
Other income (expenses)
|
|
2,438,515
|
|
|
141,858
|
|
|
-
|
|
|
-
|
|
|
(408,418
|
)
|
|
2,171,955
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
112,807
|
|
|
112,807
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(400,039
|
)
|
|
(400,039
|
)
|
Capital expenditure
|
|
(149,956
|
)
|
|
(12,115
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(162,071
|
)
|
Total assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
$
|
151,811,731
|
|
$
|
13,420,621
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
165,232,352
|
|
29
For the six months ended December 31, 2011:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
concrete
|
|
|
services
|
|
|
services
|
|
|
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
80,066,756
|
|
$
|
7,078,146
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
87,144,902
|
|
Depreciation
|
|
(766,657
|
)
|
|
(1,277,076
|
)
|
|
|
|
|
|
|
|
(147,456
|
)
|
|
(2,191,189
|
)
|
Segment profit
|
|
16,508,496
|
|
|
968,522
|
|
|
-
|
|
|
-
|
|
|
(17,536,155
|
)
|
|
(59,137
|
)
|
Other income (expenses)
|
|
4,843,618
|
|
|
422,146
|
|
|
-
|
|
|
-
|
|
|
(267,148
|
)
|
|
4,998,616
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
335,451
|
|
|
335,451
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(699,215
|
)
|
|
(699,215
|
)
|
Capital expenditure
|
|
(197,822
|
)
|
|
(17,488
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(215,310
|
)
|
Total assets as of December 31, 2011
|
$
|
151,811,731
|
|
$
|
13,420,621
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
165,232,352
|
|
For the three months ended December 31, 2010:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
concrete
|
|
|
services
|
|
|
services
|
|
|
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
26,205,792
|
|
$
|
7,108,447
|
|
$
|
1,207,396
|
|
$
|
4,311
|
|
$
|
-
|
|
$
|
34,525,946
|
|
Depreciation
|
|
(296,245
|
)
|
|
(644,991
|
)
|
|
(1,394
|
)
|
|
-
|
|
|
(14,295
|
)
|
|
(956,925
|
)
|
Segment profit
|
|
1,807,073
|
|
|
1,776,332
|
|
|
1,041,106
|
|
|
4,051
|
|
|
(578,670
|
)
|
|
4,049,892
|
|
Other income (expenses)
|
|
1,636,091
|
|
|
362,763
|
|
|
-
|
|
|
-
|
|
|
(1,771,608
|
)
|
|
227,246
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
157,220
|
|
|
157,220
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(224,136
|
)
|
|
(224,136
|
)
|
Capital expenditure
|
|
(2,706,519
|
)
|
|
(741,112
|
)
|
|
-
|
|
|
(442
|
)
|
|
-
|
|
|
(3,448,073
|
)
|
Total assets as of June 30, 2011
|
$
|
114,759,372
|
|
$
|
26,911,329
|
|
$
|
3,153,809
|
|
$
|
11,864
|
|
$
|
-
|
|
$
|
144,836,374
|
|
For the six months ended December 31, 2010:
|
|
Sales of
|
|
|
Manufacturing
|
|
|
Technical
|
|
|
Mixer
|
|
|
|
|
|
|
|
|
|
concrete
|
|
|
services
|
|
|
services
|
|
|
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
|
$
|
51,526,739
|
|
$
|
11,580,224
|
|
$
|
2,366,456
|
|
$
|
9,609
|
|
$
|
-
|
|
$
|
65,483,028
|
|
Depreciation
|
|
(597,692
|
)
|
|
(1,171,412
|
)
|
|
(1,426
|
)
|
|
-
|
|
|
(48,535
|
)
|
|
(1,819,065
|
)
|
Segment profit
|
|
2,229,451
|
|
|
2,785,525
|
|
|
2,030,535
|
|
|
9,059
|
|
|
(1,073,203
|
)
|
|
5,981,367
|
|
Other income (expenses)
|
|
3,155,348
|
|
|
631,070
|
|
|
-
|
|
|
-
|
|
|
(1,448,124
|
)
|
|
2,338,294
|
|
Interest income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,149
|
|
|
162,149
|
|
Interest expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(237,042
|
)
|
|
(237,042
|
)
|
Capital expenditure
|
|
(2,766,073
|
)
|
|
(751,629
|
)
|
|
-
|
|
|
(454
|
)
|
|
-
|
|
|
(3,518,156
|
)
|
Total assets as of June 30, 2011
|
$
|
114,759,372
|
|
$
|
26,911,329
|
|
$
|
3,153,809
|
|
$
|
11,864
|
|
$
|
-
|
|
$
|
144,836,374
|
|
30
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.
