NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1 – Organization and description of business
China
Advanced Construction Materials Group, Inc. (“China ACM” or the “Company”) was
founded on September 1, 2005, under the name TJS Wood Flooring, Inc. (“TJSW”),
and incorporated in the State of Delaware on February 15, 2007. On April 29,
2008, TJSW changed its name to China Advanced Construction Materials Group, Inc.
in connection with a share exchange transaction as described below.
On April
29, 2008, the Company executed a share exchange agreement with Xin Ao
Construction Materials, Inc. (“BVI-ACM”) whereby the Company issued to the
stockholders of BVI-ACM 8,809,583 shares of the Company’s common stock in
exchange for all of the issued and outstanding capital stock of BVI-ACM (the
“Share Exchange”). Prior to the Share Exchange, and after the cancellation of
9,990,000 shares, China ACM had 1,166,667 shares of common stock issued and
outstanding. After the Share Exchange, China ACM had 10,500,000 shares of common
stock outstanding and the former shareholders of BVI-ACM owned 83.9% of the
issued and outstanding shares. The directors and executive officers of BVI-ACM
became the directors and officers of China ACM. This transaction has been
accounted for as a reverse acquisition and recapitalization of the Company
whereby BVI-ACM is deemed to be the accounting acquirer (legal acquiree) and the
Company the accounting acquiree (legal acquirer). The historical financial
statements for periods prior to April 29, 2008, are those of BVI-ACM except that
the equity section and earnings per share have been retroactively restated to
reflect the reverse acquisition.
BVI-ACM
was established on October 9, 2007, under the laws of the British Virgin
Islands. The majority shareholders of BVI-ACM are Chinese citizens who own 100%
of Beijing Xin Ao Concrete Co., Ltd. (“Xin Ao”), a limited liability company
formed under the laws of the People’s Republic of China (“PRC”). BVI-ACM was
established as a “special purpose vehicle” for foreign fund raising for Xin Ao.
China State Administration of Foreign Exchange (“SAFE”) requires the owners of
any Chinese companies to obtain SAFE’s approval before establishing any offshore
holding company structure for foreign financing as well as subsequent
acquisition matters under Circular 106 in the PRC. On September 29, 2007,
BVI-ACM was approved by the local Chinese SAFE as a “special purpose vehicle”
offshore company.
On
November 23, 2007, BVI-ACM established a subsidiary, Beijing Ao Hang
Construction Material Technology Co., Ltd. (“China-ACMH”), in the PRC as a
wholly-owned foreign limited liability company (“WOFE”) with registered capital
of $5 million.
BVI-ACM,
through its 100% owned China-ACMH and its variable interest entity (“VIE”) Xin
Ao (see Note 2), is engaged in producing general ready-mix concrete, customized
mechanical refining concrete, and other concrete-related products that are
mainly sold in the PRC. Xin Ao, licensed by the Beijing Administration of
Industry & Commerce, PRC, was established on June 28, 2002, with an initial
capital contribution of approximately $3,630,000 (RMB30 million). On July 8,
2005, the Board of Directors of Xin Ao increased its registered capital to
$12,100,000 (RMB100 million) through the use of Xin Ao’s undistributed
profits.
On
November 28, 2007, China-ACMH entered a series of contractual arrangements (the
“Contractual Arrangements”) with Xin Ao and its shareholders in which China-ACMH
effectively took over management of the business activities of Xin Ao. The term
of these agreements is for ten (10) years and terminates automatically upon
expiration, and may be extended only if China-ACMH gives its written consent of
the extension before the expiration. The parties, through negotiations,
determine the extension term. During the term, Xin Ao may not terminate the
agreements except in the case of gross negligence, fraud or other illegal acts
or bankruptcy of China-ACMH. Notwithstanding the foregoing, China-ACMH may
terminate the agreement at any time with a written notice to Xin Ao thirty (30)
days before such termination. Additionally, without China-ACMH’s prior written
consent, Xin Ao cannot assign or otherwise transfer its rights and obligations
under the agreements. Subject to compliance with the laws of China, China-ACMH
may assign the agreements to any affiliate or any other designated entity
without the prior consent of Xin Ao.
Through
China-ACMH, BVI-ACM operates and controls Xin Ao through the Contractual
Arrangements. BVI-ACM utilized the Contractual Arrangements to gain control of
the operations of Xin Ao, instead of acquiring Xin Ao, due to: (i) new PRC laws
governing share exchange transactions with foreign entities, effective since
September 8, 2006, make the consequences of such acquisitions uncertain and (ii)
other than by share exchange transactions, PRC laws require Xin Ao to be
acquired for cash and BVI-ACM was not able to raise sufficient funds to pay the
full appraised value for Xin Ao’s assets or shares as required under PRC
laws.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Through
this series of Contractual Arrangements, China-ACMH provides exclusive technical
consulting services to Xin Ao for an annual fee equal to Xin Ao’s yearly net
income. China-ACMH effectively took over management of daily business
activities of Xin Ao and has the right to appoint all executives, senior
management and members of the board of directors of Xin Ao. China-ACMH
guarantees all of Xin Ao’s business activities with any third parties and in
return is guaranteed all of Xin Ao’s assets. In addition, shareholders of Xin Ao
pledged their shares in Xin Ao as collateral for the annual fees due to the
Company and granted China-ACMH the exclusive right and option to acquire all of
their equity interests in Xin Ao.
Note
2 – Summary of significant accounting policies
Basis of
presentation
The
Company’s accounting policies used in the preparation of the accompanying
consolidated financial statements conform to accounting principles generally
accepted in the United States of America ("US GAAP") and have been consistently
applied.
Management
has included all normal recurring adjustments considered necessary to give a
fair presentation of operating results for the periods presented. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction
with information included in the 2009 annual report filed on Form
10-K.
Principles of
consolidation
The
accompanying consolidated financial statements include the accounts of China
ACM, BVI-ACM, including its wholly-owned subsidiary China-ACMH, and its variable
interest entity Xin Ao. All significant inter-company transactions and balances
have been eliminated in consolidation.
In
accordance with FASB guidance on variable interest entities (“VIE”), all VIEs
with which the Company is involved must be evaluated to determine the primary
beneficiary of the risks for financial reporting purposes. Based upon a series
of Contractual Arrangements, The Company determined that Xin Ao is a variable
interest entity subject to consolidation and that the Company is the primary
beneficiary. Accordingly, the financial statements of Xin Ao are consolidated
into the financial statements of the Company.
Use of
estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
assessment of the fair value of share-based payments and the collectability of
accounts receivable. Actual results could be materially different from those
estimates, upon which the carrying values were based.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of
China ACM and BVI-ACM is the U.S. dollar. China-ACMH and Xin Ao use their local
currency Chinese Renminbi (“RMB”) as their functional currency. In accordance
with the FASB’s guidance on Foreign Currency Translation, the Company’s results
of operations and cash flows are translated at the average exchange rates during
the period, assets and liabilities are translated at the exchange rates at the
balance sheet dates, and equity is translated at the historical exchange rates.
As a result, amounts related to assets and liabilities reported on the
consolidated statements of cash flows will not necessarily agree with changes in
the corresponding balances on the consolidated balance sheets.
Accumulated
other comprehensive income in the consolidated statements of shareholders’
equity amounted to $2,625,173 and $2,705,267 as of December 31 and June 30,
2009, respectively. Asset and liability accounts at December 31, 2009 and June
30, 2009 were translated at RMB 6.84 and RMB 6.83 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, 2009 and 2008 were RMB 6.84 and
RMB 6.83 to $1.00, respectively.
Translation
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operations. There were no material
transaction gains or losses for the three and six months ended December 31, 2009
and 2008.
Revenue
recognition
The
Company recognizes revenue in accordance with FASB issued accounting standards
regarding revenue recognition which specifies that revenue is realized or
realizable and earned when four criteria are met:
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Ÿ
|
Persuasive
evidence of an arrangement exists (the Company considers its sales
contracts and technical service agreements to be pervasive evidence of an
arrangement);
|
|
|
Ÿ
|
Delivery
has occurred or services have been
rendered;
|
|
|
Ÿ
|
The
seller’s price to the buyer is fixed or determinable;
and
|
|
|
Ÿ
|
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 injected into the location specified
by the contract and accepted by the customer. The Company recognizes revenue
when the goods and services are provided by the Company and are accepted by the
customer.
Sales
revenue represents the invoiced value of goods, net of a value added tax
(“VAT”). All of the Company’s concrete products that are sold in the PRC are
subject to a Chinese VAT at the rate of 6% of the gross sales
price.