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 December 31, 2011 and
2010
The following table sets forth key components of our results of
operations for the three months ended December 31, 2011 and 2010, in US dollars:
|
|
Three Months
Ended
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
Total revenue
|
$
|
42,559,895
|
|
$
|
34,525,946
|
|
$
|
8,033,949
|
|
|
23
|
%
|
Total cost of revenue
|
|
35,026,426
|
|
|
27,843,836
|
|
|
7,182,590
|
|
|
26
|
%
|
Gross profit
|
|
7,533,469
|
|
|
6,682,110
|
|
|
851,359
|
|
|
13
|
%
|
Provision for doubtful accounts
|
|
3,359,502
|
|
|
509,639
|
|
|
2,849,863
|
|
|
559
|
%
|
Selling, general and administrative
expenses
|
|
5,276,670
|
|
|
2,122,579
|
|
|
3,154,091
|
|
|
149
|
%
|
Other income, net
|
|
1,884,723
|
|
|
160,330
|
|
|
1,724,393
|
|
|
1,076
|
%
|
Income before provision for
income taxes
|
|
782,020
|
|
|
4,210,222
|
|
|
(3,428,202
|
)
|
|
(81
|
) %
|
Income taxes expense
|
|
337,376
|
|
|
978,233
|
|
|
(640,857
|
)
|
|
(66
|
)
%
|
Net income available to Common shareholders
|
$
|
444,644
|
|
$
|
3,231,989
|
|
$
|
(2,787,345
|
)
|
|
(86
|
) %
|
31
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 December 31, 2011, we
generated revenue of approximately $42.6 million compared to $34.5 million
during the three months ended December 31, 2010, an increase of approximately
$8.1 million or 23%. Such increase is due to our sales generated from the
concrete division for the three months ended December 31, 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 million
for the three months ended December 31, 2011, an increase of approximately $13.8
million, or 53% compared to the three months ended December 31, 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 December 31, 2011, we continued
to supply concrete products to nine railway projects throughout China through
our portable plants, specifically our projects located in Shanxi Province,
Jiangxi Province, Hebei Province, Guangxi Province, Zhejiang Province, Guangdong
Province, and Anhui Province. These nine projects contributed approximately $2.6
million to our total revenue for the three months ended December 31, 2011, a
decrease of approximately $4.5 million, or 64%, compared to the three months
ended December 31, 2010. The decrease in revenues attributable to our
manufacturing services was principally due to the suspension of operations of a
number of our portable plants during the three months ended December 31, 2011 in
light of an increase in audit inspections at high speed rail construction sites
around China resulting from the recent heightened public scrutiny of public
railway safety in China. For these railway projects, the general contractors
generally supplied their own raw materials while we provided manufacturing and
transportation services.
In addition, no revenue was generated through our technical
consulting services during the three months ended December 31, 2011, a decrease
of approximately $1.2 million, compared to the three months ended December 31,
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 due to constraints in finding
additional capacity utilization going forward.
Cost of Revenue
.
Cost of revenue, which
consists of direct labor, rentals, depreciation, other overhead and raw
materials, including inbound freight charges, was approximately $35 million for
the three months ended December 31, 2011, as compared to approximately $27.8
million for the three months ended December 31, 2010, an increase of
approximately $7.2 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 compared to the three months ended December 31, 2010. The increase in cost
of revenue was also due to the increase of inflation in China, 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 adjust our
concrete prices to keep pace with changes in raw material pricing, particularly
the price of cement.
The cost of revenue on concrete increased approximately $9.8
million, or 43%, for the three months ended December 31, 2011, as compared to
the three months ended December 31, 2010. Such increase was due to an increase
in our concrete sales and production and the resulting increase in raw material
purchases required for production, as well as the increased labor costs, crude
oil prices and raw materials as indicated above.
Cost of revenue with respect to our manufacturing services
decreased approximately $2.6 million or 52%, during the three months ended
December 31, 2011, as compared to the three months ended December 31, 2010. The
decrease in our cost of sales was due to decreased revenue from manufacturing
services.