Due to
the fact that the Company uses recycled raw materials to manufacture its
products, the State Administration of Taxation has granted the Company VAT tax
exemption from August 2005 to August 2009 and a two year extension on the VAT
tax exemption from August 2009 to August 2011. The VAT tax collected during the
aforementioned period from the Company’s customers is retained by the Company
and recorded as other subsidy income.
The
Company also provides manufacturing services, technical consulting services and
strategic cooperation including market sharing and equipment rental with other
independently owned concrete companies. The Company signs a Technical Service
Agreement or Strategic Cooperation Agreement with each concrete company, which
specifies all terms and conditions including prices to be charged. Once concrete
products are produced by the concrete company and supplied to builders referred
by the Company or cost savings are realized by the use of technical solutions
provided by the Company, the Company has in effect rendered its service pursuant
to the agreements. The Company recognizes revenue and invoices the concrete
companies monthly for technical service and marketing cooperation on a
per-cubic-meter basis and for equipment rental on a per-mixer truck
basis.
The
Company also earns income from the renting of certain of its vehicles to other
non-related concrete companies. The rental amounts are based on
pre-determined rental rates on a per cubic meter basis.
Shipping and
handling
Shipping
and handling costs related to costs of the raw materials purchased is included
in cost of revenues. Further, transportation costs incurred in the
delivery of the Company’s concrete products are also included in cost of
revenues.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial
instruments
The
accounting standards regarding fair value of financial instruments and related
fair value measurements define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement, and enhance disclosure
requirements for fair value measures.
The three
levels are defined as follows:
|
|
Ÿ
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
|
Ÿ
|
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, substantially
the full term of the financial
instrument.
|
|
|
Ÿ
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
Marketable
securities, warrant liabilities, receivables and current liabilities qualify as
financial instruments. Marketable securities were determined using
Level 1, which are carried on the consolidated balance sheets at fair value,
with fair values determined by the financial institution who sold the
securities. The carrying amounts reported in the consolidated balance sheets for
receivables and current liabilities are reasonable estimates of fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rates of
interest.
The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of December 31, 2009 (unaudited).
|
|
|
Carrying Value at
December 31, 2009
|
|
|
Fair Value Measurement at
December 31, 2009
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Marketable
securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Derivative
liability - warrants
|
|
$
|
5,546,523
|
|
|
$
|
-
|
|
|
$
|
5,546,523
|
|
|
$
|
-
|
|
Other
than the marketable securities and derivative liability - warrants carried at
fair value, the Company did not identify any other assets and liabilities that
are required to be presented on the consolidated balance sheet at fair value in
accordance with the FASB accounting standard.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to FASB’s accounting
standard regarding stock compensation which requires companies to measure
compensation cost for stock-based employee compensation plans at fair value at
the grant date and recognize the expense over the employee's requisite service
period. Under ASC Topic 718, the Company’s expected volatility assumption is
based on the historical volatility of Company’s stock or the expected volatility
of similar entities. The expected life assumption is primarily based on
historical exercise patterns and employee post-vesting termination behavior. The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. This accounting standard requires forfeitures to be estimated at the
time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
The
Company estimates the fair value of the awards using the CRR binomial model.
Option pricing models, such as the CRR binomial model, require the input of
highly complex and subjective variables including the expected life of options
granted and the Company’s expected stock price volatility over a period equal to
or greater than the expected life of the options. Because changes in the
subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the CRR
binomial model may not provide an accurate measure of the fair value of the
Company’s employee stock options. Although the fair value of employee stock
options is determined in accordance with the accounting standard aforementioned
using an option-pricing model, the value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
Concentration of
risk
Cash -
Cash includes cash on hand and demand deposits in accounts maintained with state
owned banks within the PRC. The Company considers all highly liquid instruments
purchased with original maturities of three months or less, and money market
accounts, to be cash equivalents. Total cash in these banks at December 31 and
June 30, 2009 amounted to $827,589 and $3,634,805, respectively, of which no
deposits were covered by insurance. Also, as of December 31 and June 30, 2009,
the Company held $260,863 and $453,192 in restricted cash in a corporate legal
counsel’s trust account respectively , in accordance with an agreement with
investors for the restricted use of preferred stock dividend and investor
relation related expenses. Nonperformance by these institutions could expose the
Company to losses not covered by insurance. Management reviews the financial
condition of these institutions on a periodic basis. The Company has
not incurred any losses on these accounts from nonperformance by the
aforementioned institutions.
Major
customers – For the three months and six months ended December 31, 2009, the
Company does not have customer over 10% of sales. For the three months ended
December 31, 2008, two customers accounted for approximately 24.7% of the
Company’s sales and 25.6% of the Company’s account receivables as of December
31, 2008. For the six months ended December 31, 2008, three customers accounted
for approximately 21% of the Company’s sales and 39% of the Company’s account
receivable as of December 31, 2008.
Major
suppliers – For the three months and six months ended December 31, 2009, the
Company does not have supplier over 10% of purchases. For the three months ended
December 31, 2008, one supplier accounted for approximately 14.4% of the Company
purchase and approximately 1.48% of the Company’s accounts payable as of
December 31, 2008. For the six months ended December 31, 2008, two suppliers
accounted for approximately 19% of the Company purchase and approximately 45% of
the Company’s accounts payable as of December 31, 2008.
Political
and economic risks - The Company's operations are carried out in the PRC.
Accordingly, the Company's business, financial condition, and results of
operations may be influenced by the political, economic, and legal environments
in the PRC, and by the general state of the PRC's economy. The Company's
operations in the PRC are subject to specific considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic, and legal environments, and foreign currency exchange. The Company's
results may be adversely affected by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among
others.
Restricted
Cash
Restricted
cash represents portion of the proceeds received from the June 11, 2008, Private
Placement that was deposited in a trust account held by the Company’s legal
counsel for payment of dividends, investor relations fees, and other
professional fees. The restricted cash balance was $260,863 and $453,192 as of
December 31 and June 30, 2009, respectively.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accounts
receivable
During
the normal course of business, the Company extends unsecured credit to its
customers. Management reviews its accounts receivable each reporting period to
determine if the allowance for doubtful accounts is adequate. An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
probable. Known bad debts are written off against allowance for
doubtful accounts when identified. The Company’s reserves are consistent with
its historical experience and considered adequate by management.
The
ultimate collection of the Company’s accounts receivable may take more than one
year, and any portion of accounts receivable expected to be collected in more
than one year is reflected as noncurrent, net of allowance for doubtful accounts
relating to that portion of the receivables. The bifurcation between current and
noncurrent portions of accounts receivable is based on management’s estimate and
predicated on historical collection experience.
Inventories
Inventories
consist of raw materials and are stated at the lower of cost or market, using
the weighted average cost method. The Company reviews its inventory periodically
for possible obsolescence or if a write down is necessary because the carrying
value exceeds net realizable value. As of December 31 and June 30, 2009, the
Company determined no reserves for obsolescence were necessary.
Prepayments
The
Company advances monies to certain suppliers for raw materials and short term
prepaid rent. These advances are interest free and unsecured. In addition, the
prepayments also include amounts prepaid for rent.
Plant, machinery and
equipment
Plant,
machinery and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred while additions, renewals and
betterments are capitalized. Depreciation is provided over the estimated useful
life of each class of depreciable assets and is computed using the straight-line
method with 5% residual value.
The
estimated useful lives of assets are as follows:
|
|
Useful
Life
|
|
Transportation
equipment
|
10
years
|
|
Plant
and machinery
|
10
years
|
|
Office
equipment
|
5
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the
consolidated statements of income. Construction-in-progress
represents labor costs, materials, and capitalized interest incurred in
connection with the construction of a new mixer station inside the current plant
facility in and outside of Beijing. Interest incurred during
construction is capitalized into construction in progress. All other interest is
expensed as incurred. No depreciation is provided for construction in
progress until it is completed and placed into service. Maintenance, repairs and
minor renewals are charged to expense as incurred. Major additions and
betterment to property and equipment are capitalized.
Long-lived
assets of the Company are reviewed at least annually, more often if
circumstances dictate, for possible impairment. Whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable, the Company records an impairment charge to reduce the related
assets to their net realizable value. The Company believes no impairment exists
at December 31, 2009.
Redeemable convertible
preferred stock
On June
11, 2008, the Company completed the sale to certain accredited investors of
875,000 investment units for gross proceeds of $7,000,000, each unit consisting
of one share of the Company’s Series A Convertible Preferred Stock and one
warrant to purchase two shares of the Company’s common stock. The preferred
stock pays annual dividends of 9% regardless of the Company’s profitability.
Each preferred share is convertible into four shares of common stock. The
Company received net proceeds of approximately $5.3 million after offering
expenses and net of $930,000 restricted cash which was required to be placed in
escrow. Upon the two year anniversary of the closing date, the Company is
required to redeem for cash the outstanding preferred stock, if not previously
converted by the holders, for $8.00 per share plus accrued but unpaid
dividends. Because the Company is required to redeem the
preferred stock on June 11, 2010, if it has not been previously converted by the
holders, in accordance with a FASB accounting standard, the preferred stock is
classified outside of shareholders’ equity.
In
accordance with an accounting standard issued by the FASB regarding debt with
conversion and other options, the Company allocated the proceeds received
between the preferred stock and the warrants. The resulting discount
from the face amount of the preferred stock is being amortized using the
effective interest method over the period to the required redemption date. After
allocating a portion of the proceeds to the warrants, the effective conversion
price of the preferred stock was higher than the market price at the date of
issuance, and therefore, no beneficial conversion feature was recorded. The
dividends on the preferred stock, together with the periodic accretion of the
preferred stock to its redemption value, are charged to retained
earnings.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Income
taxes
The
Company’s subsidiaries Xin Ao and WOFE are governed by the income tax laws
of the PRC. The Company accounts for income taxes in accordance with a FASB
accounting standard, which requires the Company to use the assets and liability
method of accounting for income taxes. Under the assets and liability method,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between financial statement carrying amounts and the tax bases of
existing assets and liabilities. Under this accounting standard, the effect on
deferred income taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recognized if
it is more likely than not that some portion, or all of, a deferred tax asset
will not be realized. Since the Company’s operations are outside of the U.S.,
the Company did not have any provision for U.S. income taxes including any
deferred income taxes, for the six months ended December 31, 2009 and 2008,
respectively.
Under the
accounting standard defines uncertainty in income taxes, the evaluation of a tax
position is a two-step process. The first step is to determine whether it is
more likely than not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the
technical merits of that position. The second step is to measure a tax position
that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50 percent likelihood of being
realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures, and transition. The adoption had no effect on the
Company’s consolidated financial statements. There were no material
deferred tax amounts as of December 31 and June 30, 2009,
respectively.
The
Company has cumulative undistributed earnings of China ACMH of approximately
$21.6 million as of December 31, 2009, is included in consolidated retained
earnings and will continue to be indefinitely reinvested in international
operations. Accordingly, no provision has been made for U.S. deferred
taxes related to future repatriation of these earnings.
Chinese Income
Taxes
The
Company and its subsidiaries are governed by the income tax laws of the PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (the “Income Tax Laws”).
Xin Ao’s
use of recycled raw materials in its production since its inception entitled the
Company to an income tax exemption from January 1, 2003, through to December 31,
2007 and an income tax reduction from 25% to 15% from January 1, 2009 to
December 31, 2012 as granted by the State Administration of Taxation
of the PRC. The income tax exemption granted to the Company was eliminated after
December 31, 2007. Beginning January 1, 2008, the new Chinese
Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic
Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). Effective January
1, 2009, the new reduced EIT rate of 15% replaced the existing rates of 25%
currently applicable to both DES and FIEs.
PRC laws
require that before a FIE can legally distribute profits to its shareholders, it
must satisfy all tax liabilities, provide for losses in previous years, and make
allocations in proportions made at the discretion of the board of directors,
after the statutory reserve. The statutory reserve includes the surplus reserve
fund, the common welfare fund, and represents restricted retained
earnings.
The
Company adopted accounting policies in accordance to U.S. GAAP with regard to
provisions, reserves, inventory valuation method, and depreciation that are
consistent with requirements under Chinese income tax laws. Therefore, there
were no significant deferred tax assets or liabilities during the six months
ended December 31, 2009 and 2008, respectively.
The
Company classifies interest and penalties assessed due to underpayment of income
taxes as interest expense and other expenses, respectively. The Company incurred
no such expenses for the six months ended December 31, 2009 and 2008,
respectively.
Value added
tax
Enterprises
or individuals, who sell commodities, engage in repair and maintenance, or
import and export goods in the PRC are subject to a value added tax. The
standard VAT rate is 6% of gross sales for the Company’s industry. A credit is
available whereby VAT paid on the purchases of raw materials used in the
production of the Company’s finished products can be used to offset the VAT due
on sales of finished products. Due to the fact that the Company uses recycled
raw materials to manufacture its products, the State Administration of Taxation
has granted the Company VAT exemption from August 2005 through to August 2009
and a two year tax (VAT) credit extension from August 2009 through August
2011.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Research and development
costs
Research
and development costs are expensed as incurred. The cost of materials and
equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and
development, marketing, or sales, are classified as property and equipment, and
depreciated over their estimated useful lives. Research and development expenses
for the three and six months ended December 31, 2009 were $2,898 and $40,479,
respectively. The Company did not incur any research and development expense for
the six months ended December 31, 2008.
Earnings per
share
The
Company reports earnings per share in accordance with a FASB accounting
standard, requires presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing such
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted earnings per
share takes into account the potential dilution that could occur if securities
or other contracts, such as warrants, options and convertible preferred stock,
to issue common stock were exercised and converted into common stock. Dilutive
securities having an anti-dilutive effect on diluted earnings per share are
excluded from the calculation.
Comprehensive
income
The FASB
accounting standard for reporting and display of comprehensive income and its
components in financial statement, requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same providence
as other financial statements. The accompanying consolidated financial
statements include the provision of this accounting standard, and therefore,
comprehensive income consists of net income, unrealized gains and losses from
marketable securities, and foreign currency translation
adjustments.
Recently issued accounting
pronouncements
In
January 2009, the FASB issued an accounting standard which amended the
impairment model by removing its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the “market
participant” view to a holder’s estimate of whether there has been a “probable”
adverse change in estimated cash flows allows companies to apply reasonable
judgment in assessing whether an other-than-temporary impairment has occurred.
The adoption of this accounting standard did not have a material impact on the
Company’s consolidated financial statements because all of the investments
in debt securities are classified as trading securities.
In April
2009, the FASB issued authoritative guidance related to the determination of
fair value when the volume and level of activity for an asset or liability has
significantly decreased, the identification of transactions that are not
orderly, the recognition and presentation of other-than-temporary impairments,
and the disclosure of the fair value of financial instruments on an interim
basis. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued an accounting standard to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard provides increased disclosure
about the credit and noncredit components of impaired debt securities that are
not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result
in a change in the carrying amount of debt securities, it does require that
the portion of an other-than-temporary impairment not related to a credit loss
for a held-to-maturity security be recognized in a new category of other
comprehensive income and be amortized over the remaining life of the debt
security as an increase in the carrying value of the security. This standard
became effective for interim and annual periods ending after June 15, 2009.
The adoption of this standard did not have a material impact on the Company’s
consolidated financial statements.
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the
rationale for why that date was selected. The standard is effective for
interim and annual periods ending after June 15, 2009, and accordingly, the
Company adopted this Standard during the second quarter of 2009. The
standard requires that public entities evaluate subsequent events through
the date that the financial statements are issued.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed the
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within
this accounting standard. Further, this accounting standard requires a
company to perform a qualitative analysis when determining whether or not it
must consolidate a VIE. It also requires a company to continuously reassess
whether it must consolidate a VIE. Additionally, it requires enhanced
disclosures about a company’s involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how its involvement
with VIEs impacts the company’s financial statements. Finally, a company will be
required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This accounting standard is effective
for financial statements issued for fiscal years beginning after November 15,
2009. The Company has not completed their assessment of the
impact that this pronouncement will have on the Company’s financial condition,
results of operations or cash flows.
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, the
Company’s Quarterly Report on Form 10-Q for the quarter ending September 30,
2009 and all current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value
using one or more of valuation techniques, as defined. This ASU is effective for
the first reporting period, including interim periods, beginning after the
issuance of this ASU. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an
offset to additional paid-in capital. Further, loaned shares are excluded from
basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The Company
is currently evaluating the impact of this ASU on its consolidated financial
statements.
In
October 2009, the FASB issued new standards that revised the guidance for
revenue recognition with multiple deliverables. These new standards impact the
determination of when the individual deliverables included in a multiple-element
arrangement may be treated as separate units of accounting. Additionally, these
new standards modify the manner in which the transaction consideration is
allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. The guidance is
effective for revenue arrangements entered into for fiscal years beginning on or
after June 15, 2010. The Company does not expect the adoption will
have a material impact on its consolidated financial statements.