Gross Profit
. Gross profit is equal to the
difference between our revenue and cost of sales. Gross profit was approximately
$7.5 million for the three months ended December 31, 2011, as compared to
approximately $6.7 million for the three months ended December 31, 2010. Our
gross profit for sale of concrete was approximately $7.3 million, or 18% of
revenue, for the three months ended December 31, 2011, compared to approximately
$3.4 million, or 13% of revenue for the three months ended December 31, 2010, an increase of approximately $3.9 million.
The higher gross profit for concrete sales for the three months ended December
31, 2011, compared with the three months ended December 31, 2010, reflects
higher demand and higher prices for our concrete products in Beijing. The
primary reason for the margin increase in concrete sales from 13% in the three
months ended December 31, 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.
32
Our gross profit with respect to our manufacturing services was
approximately $0.2 million, or 9% for the three months ended December 31, 2011,
a decrease of approximately $2 million from approximately $2.2 million during
the three months ended December 31, 2010. Such decrease was principally due to
the suspension of operations of a number of our portable plants during the three
months ended December 31, 2011. The primary reasons for the margin decrease
compared to the same period last year were the 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 China .
Provision for Doubtful Accounts
. Provision for
doubtful accounts was approximately $3.4 million for the three months ended
December 31, 2011, an increase of approximately $2.8 million, compared to
approximately $0.5 million for the three months ended December 31, 2010. We have
experienced delays in payment on our projects from Chinas Ministry of Railways,
or MOR. Following the arrest of its head on corruption charges, the MOR
conducted payment chain audits; in addition, the MOR was under pressure to repay
its debts incurred during the years of expansion. As a result, the MOR has
delayed payments to construction companies, including us. Furthermore, the
government tightened its monetary policy in order to regulate inflation, which
in turn led to delayed payment on our housing construction projects. We expect
longer collection period on accounts receivable and higher probability of
uncollectable accounts receivable, and therefore have changed the accounting
estimate on allowance for doubtful accounts within one year from our historical
default rate of 2% to 5% based on peers comparable rate in the domestic
construction industry during the three months ended December 31, 2011. The
allowance for doubtful accounts increased to approximately $16 million at
December 31, 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 $2.9 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 December 31, 2010, the provision for doubtful accounts would have been
increased approximately $2.5 million and $ 1.8 million for the year ended June
30, 2011 and the three months ended December 31, 2010, respectively.
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 $5.3
million for the three months ended December 31, 2011, an increase of
approximately $3.2 million, or 149%, as compared to approximately $2.1 million
for the three months ended December 31, 2010. The increase was primarily due to
a $1.7 million increase in research and development expenses, a $0.9 million
increase in consulting service, a $0.2 million increase in salary and employment
benefit expense, and a $0.4 million increase in other business expenses
resulting from higher production.
Other Income (Expense), net
. Our other income
(expense) consists of value added tax, or VAT, 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 $1.9 million for the three months ended December 31, 2011, as
compared to net other income of $0.2 million for the three months ended December
31, 2010, an increase of approximately $1.7 million. The increase in net other
income was primarily due to an increase in other subsidy income to approximately
$2.6 million for the three months ended December 31, 2011, as compared to
approximately $2 million for the three months ended December 31, 2010, an
increase of approximately $0.6 million, or 28%. 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. We applied for VAT tax exemption extension and recently 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 liability to a charge of $0.4 million for the three months ended
December 31, 2011, as compared to a charge of $1.4 million for the three months
ended December 31, 2010, a net decrease of $1 million, or 72%. In addition, we
had interest expense of $0.4 million for the three months ended December 31,
2011, as compared to $0.2 million for the three months ended December 31, 2010,
an increase of $0.2 million related to short-term loans. The Company also had
interest income of $0.1 million for the three months ended December 31, 2011, as
compared to $0.2 million in the three months ended December 31, 2010, a decrease
of $0.1 million, resulting from a decrease in short-term investment.
33
Provision for Income Taxes
.
Provision for
income taxes amounted to approximately $0.3 million and $1 million for the three
months ended December 31, 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 $0.4 million for the three months
ended December 31, 2011, as compared to net income of approximately $3.2 million
for the three months ended December 31, 2010, a decrease of $2.8 million. Such
decrease in net income was primarily due to an increase in provision of doubtful
accounts, research and development expenses, consulting service associated with
the current going private transaction and selling, general, and administrative
expense from an increase in our labor base and scale of operations, offset by
higher prices, growth of our client base, and increase in our plant production
capacity across our Beijing concrete plant network.
Comparison of the Six Months Ended December 31, 2011 and
2010
The following table sets forth key components of our results of
operations for the six months ended December 31, 2011 and 2010, in US dollars:
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
Total revenue
|
$
|
87,144,902
|
|
$
|
65,483,028
|
|
$
|
21,661,874
|
|
|
33
|
%
|
Total cost of revenue
|
|
68,856,887
|
|
|
54,675,654
|
|
|
14,181,233
|
|
|
26
|
%
|
Gross profit
|
|
18,288,015
|
|
|
10,807,374
|
|
|
7,480,641
|
|
|
69
|
%
|
Provision for doubtful accounts
|
|
10,361,042
|
|
|
676,697
|
|
|
9,684,345
|
|
|
1,431
|
%
|
Selling, general and administrative
expenses
|
|
7,986,110
|
|
|
4,149,310
|
|
|
3,836,800
|
|
|
92
|
%
|
Other income, net
|
|
4,634,852
|
|
|
2,263,401
|
|
|
2,371,451
|
|
|
105
|
%
|
Income before provision for income
taxes
|
|
4,575,715
|
|
|
8,244,768
|
|
|
(3,669,053
|
)
|
|
(45
|
) %
|
Income taxes expense
|
|
1,039,005
|
|
|
1,704,459
|
|
|
(665,454
|
)
|
|
(39
|
) %
|
Net income available to Common shareholders
|
$
|
3,536,710
|
|
$
|
6,540,309
|
|
$
|
(3,003,599
|
)
|
|
(46
|
) %
|
Revenue
. Our revenue is primarily generated from
sales of our advanced ready-mix concrete products, manufacturing services and
technical consulting services. For the six months ended December 31, 2011, we
generated revenue of approximately $87.1 million compared to $65.5 million
during the six months ended December 31, 2010, an increase of approximately
$21.6 million or 33%. Such increase is due to our sales generated from the
concrete division for the six months ended December 31, 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 $80.1
million for the six months ended December 31, 2011, an increase of approximately
$28.5 million, or 55% compared to the six months ended December 31, 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.
34
During the six months ended December 31, 2011, we continued to
supply concrete products to nine 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 nine projects contributed
approximately $7.1 million to our total revenue for the six months ended
December 31, 2011, a decrease of approximately $4.5 million, or 39%, compared to
the six months ended December 31, 2010. The decrease in revenues attributable to
our manufacturing services was principally due to the suspension of operations
of a number of our portable plants for the six months ended December 31 2011 in
light of an increase in audit inspections at high speed rail construction sites
around China resulting from the recent heightened public scrutiny of public
railway safety in China. For these railway projects, the general contractors
generally supplied their own raw materials while we provided manufacturing and
transportation services.
In addition, no revenue was generated through our technical
consulting services during the six months ended December 31, 2011, a decrease of
approximately $2.4 million, compared to the six months ended December 31, 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.
Cost of Revenue
.
Cost of revenue, which
consists of direct labor, rentals, depreciation, other overhead and raw
materials, including inbound freight charges, was approximately $68.9 million
for the six months ended December 31, 2011, as compared to approximately $54.7
million for the six months ended December 31, 2010, an increase of approximately
$14.2 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
compared to the six months ended December 31, 2010. The increase in cost of
revenue was also due to the increase of inflation in China, 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 adjust our concrete prices to
keep pace with changes in raw material pricing, particularly the price of
cement.
The cost of revenue on concrete increased approximately $16.5
million, or 36%, for the six months ended December 31, 2011, as compared to the
six months ended December 31, 2010. Such increase was due to an increase in our
concrete sales and production and resulting increase in raw material purchases,
as well as the increased labor costs, crude oil prices and raw materials as
indicated above.
Cost of revenue with respect to our manufacturing services
decreased approximately $2.1 million or 26%, during the six months ended
December 31, 2011, as compared to the six months ended December 31, 2010. The
decrease in our cost of sales is due to decreased revenue from manufacturing
services.