Decreases
in Ownership of a Subsidiary – a Scope Clarification
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
January 2010, the FASB issued an accounting standard update to address the
accounting and reporting for Decreases in ownership of a subsidiary. This
amendment to Topic 810 clarifies, but does not change, the scope of current US
GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and
removes the potential conflict between guidance in that Subtopic and asset
derecognition and gain or loss recognition guidance that may exist in other US
GAAP. An entity will be required to follow the amended guidance beginning in the
period that it first adopts FAS 160 (now included in Subtopic 810-10). For those
entities that have already adopted FAS 160, the amendments are effective at the
beginning of the first interim or annual reporting period ending on or after
December 15, 2009. The amendments should be applied retrospectively to the first
period that an entity adopted FAS 160. The Company does not expect the
provisions of ASU 2010-02 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
Distributions
to Shareholders with Components of Stock and Cash
In
January 2010, the FASB issued an accounting standard update to address the
accounting for distributions to shareholders with components of stock and cash
(A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic
505 clarifies the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a limit on the amount of cash that
will be distributed is not a stock dividend for purposes of applying Topics 505
and 260 for interim and annual periods ending on or after December 15, 2009, and
should be applied on a retrospective basis. The Company does not expect the
provisions of ASU 2010-01 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
Note
3 – Supplemental disclosure of cash flow information
During
the six months ended December 31, 2009 and 2008, the Company paid interest in
the amount of $328,543 and $443,786, respectively.
Cash
payments for income taxes for the six months ended December 31, 2009 and 2008
were $1,682,537 and $0, respectively. The Company was subject to corporate
income tax exemption for calendar 2008.
For the
six months ended December 31, 2009, 230,687 shares of common stock underlying
warrants were converted into 139,608 shares of common stock by the exercise of
such warrants on a cashless basis.
For the
six months ended December 31, 2009, 301,250 shares of redeemable convertible
preferred stock were converted into 1,205,000 shares of common stock on a
cashless basis.
For the
six months ended December 31, 2009, $4.2 million was assigned as prepayment for
purchase of equipment.
Non-cash transactions in the
six months ended December 31, 2008
For the
six months ended December 31, 2008, the Company assigned accounts receivables
totaling approximately $3,600,000 as payment to suppliers whose balances were
included in accounts payable. Balances of accounts receivable and payable
reported on the balance sheets are net of the assignments.
For the
six months ended December 31, 2008, the accretion of the discount on redeemable
preferred stock amounted to approximately $300,000, and has been included in the
consolidated statements of shareholders’ equity.
Note
4 – Marketable securities
Marketable
securities are the mutual fund that XinAo purchased from CYJA Allianz Fund, all
securities are available for sale and therefore are carried at fair value with
unrealized gains and losses reported as accumulated other comprehensive income
in shareholders’ equity. Realized gains and losses on marketable securities are
included in other income or expense in the period they incurred, and when
applicable, are reported as a reclassification adjustment in other comprehensive
income. Gains and losses on the sale of marketable securities are determined
using the specific-identification method.
Note
5 – Accounts receivable
Accounts
receivable are generated from concrete products sold, vehicle rental services
provided to other unrelated concrete companies, and technological consulting
services provided to the Company’s customers and other concrete companies with
which the Company conducts business. The payment terms are defined in the
respective contracts. Over 73% of the Company’s receivables are due within a
year by contract and are classified as current assets on the consolidated
balance sheets. For certain large construction projects that can take several
years to complete, the Company provides extended payment terms to the general
contractors. These contractors are usually large state-owned builders with good
credit ratings. At the end of each period, the Company evaluates the structure
and collectability of accounts receivable and for these receivables that are
past due or not being paid according to payment terms, the Company takes
appropriate actions including seeking legal resolution in a court of law, for
its collection efforts.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of
December 31 and June 30, 2009, accounts receivable and allowance for doubtful
accounts consisted of the following:
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2009
|
|
|
Accounts
receivable, current
|
|
$
|
23,327,255
|
|
|
$
|
11,936,388
|
|
|
Less: allowance
for doubtful accounts, current
|
|
|
(95,866
|
)
|
|
|
(120,986
|
)
|
|
Net
accounts receivable, current
|
|
|
23,231,389
|
|
|
|
11,815,402
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, non-current
|
|
|
8,627,888
|
|
|
|
4,461,269
|
|
|
Less: allowance
for doubtful accounts, non-current
|
|
|
(223,685
|
)
|
|
|
(328,563
|
)
|
|
Net
accounts receivable, non-current
|
|
|
8,404,203
|
|
|
|
4,132,706
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
accounts receivable, net
|
|
$
|
31,635,592
|
|
|
$
|
15,948,108
|
|
Note
6 – Plant and equipment
Plant and
equipment consist of the following as of December 31 and June 30,
2009:
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2009
|
|
|
Transportation
equipment
|
|
$
|
20,358,047
|
|
|
$
|
20,375,873
|
|
|
Plant
and machinery
|
|
|
9,833,606
|
|
|
|
6,246,380
|
|
|
Office
equipment
|
|
|
103,919
|
|
|
|
95,556
|
|
|
Construction-in-progress
|
|
|
-
|
|
|
|
3,369,500
|
|
|
Total
|
|
|
30,295,572
|
|
|
|
30,087,309
|
|
|
Less:
accumulated depreciation
|
|
|
(9,372,560
|
)
|
|
|
(7,997,592
|
)
|
|
Plant
and equipment, net
|
|
$
|
20,923,012
|
|
|
$
|
22,089,717
|
|
Construction-in-progress
represents labor costs, materials, and capitalized interest incurred in
connection with the construction of a new mixer station inside and outside of
the current plant facility in Beijing. No depreciation is provided for
construction-in-progress until it is completed and placed into service. Most
construction-in-progress is related to assembling of portable machinery we
purchased with cash and in general the assembling process can be done in less
than three weeks. Therefore, no interest expense was capitalized as the
capitalized interest was not significant.
Construction
of some of the new portable mixing stations was completed and $3,391,598 was
transferred to fixed assets during the six months ended December 31,
2009.
Depreciation
expense for the three months ended December 31, 2009 and 2008 amounted to
$719,863 and $536,237, respectively. Depreciation expense for the six months
ended December 31, 2009 and 2008 amounted to $1,387,883 and $1,071,362,
respectively. For the six months ended December 31, 2009 and 2008, no material
interest amounts were capitalized.
Note
7 – Prepayments
Prepayments
are comprised of short-term and long-term factory rental prepayments the Company
made and also prepayments for inventory purchases. Short-term prepayments as of
December 31 and June 30, 2009 consisted of the following:
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2009
|
|
|
Prepayments
for inventories
|
|
$
|
2,950,265
|
|
|
$
|
2,431,401
|
|
|
Short
term prepayments-rent
|
|
|
2,559,527
|
|
|
|
1,823,925
|
|
|
Others
|
|
|
15,000
|
|
|
|
-
|
|
|
Total
prepayments
|
|
$
|
5,524,792
|
|
|
$
|
4,255,326
|
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long term
prepayments represented prepayment for purchase of equipment and the non-current
portion of the factory rental prepayments the Company made. Prepayment for
purchase of equipment amounted to $4,236,977 and $0 as of December 31 and June
30, 2009, respectively. Long term rental prepayments amounted to $5,210,999 and
$4,794,746 as of December 31 and June 30, 2009, respectively. Rent prepayments
for the next five years ended June 30 amounted to $7,770,526 and consists of the
following:
|
Years ending December 31,
|
|
Amount
|
|
|
2010
|
|
$
|
2,559,527
|
|
|
2011
|
|
|
1,864,798
|
|
|
2012
|
|
|
1,828,234
|
|
|
2013
|
|
|
1,196,198
|
|
|
2014
|
|
|
321,769
|
|
Note
8 – Short term loans
Short
term loans represent amounts due to one of the Company’s employee that are due
on demand or within one year. As of December 31 and June 30, 2009, the
outstanding balances on these loans were $146,259 and $4,512,200, respectively,
and these loans consisted of the following:
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2009
|
|
|
Loan
from Beijing International Trust Co, Ltd. interest rate of 15% per annum,
due July 15, 2009, guaranteed by Rayland Credit Guarantee Co. Ltd., paid
off in July 2009
|
|
$
|
-
|
|
|
$
|
4,395,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from an employee(s), effective interest rate of 0% per annum, due upon
demand, unsecured.
|
|
|
146,259
|
|
|
|
117,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
short term loans
|
|
$
|
146,259
|
|
|
$
|
4,512,200
|
|
Interest
expense on short-term loans for the three months ended December 31, 2009 and
2008 amounted to $0 and $215,975, respectively. Interest expense on short-term
loans for the six months ended December 31, 2009 and 2008 amounted to $23,753
and $443,786, respectively.
Note
9 – Derivative liability
Effective
July 1, 2009, the Company adopted a FASB accounting standard, which defines
determining whether an instrument (or embedded feature) is indexed to an
entity’s own stock. This accounting standard specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument. This FASB accounting standard
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the scope exception.