Gross Profit
. Gross profit is equal to the
difference between our revenue and cost of sales. Gross profit was approximately
$18.3 million for the six months ended December 31, 2011, as compared to
approximately $10.8 million for the six months ended December 31, 2010. Our
gross profit for sale of concrete was approximately $17.3 million, or 22% of
revenue, for the six months ended December 31, 2011, compared to approximately
$5.2 million, or 10% of revenue for the six months ended December 31, 2010, an
increase of approximately $12.1 million. The higher gross profit for concrete
sales for the six months ended December 31, 2011, compared with the six months
ended December 31, 2010, reflects higher demand and higher prices for our
concrete products in Beijing. The primary reason for the margin increase in
concrete sales from 10% in the six months ended December 31, 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 $1 million, or 15% for the six months ended December 31, 2011, a
decrease of approximately $2.4 million from the $3.4 million during the six
months ended December 31, 2010. Such decrease was principally due to the
suspension of operations of a number of our portable plants for the six months
ended December 31, 2011.The primary reasons for the margin decrease compared to
the same period last year were the 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 China.
35
Provision for Doubtful Accounts
. Provision for
doubtful accounts was approximately $10.4 million for the six months ended
December 31, 2011, an increase of approximately $9.7 million, compared to
approximately $0.7 million for the six months ended December 31, 2010. We have
experienced delays in payment on our projects from Chinas Ministry of Railways,
or MOR. After arrest of its head on corruption charges, the MOR conducted
payment chain audits; in addition, the MOR was under pressure to repay its debts
incurred during the years of expansion. As a result, the MOR has delayed
payments to construction companies, including us. Furthermore, the government
tightened monetary policy in order to regulate inflation, which in turn
led to delayed payment on our housing construction projects. We expect longer
collection period on accounts receivable and higher probability of uncollectable
accounts receivable, and therefore changed the accounting estimate on allowance
for doubtful accounts within one year from our historical default rate of 2% to
5% based on peers comparable rate in domestic construction industry during the
six months ended December 31, 2011. The allowance for doubtful accounts
increased to approximately $16 million at December 31, 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 $2.9 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 December 31,
2010, the provision for doubtful accounts would have been increased
approximately $2.5 million and $1.8 million for the year ended June 30, 2011 and
the six months ended December 31, 2010, respectively.
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 $8
million for the six months ended December 31, 2011, an increase of approximately
$3.9 million, or 92%, as compared to approximately $4.1 million for the six
months ended December 31, 2010. The increase was primarily due to a $1.9 million
increase in research and development expenses, a $1 million increase in
consulting service, a $0.3 million increase in salary and employment benefit
expense, and a $0.7 million increase in other business expenses resulting from
higher production.
Other Income (Expense), net
. Our other income
(expense) consists of VAT 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 $4.6 million for the
six months ended December 31, 2011, as compared to net other income of $2.3
million for the six months ended December 31, 2010, an increase of approximately
$2.3 million, or 105%. The increase in net other income was primarily due to an
increase in other subsidy income to approximately $5.2 million for the six
months ended December 31, 2011, as compared to approximately $3.8 million for
the six months ended December 31, 2010, an increase of approximately $1.4
million, or 38%. 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. We applied for
VAT tax exemption extension and recently 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 liability to a charge
of $0.2 million for the six months ended December 31, 2011, as compared to a
charge of $1.3 million for the six months ended December 31, 2010, a net
decrease of $1.1 million, or 84%. In addition, we had interest expense of $0.7
million for the six months ended December 31, 2011, as compared to $0.2 million
for the six months ended December 31, 2010, an increase of $0.5 million related
to short-term loans. The Company also had interest income of $0.3 million for
the six months ended December 31, 2011, as compared to $0.2 million in the six
months ended December 31, 2010, an increase of $0.1 million. The interest income
increase was due to the interest income from short-term investments.
Provision for Income Taxes
.
Provision for
income taxes amounted to approximately $1 million and $1.7 million for the six
months ended December 31, 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 $3.5 million for the six months
ended December 31, 2011, as compared to net income of approximately $6.5 million
for the six months ended December 31, 2010, a decrease of $3 million. Such
decrease in net income was primarily due to an increase in provision of doubtful
accounts, research and development expenses, consulting service associated with
the current going private transaction and selling, general, and administrative
expense from an increase in our labor base and scale of operations, offset by
higher prices, growth of our client base, and increase in our plant production
capacity across our Beijing concrete plant network.
36
Liquidity and Capital Resources
As of December 31, 2011, we had cash and cash equivalents of
approximately $3.4 million and restricted cash of approximately $8.4 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 six months ended
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash used in operating
activities
|
$
|
(2,851,164
|
)
|
$
|
(2,433,775
|
)
|
Net cash provided by (used in) investing
activities
|
|
5,737,950
|
|
|
(12,029,417
|
)
|
Net cash (used in) provided
by financing activities
|
|
(1,016,703
|
)
|
|
12,263,045
|
|
Effect of foreign currency translation on
cash and cash equivalents
|
|
(48,970
|
)
|
|
2,052,476
|
|
Net increase (decrease) in
cash and cash equivalents
|
$
|
1,821,113
|
|
$
|
(147,671
|
)
|
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 used in operating
activities totaled approximately $2.9 million for the six months ended December
31, 2011, as compared to net cash used in operating activities of approximately
$2.4 million for the six months ended December 31, 2010. The increase in net
cash used in operating activities was primarily due to a decrease in accounts
payable, accrued liability and tax payable, offset by decrease in accounts
receivable, other receivables, and prepayments during the six months ended
December 31, 2011.
Investing Activities
. Net cash provided by
investing activities was approximately $5.7 million for the six months ended
December 31, 2011, as compared to approximately $12 million net cash used in
investing activities for the six months ended December 31, 2010. The increase in
cash provided by investing activities was due to the fact that we received
proceeds of approximately $12.4 million from our sale of an investment in a
financial investment guaranty company and entered into a $6.4 million two-month
short-term agreement with another financial investment 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 invested the Companys funds in financial
instruments including bonds, mortgage trust and mutual funds. The return on this
investment was guaranteed at 7% per annum. Our funds deposited with the
financial investment company were not insured. The investment contract with the
financial investment company was terminated at expiration in October, 2011.
During November and December, 2011, the Company entered into
two two-month agreements with another financial investment company for aggregate
amount of RMB 41,000,000 (approximately $6.4 million). Under the agreements, RMB
26,000,000 (approximately $4.1 million) of the investment expired on January 23,
2012 and RMB 15,000,000 (approximately $2.3 million) of the investment expired
on February 1, 2012. The interest rates were 9% per annum. Subsequent to the end
of the reporting period covered by this report, the Company
received $4.1 million cash proceeds plus interest from the above financial
investment company on January 21, 2012 and another $2.3 million on February 3,
2012. Investment income of approximately $0.3 million was recognized and
included in the non-operating income for the six months ended December 31, 2011.
37
Financing Activities
. Net cash used in financing
activities totaled approximately $1 million for the six months ended December
31, 2011, as compared to net cash provided by financing activities of $12.3
million during the six months ended December 31, 2010. The $1 million net cash
used in financing activities for the six months ended December 31, 2011was due
to $16.2 million of loan repayments and a $7.4 million increase in restricted
cash offset by $22.5 million of proceeds from a short-term loan. The $12.3
million net cash provided by financing activities for the six months ended
December 31, 2010 was due to $12.3 million in proceeds from a short-term loan
and $0.1 million decrease in restricted cash and offset by $0.1 million in loan
repayments and rent payment to shareholders.
Cash
.
As of December 31, 2011, we had
approximately $3.4 million in cash 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,
will be 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 borrowings totaling approximately $22 million from loans
and credit facilities as of December 31, 2011. The loans consisted of the
following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Loan from Huaxia Bank,
interest rate of 6.94% per annum, due February 9, 2012, guaranteed by Mr.