As a
result of adopting this FASB accounting standard, warrants previously treated as
equity pursuant to the derivative treatment exemption are no longer afforded
equity treatment because the warrants have a downward ratchet provision on the
exercise price. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.
As such,
effective July 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in June 2008. On July 1, 2009,
the Company reclassified from additional paid-in capital, as a cumulative effect
adjustment, $1,965,945 to beginning retained earnings and $3,337,225 to warrant
liabilities to recognize the fair value of such warrants. The fair value of the
warrants was $5,546,523 on December 31, 2009. Therefore, the
Company recognized a $3,356,796 gain and $3,916,645 loss from the change in fair
value for the three and six months ended December 31, 2009,
respectively.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the
Cox-Ross-Rubinstein (“CRR”) Binomial Model using the following
assumptions:
|
|
|
December 31, 2009
|
|
|
July 1, 2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Annual
dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
Expected
life (years)
|
|
|
3.50
|
|
|
|
4.00
|
|
|
Risk-free
interest rate
|
|
|
1.92
|
%
|
|
|
2.07
|
%
|
|
Expected
volatility
|
|
|
75
|
%
|
|
|
75
|
%
|
Expected
volatility is based on historical volatility of a similar U.S. public company
due to limited trading history of the Company’s common stock. The
Company has no reason to believe future volatility over the expected remaining
life of these warrants is likely to differ materially from historical
volatility. The expected life is based on the remaining term of the warrants.
The risk-free interest rate is based on U.S. Treasury securities according to
the remaining term of the warrants. The expected dividend yield was based on the
Company’s current and expected dividend policy.
The
conversion option does not need to be separated from the redeemable convertible
preferred stock and accounted for as derivative liability because it has the
risks and rewards of an equity instrument and clearly and closely related to the
risks and rewards of the redeemable convertible preferred stock, which has been
accounted for as an equity instrument.
The
redeemable convertible preferred stock contains residual equity interest, which
on dissolution and liquidation of the Company, entitle the preferred
stockholders to liquidation value and accumulated dividends, and rank equal with
the common shareholders on an as if converted basis. A host contract is
considered an equity instrument if it encompasses a residual interest in an
entity.
Note
10 – Related party transactions
Other payables –
shareholders
Beginning
in July 2007, Mr. He Weili, a 38.10% shareholder, leased an office space to the
Company at approximately the current fair market value from July 2009 to June
2010 with annual payment of $172,950. For the three months ended December
31, 2009 and 2008, the Company recorded rent expenses from the shareholder in
the amount of approximately $43,000 and $43,000, respectively. For the six
months ended December 31, 2009 and 2008, the Company recorded rent expense from
the shareholder in the amount of approximately $86,000 and $87,000,
respectively. As of December 31 and June 30, 2009, approximately $926 and
$56,046, respectively, remained unpaid, and is included as other payables -
shareholders.
The
Company’s shareholders Mr. Han Xianfu and Mr. He Weili, who have 57.15% and
38.10% indirect ownership interests in BVI-ACM, respectively, together loaned
$750,900 to BVI-ACM on March 12, 2008, for the entity’s cash flow purposes. The
loan is non-interest bearing, unsecured, and is payable in cash on
demand.
Total
other payables - shareholders as of December 31 and June 30, 2009 is as
follows:
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2009
|
|
|
Han
Xianfu, shareholder
|
|
$
|
450,550
|
|
|
$
|
450,550
|
|
|
He
Weili, shareholder
|
|
|
301,276
|
|
|
|
356,396
|
|
|
Total
other payable – shareholder
|
|
$
|
751,826
|
|
|
$
|
806,946
|
|
Note
11 – Other receivables
As of
December 31, 2009, other receivables mainly include advances to employees,
monies to another entity, receivables from an insurance company and other
deposits paid.
Monies
advanced to an entity that was in part formerly owned by Mr. He
Weili. Prior to the reverse acquisition (Note 1), the Company and
this related entity were engaged in joint contracts, business licenses, and
other partnership agreements. Pursuant to the reverse acquisition, the Company
and this related entity began separate operations and the process of obtaining
separate contracts, business licenses, and other partnership agreements were
initiated. To date, the Company and this related entity are finalizing the
aforementioned process of obtaining separate contracts, business licenses, and
agreements.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Due to
the relationship of the two companies, certain monies were exchanged as part of
their joint contracts. For the six months ended December 31, 2009,
the Company advanced approximately $5,343,299 to this entity, and approximately
$4,586,991 was repaid. As of December 31, 2009 and June 30, 2009, the
balance of other receivable for related party transaction was approximately
$756,000 and $0, respectively.
As of
June 30, 2009, other receivables consisted of accounts receivables that were
factored to a trust company, employee advances, station advances, and bidding
deposits. For the fiscal year ended June 30, 2009, the Company had a factoring
agreement with a third party unrelated trust company wherein it transferred its
receivables for cash during the fourth quarter of 2009. As of June 30, 2009, the
Company had not collected $3.6 million from the trust company and recorded the
uncollected balances as other receivable. The Company received its remaining
balances in July 2009.
Note
12 – Income taxes
Corporate
income taxes
Companies
established before March 16, 2007, will continue to enjoy tax holiday treatment
approved by the local government for a grace period of either for the next five
years or until the tax holiday term is completed, whichever is sooner. These
companies will pay the standard tax rate when the grace period expires. The
Company had received its tax holiday treatment until December
2007. During the fourth quarter of the year, the Company has applied
and received the Enterprise High-Tech Certificate. The certificate was awarded
based on the Company's involvement in producing high-tech products, its research
and development, as well as its technical services. As a result of this
certification, the Company's effective income tax rate has been reduced to 15%
from 25%. The new tax rate will be retroactive to January 1, 2009 and will be
effective for three years, through December 31, 2011.
The
Company was granted income tax exemption from January 1, 2003 to December 31,
2007. Beginning on January 1, 2008, the Company and its subsidiaries were
subject to an EIT rate of 25%. The Company was granted a 10% tax
deduction on 90% of the total sales revenue by the local authority due to the
Company’s utilization of recycled raw materials. Beginning on January
1, 2009, the Company and its subsidiaries were subject to an EIT rate of
15%. For the six months ended December 31, 2009 and 2008, the
provision for income taxes amounted to $1,348,627 and $1,575,230,
respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended December 31, 2009 and 2008:
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
|
|
2009
(Unaudited)
|
|
|
|
2008
(Unaudited)
|
|
|
|
U.S.
statutory rates
|
|
|
34
|
%
|
|
|
|
34
|
%
|
|
|
Foreign
income not recognized in the U.S.
|
|
|
(34
|
)%
|
|
|
|
(34
|
)%
|
|
|
China
income taxes
|
|
|
25
|
%
|
|
|
|
25
|
%
|
|
|
China
income tax exemption
|
|
|
(10
|
)%
|
|
|
|
-
|
|
|
|
Other
|
|
|
(6
|
)%
|
(a)
|
|
|
2
|
%
|
(a)
|
|
Effective
income tax rates
|
|
|
9
|
%
|
|
|
|
27
|
%
|
|
(a)The –
(6%) represents expenses (such as change in fair value of warrants in the amount
of $3,356,796 and certain expenses in the amount of $239,217 incurred in the
U.S. entity) incurred by the Company that are not deductible for PRC income tax
for the three months ended December 31, 2009. The 2% represents the expenses
incurred in the U.S entity that were not subjected to PRC income tax for the
three months ended December 31, 2008.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended December 31, 2009 and
2008:
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
|
|
2009
(Unaudited)
|
|
|
|
2008
(Unaudited)
|
|
|
|
U.S.
statutory rates
|
|
|
34
|
%
|
|
|
|
34
|
%
|
|
|
Foreign
income not recognized in the U.S.
|
|
|
(34
|
)%
|
|
|
|
(34
|
)%
|
|
|
China
income taxes
|
|
|
25
|
%
|
|
|
|
25
|
%
|
|
|
China
income tax exemption
|
|
|
(10
|
)%
|
|
|
|
-
|
|
|
|
Other
|
|
|
13
|
%
|
(a)
|
|
|
3
|
%
|
(a)
|
|
Effective
income tax rates
|
|
|
28
|
%
|
|
|
|
28
|
%
|
|
|
|
(a)
|
The
- 13% represents the expenses (such as change in fair value of warrants in
the amount of $3,916,645 and certain expenses in the amount of $379,400
incurred in the U.S. entity) incurred by the Company that are not
deductible for PRC income tax for the six months ended December 31, 2009.