Han Xian Fu, Beijing Jinshengding Mineral Products Co., LTD and Beijing
Xinhang Construction Group.
|
$
|
786,500
|
|
$
|
2,320,500
|
|
Loan from Shanghai Pudong Development Bank,
interest rate of 8.53% per annum, $2,359,500 due October 27, 2012 and
$2,359,500 due November 29, 2012, guaranteed by Beijing Xinhang
Construction Group.
|
|
4,719,000
|
|
|
9,282,000
|
|
Loan from Construction Bank,
interest rate of 5.83% per annum, due October 20, 2012, guaranteed by
Beijing Jinshengding Mineral Products Co., LTD, Mr. Han XianFu and Mr. He
Weili.
|
|
5,505,500
|
|
|
-
|
|
Loan from Hengsheng Bank, interest rate of
5.84% per annum, due April 21, 2012, guaranteed by Beijing Xinhang
Construction Group, Mr. Han XianFu and Mr. He Weili.
|
|
6,292,000
|
|
|
-
|
|
Loan from Citibank, interest
rate of 5.83% per annum, due October 18, 2012, guaranteed by Beijing
Xinhang Construction Group, Mr. Han XianFu and Mr. He Weili.
|
|
2,359,500
|
|
|
2,320,500
|
|
Loan from Zhaoshang Bank, interest rate of
6.12% per annum, due November 8, 2012, guaranteed by Mr. Han Xian Fu,
Beijing Jinshengding Mineral Products Co., LTD and Beijing Xinhang
Construction Group.
|
|
1,573,000
|
|
|
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.
|
|
802,230
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
22,037,730
|
|
$
|
15,470,000
|
|
38
The Company paid off the loan from Huaxia Bank on February 9,
2012.
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.
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
on 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)
warrants, (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 six months ended December 31, 2011.
Contingencies
Management assesses the probability of loss for certain
contingencies and accrues a liability and/or discloses the relevant
circumstances, as appropriate. Management reports all liabilities which, taken
as a whole, may have a material adverse effect on the financial condition of the
Company. Refer to Note 18 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 6.56%
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
$22 million as of December 31, 2011.
Credit Risk
We are exposed to credit risk from our cash held in bank
accounts and fixed deposits, investments and accounts receivable. The credit
risk on cash held in bank accounts and fixed deposits is limited because the
counterparties are recognized financial institutions. However, our cash
deposited in financial institutions in the PRC is not insured. We deposit some
of our available cash with one or more financial investment companies. The rate
of return on a $5 million investment with our financial investment companies had
a guaranteed minimum return at 9% per annum during the six months ended December
31, 2011. These investments are 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.
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.
39
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.
Most of our transactions are settled in Renminbi and U.S.
dollars. In the opinion of our Board of Directors, currently 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 December 31, 2011. Based upon their evaluation, these executive officers have
concluded that our disclosure controls and procedures are effective as of
December 31, 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, our internal control over financial reporting during the three months
ended December 31, 2011.
40
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:
As previously reported, since July 29, 2011, multiple class
action complaints (the Stockholder Actions) have been filed against the
Company and its Board of Directors in the Court of Chancery of the State of
Delaware, generally alleging 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
have been consolidated under the caption In re China Advanced Construction
Materials Group Litigation, Consolidated C.A. No. 6729-CS. 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.
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 December 31, 2011, except as follows:
During May, 2010, the Company entered into 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 December 31, 2011 and the
Company agreed to issue 4,167 restricted shares to the consultant for the
service provided from June to September 2011. 2,500 shares were issued on
October 14, 2011 and 1,667 shares were issued on October 31, 2011 in
consideration of such services.
The shares were sold by the Company pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, or the
Securities Act, for the offer and sale of securities not involving a public
offering. The recipient of the shares agreed, pursuant to the terms and
conditions of the restricted stock agreement, that (a) he had access to all of
the Companys information pertaining to the investment and were provided with
the opportunity to ask questions and receive answers regarding the offering, (b)
he acquired the shares for his own account for investment and not for the
account of any other person and not with a view to or for any distribution
within the meaning of the Securities Act and (c) he will not sell or otherwise
transfer the shares unless in compliance with state and federal securities laws.
The recipient represented, pursuant to the terms and conditions of the
restricted stock agreement, that he is an accredited investor as defined in Rule
501(a) under the Securities Act and that there was no general solicitation or
advertising in connection with the offer and sale of the shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the fiscal
quarter ended December 31, 2011.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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
41
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).
|
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.
|
42
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: February 13, 2012
|
CHINA ADVANCED CONSTRUCTION
MATERIALS GROUP, INC.
|
|
|
|
|
|
By:
|
/s/ Xianfu Han
|
|
|
|
Xianfu Han, Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/ Yanwei He
|
|
|
|
Yanwei He, Interim Chief Financial
Officer
|
|
|
|
(Principal Financial Officer and
Principal
|
|
|
|
Accounting Officer)
|
|
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