The 3% represents the expenses incurred in the U.S entity that were not
subjected to PRC income tax for the six months ended December 31,
2008.
|
Taxes
payable consisted of the following:
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2009
|
|
|
Income
taxes payable
|
|
$
|
2,700,196
|
|
|
$
|
3,039,905
|
|
|
Other
taxes payables
|
|
|
27,282
|
|
|
|
8,274
|
|
|
Total
taxes payable
|
|
$
|
2,727,478
|
|
|
$
|
3,048,179
|
|
Note
13 – Shareholders’ equity
On June
11, 2008, the Company completed an offering (the “Offering”) on the sale of
875,000 of investment units for a total of $7,000,000, each unit consisting of
one share of the Company’s Series A Convertible Preferred Stock, $0.001 par
value per share, and one (1) five year warrant to purchase two shares of Common
Stock (the “Warrants”). Each preferred share is convertible into four shares of
common stock. Additionally, each holder is entitled to cumulative
dividends equal to 9% annually, payable in cash, irrespective of the
profitability of the Company.
The
Company received net proceeds of approximately $5,223,291 with $930,000 in an
escrow and after payment of certain fees and expenses. $497,500 was
paid to Maxim Group LLC (“Maxim”) who served as the placement agent for the
transaction, $9,500 was paid to American Stock Transfer & Trust Company as a
transfer agent fee, $60,000 was paid to the attorney, and $45,000 was paid for a
finance fee for the purchasers in connection with the transaction. These
offering costs approximating $602,500 were charged to additional paid-in
capital. The allocation of the proceeds from the investment to a relative
fair value basis which resulted in the allocation of $5,798,000 to the Series A
Preferred and $1,202,000 to the warrants.
The
following is a summary of our current Redeemable Convertible Preferred Stock
issued and outstanding net of discount:
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
|
2009
(Unaudited)
|
|
|
2009
|
|
|
Numbers
of Redeemable Convertible Preferred shares outstanding in the beginning of
the fiscal year
|
|
|
851,125
|
|
|
|
875,000
|
|
|
Redeemable
Convertible Preferred shares converted to Common share during the fiscal
year
|
|
|
(301,250
|
)
|
|
|
(23,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Current
Redeemable Convertible Preferred shares outstanding
|
|
|
549,875
|
|
|
|
851,125
|
|
|
Per
share conversion price from Redeemable Convertible Preferred shares to
Common share
|
|
$
|
8
|
|
|
$
|
8
|
|
|
Current
Redeemable Convertible Preferred outstanding before
discount
|
|
$
|
4,399,000
|
|
|
$
|
6,809,000
|
|
|
Discount
on Redeemable Convertible Preferred shares outstanding
|
|
$
|
(167,851
|
)
|
|
$
|
(567,581
|
)
|
|
Total
Current Redeemable Convertible Preferred stocks net of
discount
|
|
$
|
4,231,149
|
|
|
$
|
6,241,419
|
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company also issued to the placement agent a warrant to purchase an aggregate of
245,000 shares of common stock with an exercise price of $2.40 per share with a
term of five years. The warrants are exercisable on a cashless basis, in whole
or in part, at an exercise price equal to $2.40 per share. The Company may call
the warrants for redemption at any time after the warrants become exercisable
(i) at a price of $.01 per warrant; (ii) upon not less than 30 days’ prior
written notice of redemption to each warrant holder; and (iii) if, and only if,
the last sale price of the common stock equals or exceeds $5.00 per share, for
any twenty (20) trading days within a thirty (30) consecutive trading day period
ending on the third business day prior to the notice of redemption to warrant
holders.
The value
of the warrants issued to the placement agent was $169,345 calculated by using
the Cox-Ross-Rubinstein (“CRR”) Binomial Model. The fair value of these warrants
of $169,345 was recognized as offering expense and charged to additional paid-in
capital. The value of the warrants was determined using the CRR Binomial Model
using the following assumptions: volatility 75%; risk-free interest rate of
3.49% of the Investor Warrants, the Placement and Advisory Warrants; dividend
yield of 0%, and expected term of 5 years of the Investor Warrants and the
Placement and Advisory Warrants. The volatility of the Company’s common stock
was estimated by management based on the historical volatility of a similar U.S.
public company due to limited trading history of the Company’s common stock. The
risk-free interest rate was based on the Treasury Constant Maturity Rates
published by the U.S. Federal Reserve for periods applicable to the expected
life of the warrants. The expected dividend yield was based on the Company’s
current and expected dividend policy and the expected term is equal to the
contractual life of the warrants.
Following
is a summary of the status of warrants outstanding:
|
Outstanding Common Stocks Underlying Warrants
|
|
|
|
Number
|
|
Average Remaining
Contractual Life
|
|
US$
|
2.40
|
|
|
1,551,250
|
|
3.45 years
|
|
US$
|
2.40
|
|
|
52,188
|
|
3.50 years
|
|
Total
|
|
|
1,603,438
|
|
|
Following
is a summary of the warrant activity:
|
|
|
Number of Common
stock underlying
Warrants
|
|
|
Outstanding
as of June 30, 2008
|
|
|
1,995,000
|
|
|
Granted
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
Outstanding
as of June 30, 2009
|
|
|
1,995,000
|
|
|
Granted
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
Exercised
|
|
|
(391,562
|
)
|
|
Outstanding
as of December 31, 2009 (unaudited)
|
|
|
1,603,438
|
|
In
connection with the private placement, the Company agreed to file a registration
statement to register the warrants and common stock issuable upon conversion of
the preferred stock and exercise of the warrants, as defined. The registration
statement was declared effective in January 2009. The Company incurred $140,000
penalties for late registration and was paid based on the contract in connection
with the private placement.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Employee Stock
Options
On May 1,
2008, the Company issued 25,000 common shares to a Company executive, par value
$0.001 for services the executive renders to the Company. The shares
become fully vested after one year from the date of grant. On July 31 2008, the
executive’s employment with the Company terminated, and the 25,000 shares were
forfeited upon resignation.
On
October 3, 2008, the Company entered into a one-year agreement with one of the
Company’s board of directors. In connection with his services, the Company
issued an aggregate of 50,000 options of the Company’s common stock at an
exercise price of $2.90 per share. The options vest in equal quarterly
installments over the first year of the agreement.
On
December 1, 2008, the Company entered into a three-year agreement with
the Company’s Chief Financial Officer. In connection with his services, the
Company issued a total of 200,000 options of the Company’s common stock
from the option bonus pool. The option bonus pool consists of four equal
tranches of 50,000 options, with the first tranche of 50,000 options carrying an
exercise price of $3.00, the second tranche of 50,000 options carrying an
exercise price of $3.50, the third tranche of 50,000 options carrying an
exercise price of $4.00, and the fourth tranche of 50,000 options carrying an
exercise price of $4.50. A quarter (25%) of each tranche of options will vest at
the end of each twelve-month period of the agreement.
The
Company valued the stock options by the Cox-Ross-Rubinstein (“CRR”) binomial
model with the following assumptions:
|
|
|
Expected
|
|
|
Expected
|
|
|
Dividend
|
|
|
Risk Free
|
|
|
Grant Date
|
|
|
|
|
Term
|
|
|
Volatility
|
|
|
Yield
|
|
|
Interest Rate
|
|
|
Fair
Value
|
|
|
Chief
Financial Officer
|
|
|
6.25
|
|
|
|
75
|
%
|
|
|
0
|
%
|
|
|
1.16
|
%
|
|
$
|
3.00
|
|
|
Director
|
|
|
5.31
|
|
|
|
75
|
%
|
|
|
0
|
%
|
|
|
1.41
|
%
|
|
$
|
2.90
|
|
The
following is a summary of the option activity:
|
|
|
Number
of
options
|
|
|
Intrinsic
Value
|
|
|
Outstanding
as of June 30, 2008
|
|
|
|
|
|
|
|
Granted
|
|
|
250,000
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
Outstanding
as of June 30, 2009
|
|
|
250,000
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
Outstanding
as of December 31, 2009 (Unaudited)
|
|
|
250,000
|
|
|
$
|
350,000
|
|
Following
is a summary of the status of options outstanding at December 31,
2009:
|
|
Outstanding options
|
|
|
Exercisable options
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
Average
|
|
|
of
|
|
|
remaining
|
|
|
Exercise
|
|
|
of
|
|
|
remaining
|
|
|
|
Exercise price
|
|
|
options
|
|
|
contractual life
|
|
|
price
|
|
|
options
|
|
|
contractual life
|
|
|
|
|
|
|
|
|
|
(years)
|
|
|
|
|
|
|
|
|
(years)
|
|
|
|
$
|
2.90
|
|
|
|
50,000
|
|
|
|
8.76
|
|
|
$
|
2.90
|
|
|
|
50,000
|
|
|
|
8.76
|
|
|
|
$
|
3.00
|
|
|
|
50,000
|
|
|
|
8.92
|
|
|
$
|
3.00
|
|
|
|
50,000
|
|
|
|
8.92
|
|
|
|
$
|
3.50
|
|
|
|
50,000
|
|
|
|
8.92
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
4.00
|
|
|
|
50,000
|
|
|
|
8.92
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
4.50
|
|
|
|
50,000
|
|
|
|
8.92
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
3.58
|
|
|
|
250,000
|
|
|
|
|
|
|
$
|
2.95
|
|
|
|
100,000
|
|
|
|
|
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of
December 31, 2009, there was approximately $248,439 of total unrecognized
compensation expense related to un-vested share-based compensation arrangements.
That cost is expected to be recognized over a weighted-average period of three
years.
For the
three months ended December 31, 2009 and 2008, the Company recognized
approximately $22,089 and $26,210, respectively, as compensation expenses for
its stock option plan. For the six months ended December 31, 2009 and 2008, the
Company recognized approximately $63,396 and $26,210, respectively, as
compensation expenses for its stock option plan.
Restricted Stock
Awards
On August
15, 2009, the Company issued 10,000 shares of restricted stock to each of its
three board of directors for one year of service. The restricted stocks vest in
equal quarterly installments over the first year of the
agreement. For the three months ended December 31, 2009, the Company
recognized $38,534 of the restricted stock as compensation expense. For the six
months ended December 31, 2009, the Company recognized approximately $57,382 of
the restricted stock as compensation expense. As of December 31,
2009, $95,498 of total unrecognized compensation expense was related to the
unvested restricted stock based compensation arrangements.
Note
14 – Contribution receivable
On July
8, 2005, Xin Ao’s board of directors passed a resolution to increase the
registered capital from $3,630,000 (RMB30 million) to $12,100,000 (RMB100
million). The increase in registered capital of $8,470,000 (RMB70 million) was
funded by the undistributed profits as of June 30, 2005. Based on the PRC
government’s regulations, all companies are required to record its capital in
accordance with the business license, and since Xin Ao did not have sufficient
undistributed profits as of June 30, 2005, the unfunded amount has been recorded
as contribution receivable. Since the capital should be contributed
by the shareholders of the Company, the contribution receivable was recorded as
part of the equity transaction.
Further,
pursuant to BVI-ACM’s establishment of China-ACMH in November 2007, BVI-ACM was
required to pay 15% of $5,000,000 by February 22, 2008, and the remaining
balance by November 22, 2009, in accordance with the laws of the
PRC.
On March
30, 2008, Xin Ao’s board of directors approved to transfer $7,260,000 from
undistributed retained earnings into registered capital of the Company.
Contemporaneously, China-ACMH made a payment of $5,000,000 and BVI-ACM made a
payment of $100 to the Company. On October 9, 2009, the Company has transferred
$1,210,000 (RMB10,000,000) from unrestricted retained earnings to registered
capital. As of December 31, 2009, the Company has zero contribution
receivable.
Note
15 – Reserves and dividends
The laws
and regulations of the PRC require that before a foreign invested enterprise can
legally distribute profits, it must first satisfy all tax liabilities, provide
for losses in previous years, and make allocations, in proportions determined at
the discretion of the board of directors, after the statutory reserves. The
statutory reserves include the surplus reserve fund and the common welfare
fund.
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital. As of December 31, 2009, the Company still needs to reserve
$3.5 million to statutory reserve.
The
transfer to this reserve must be made before distribution of any dividends to
the Company’s shareholders. The surplus reserve fund is non-distributable other
than during liquidation and can be used to fund previous years’ losses, if any,
and may be utilized for business expansion or converted into share capital by
issuing new shares to existing shareholders in proportion to their shareholding
or by increasing the par value of the shares currently held by them, provided
that the remaining reserve balance after such issue is not less than 25% of the
registered capital.
The
Chinese government restricts distributions of registered capital and the
additional investment amounts required by foreign invested enterprises. Approval
by the Chinese government must be obtained before distributions of these amounts
can be returned to the shareholders.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
16 – Earnings per share
The
following is a reconciliation of the basic and diluted earnings per share
computation for the three months and six months ended December, 2009 and
2008:
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
7,626,246
|
|
|
$
|
2,335,966
|
|
|
$
|
2,762,445
|
|
|
$
|
3,485,709
|
|
|
Weighted
average shares outstanding-Basic
|
|
|
12,377,182
|
|
|
|
10,525,000
|
|
|
|
11,681,294
|
|
|
|
10,525,000
|
|
|
Earnings
per share-Basic
|
|
$
|
0.62
|
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
7,626,246
|
|
|
$
|
2,335,966
|
|
|
$
|
2,762,445
|
|
|
$
|
3,485,709
|
|
|
Add:
Dividends on preferred stock
|
|
|
110,843
|
|
|
|
158,795
|
|
|
|
259,969
|
|
|
|
317,650
|
|
|
Add:
Accretion on preferred stock
|
|
|
207,990
|
|
|
|
150,241
|
|
|
|
399,728
|
|
|
|
300,482
|
|
|
Net
income for diluted EPS
|
|
$
|
7,945,079
|
|
|
$
|
2,645,002
|
|
|
$
|
3,422,142
|
|
|
$
|
4,103,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-Basic
|
|
|
12,377,182
|
|
|
|
10,525,000
|
|
|
|
11,681,294
|
|
|
|
10,525,000
|
|
|
Restricted
stock
|
|
|
7,500
|
|
|
|
-
|
|
|
|
7,500
|
|
|
|
-
|
|
|
Warrants
and options
|
|
|
1,093,508
|
|
|
|
195,410
|
|
|
|
1,052,507
|
|
|
|
195,410
|
|
|
Preferred
stock
|
|
|
2,477,326
|
|
|
|
3,500,000
|
|
|
|
2,883,481
|
|
|
|
3,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
shares outstanding-Diluted
|
|
|
15,955,516
|
|
|
|
14,220,410
|
|
|
|
15,624,782
|
|
|
|
14,220,410
|
|
|
Earnings
per share-Diluted
|
|
$
|
0.50
|
|
|
$
|
0.19
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
On June
11, 2008, the Company issued 875,000 shares of preferred stock, each of which
can be converted into four shares of common stock. The convertible preferred
stock is mandatorily redeemable for cash at the end of two years if not yet
converted. As of December 31, 2009, 325,125 of the preferred stock had been
converted into 1,300,500 of common stock. Dividends on the preferred stock and
accretion of the initial discount from the redemption value of the preferred
stock, both of which are charged to retained earnings, are subtracted from net
income to determine net income available to common shareholders for the purposes
of computing basic earnings per share. In calculating diluted earnings per
share, the convertible preferred stock is treated as common stock equivalents on
an as-converted basis. The dividends and accretion on the preferred stock are
added back to the net income available to common shareholders for calculating
diluted earnings per share, as if the preferred stock were converted at the
beginning of the period. For the six months ended December 31, 2009
and 2008, total dividend and accretion were $659,699 and $618,132,
respectively. For six months ended December 31, 2009, 292,182
warrants were converted into 300,483 shares of common stock. For the six months
ended December 31, 2009, 1,603,438 warrants at an exercise price of $2.40 per
share were included in the diluted EPS calculation, which under treasury stock
method resulted in an additional 1,008,063 shares of common stocks.
Note
17 – Employee pension
The
Company offers a discretionary pension fund, a defined contribution plan, to
qualified employees. The pension includes two parts: the first to be paid by the
Company is 20% of the employee’s actual salary in the prior year. The other
part, paid by the employee, is 8% of the actual salary. The Company’s
contributions of employment benefits, including pension were approximately
$39,142 and $16,284 for the three months ended December 30, 2009 and 2008,
respectively. The Company’s contributions of employment benefits, including
pension were approximately $56,822 and $33,734 for the six months ended December
30, 2009 and 2008, respectively.
Note
18 – Operating leases
The
Company entered into a lease agreement for a manufacturing plant with an
unrelated party from October 1, 2008 to September 30, 2013 with annual payment
of $197,000. Further, the Company agreed to lease office space from
the Company’s shareholder, Mr. He Weili, from July 2009 to June 2010 with annual
payment of $172,950, the rent is valued at fair value from the main property
management.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company has four different five-year operating lease agreements as of December
31, 2009. The lease payments are for four manufacturing plants with
various unrelated parties for a total monthly payment of approximately $214,000.
Certain lease payments have been pre-paid by transferring the Company’s
long-term accounts receivable to the lessors as the Company believes that a
lump-sum pre-payments from an aging receivable in exchange for agreeing to no
increase in the future lease will benefit its future operation.
Total
operating lease expense for the three months ended December 31, 2009 and 2008
was $796,343 and $92,589, respectively. Total operating lease expense for the
six months ended December 31, 2009 and 2008 was $1,391,370 and $185,179,
respectively, and is included in selling, general, and administrative expenses.
Future minimum annual lease expense under non-cancelable operating leases with a
term of one year or more consist of the following:
|
Years ending June 30,
|
|
Amount
|
|
|
Six
months remaining in 2010
|
|
$
|
1,563,313
|
|
|
2011
|
|
|
2,756,596
|
|
|
2012
|
|
|
2,756,596
|
|
|
2013
|
|
|
2,639,596
|
|
|
2014
|
|
|
633,187
|
|
Note
19 — Business Segments
The
Company’s operations are classified into four principal reportable segments that
provide different products or services. The Company is engaged in the
business of sales of concrete, manufacturing concrete, 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. Corporate
represents the expenses that are not directly interrelated to the business
units.
For the
three months ended December 31, 2009 (Unaudited):
|
|
|
Sales
of concrete
|
|
|
Manufacturing
services
|
|
|
Technical
services
|
|
|
Others
|
|
|
Corporate
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
20,316,502
|
|
|
$
|
3,663,114
|
|
|
$
|
1,234,760
|
|
|
$
|
949,936
|
|
|
$
|
-
|
|
|
$
|
26,164,312
|
|
|
Depreciation
|
|
|
(241,139
|
)
|
|
|
(421,619
|
)
|
|
|
(1,273
|
)
|
|
|
(45,124
|
)
|
|
|
(10,709
|
)
|
|
|
(719,863
|
)
|
|
Operating
income
|
|
|
1,764,973
|
|
|
|
1,581,756
|
|
|
|
1,147,274
|
|
|
|
614,115
|
|
|
|
(1,030,742
|
)
|
|
|
4,077,376
|
|
|
Other
income (expenses)
|
|
|
1,077,857
|
|
|
|
216,333
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,008
|
|
|
|
1,321,198
|
|
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,524
|
|
|
|
1,524
|
|
|
Interest
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Capital
expenditure
|
|
|
(114,282
|
)
|
|
|
(48,467
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(527
|
)
|
|
|
(163,276
|
)
|
For the
six months ended December 31, 2009 (Unaudited):
|
|
|
Sales of concrete
|
|
|
Manufacturing
services
|
|
|
Technical services
|
|
|
Others
|
|
|
Corporate
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
35,203,259
|
|
|
$
|
6,468,728
|
|
|
$
|
2,479,655
|
|
|
$
|
1,493,806
|
|
|
$
|
-
|
|
|
$
|
45,645,448
|
|
|
Depreciation
|
|
|
(531,393
|
)
|
|
|
(745,240
|
)
|
|
|
(2,544
|
)
|
|
|
(90,858
|
)
|
|
|
(17,848
|
)
|
|
|
(1,387,883
|
)
|
|
Operating
income
|
|
|
2,193,685
|
|
|
|
2,607,338
|
|
|
|
2,327,540
|
|
|
|
1,107,819
|
|
|
|
(1,767,001
|
)
|
|
|
6,469,381
|
|
|
Other
income (expenses)
|
|
|
1,854,061
|
|
|
|
379,163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,543
|
|
|
|
2,238,767
|
|
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,021
|
|
|
|
3,021
|
|
|
Interest
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,753
|
)
|
|
|
(23,753
|
)
|
|
Capital
expenditure
|
|
|
(150,431
|
)
|
|
|
(3,463,262
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,131
|
)
|
|
|
(3,619,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
60,152,105
|
|
|
|
11,053,259
|
|
|
|
-
|
|
|
|
1,641,629
|
|
|
|
359,984
|
|
|
|
73,206,977
|
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the
three months ended December 31, 2008 (Unaudited):
|
|
|
Sales
of
concrete
|
|
|
Manufacturing
services
|
|
|
Technical
services
|
|
|
Others
|
|
|
Corporate
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
7,969,878
|
|
|
$
|
2,070,996
|
|
|
$
|
423,330
|
|
|
$
|
363,997
|
|
|
$
|
-
|
|
|
$
|
10,828,201
|
|
|
Depreciation
|
|
|
(407,068
|
)
|
|
|
(82,263
|
)
|
|
|
(1,269
|
)
|
|
|
(45,637
|
)
|
|
|
-
|
|
|
|
(536,237
|
)
|
|
Operating
income
|
|
|
1,882,823
|
|
|
|
1,250,909
|
|
|
|
388,601
|
|
|
|
306,907
|
|
|
|
(485,803
|
)
|
|
|
3,343,437
|
|
|
Other
income (expenses)
|
|
|
392,872
|
|
|
|
124,260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
517,132
|
|
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,406
|
|
|
|
2,406
|
|
|
Interest
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(217,570
|
)
|
|
|
(217,570
|
)
|
|
Capital
expenditure
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,599
|
)
|
|
|
(12,599
|
)
|
For the
six months ended December 31, 2008 (Unaudited):
|
|
|
Sales of
concrete
|
|
|
Manufacturing
services
|
|
|
Technical
services
|
|
|
Others
|
|
|
Corporate
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
9,837,565
|
|
|
$
|
3,996,539
|
|
|
$
|
1,040,127
|
|
|
$
|
1,090,716
|
|
|
$
|
-
|
|
|
$
|
15,964,947
|
|
|
Depreciation
|
|
|
(824,362
|
)
|
|
|
(137,509
|
)
|
|
|
(2,547
|
)
|
|
|
(106,944
|
)
|
|
|
-
|
|
|
|
(1,071,362
|
)
|
|
Operating
income
|
|
|
2,152,189
|
|
|
|
2,640,052
|
|
|
|
924,942
|
|
|
|
695,920
|
|
|
|
(1,038,361
|
)
|
|
|
5,374,742
|
|
|
Other
income (expenses)
|
|
|
507,041
|
|
|
|
239,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
746,833
|
|
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,840
|
|
|
|
3,840
|
|
|
Interest
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(446,344
|
)
|
|
|
(446,344
|
)
|
|
Capital
expenditure
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(31,666
|
)
|
|
|
(31,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
18,205,559
|
|
|
|
18,769,519
|
|
|
|
-
|
|
|
|
6,402,393
|
|
|
|
55,808
|
|
|
|
43,433,279
|
|
Note
20 – Commitments and contingencies
Litigation
From time
to time, the Company is a party to various legal actions arising in the ordinary
course of business. The Company’s management does not expect the legal
matters involving the Company would have a material impact on the Company’s
consolidated financial position or results of operations.
Following
is the summary of the current litigation:
Beijing
Xin’Ao Concrete Co., Ltd vs. Beijing Boda Guosheng Investment Co., Ltd. (Beijing
District Court, PRC)
In August
2006, Xin Ao filed a lawsuit against Beijing Boda Guosheng Investment Co., Ltd
(“Boda”) seeking specific performance of Boda’s obligations under the sales
contract to pay approximately $275,380 (RMB 2,000,000) for the cement supplied
by Xin Ao between March 2005 and June 2005 and compensatory damages of
approximately $23,500 (RMB 171,000) to cover the interest incurred on the unpaid
balance. The Court ruled against Boda and ordered Boda to pay the amounts
requested by Xin Ao; however, Boda appealed the court’s rulings. In November
2007, the Appeals Court upheld the original verdict and again ordered Boda to
pay all the damages. Management does not believe that the ultimate outcome of
this case will have a material adverse effect on the Company’s consolidated
financial position or results of operations. As of December 31, 2009, the
Company has factored this amount to an unrelated third party trust company and
the trust company has received the payment from Boda.
Yunwei
Zhang vs. Beijing Xin’Ao Concrete Co., Ltd. (Beijing District Court,
PRC)
In May
2006, an action against Xin Ao and Beijing Shangdi Xinda Company was filed by
Yunwei Zhang (“Shangdi”) in Beijing District Court seeking payment of
approximately $112,000 (RMB 814,000) for damages caused by Qingbao Zhang, a
contracted driver of Xin Ao and an employee of Zhangbei County Labor Service
Co., Ltd. The vehicle involved in the accident is owned by Beijing Shangdi
Xingda Company who leased to Xin Ao who subsequently leased the vehicle to
Zhangbei County Labor Service Company. On June 16, 2008, the Court ruled against
Xin Ao and Shangdi to pay the damages incurred to Yunwei Zhang in the accident.
Xin Ao is responsible for approximately $39,000 (approximately RMB 273,000) for
the damages, and as of December 31, 2009, the Company has paid the final payment
approximately $35,000. The remaining $4,000 will be paid by Beijing Shangdi
Xingda Company.
Note
21 – Subsequent Events
The
Company evaluated subsequent events through the time of filing this Quarterly
Report on Form 10-Q on February 9, 2010, no significant events
occurred subsequent to the balance sheet date but prior to the filing of this
report that would have a material impact on our Consolidated Financial
Statements.