UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30,
2011
or
¨
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to
______________
Commission File Number: 333-146758
China Infrastructure Construction Corporation
(Exact name of registrant as specified
in its charter)
Colorado
|
|
16-1718190
|
(State or other jurisdiction of incorporation)
|
|
(IRS Employer Identification Number)
|
Shidai Caifu Tiandi Suite 1906-1909
1 Hangfeng Road Fengtai District
Beijing, China 100070
(Address of principal executive offices)
86-10-5809-0217
(Registrant’s telephone number, including
area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x
Yes
¨
No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was Required to submit and post such files).
S
Yes
£
No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
¨
|
|
Accelerated filer
¨
|
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
x
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
£
Yes
x
No
As of January 23, 2012, there were outstanding
14,095,620 shares of the registrant’s common stock, no par value.
TABLE OF CONTENTS
|
Page
|
|
|
PART I Financial Information
|
1
|
|
|
Item 1. Financial Statements.
|
1
|
|
|
Consolidated Balance Sheets as of November 30, 2011 (Unaudited) and May 31, 2011
|
1
|
|
|
Consolidated Statements of Income And Comprehensive Income for the three and six months ended November 30, 2011 and 2010 (Unaudited)
|
2
|
|
|
Consolidated Statements of Cash Flows for the three and six months ended November 30, 2011 and 2010 (Unaudited)
|
3
|
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
4
|
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
23
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|
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Item 4T. Controls and Procedures
|
27
|
|
|
PART II Other Information
|
27
|
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
|
27
|
|
|
Item 6. Exhibits.
|
27
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Signatures
|
28
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Exhibits/Certifications
|
|
PART I-FINANCIAL INFORMATION
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
CONSOLIDATED
BALANCE SHEETS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
|
|
November 30,
|
|
|
May 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
289,913
|
|
|
$
|
136,702
|
|
Restricted cash
|
|
|
301
|
|
|
|
10,868
|
|
Trade accounts receivable, net
|
|
|
47,508,418
|
|
|
|
30,058,457
|
|
Other receivables
|
|
|
891,828
|
|
|
|
983,199
|
|
Inventories
|
|
|
593,760
|
|
|
|
348,102
|
|
Total current assets
|
|
|
49,284,220
|
|
|
|
31,537,328
|
|
|
|
|
|
|
|
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
9,893,685
|
|
|
|
8,898,993
|
|
Prepayments
|
|
|
14,726,108
|
|
|
|
15,240,990
|
|
Accounts receivable, net – long-term
|
|
|
31,776,895
|
|
|
|
33,129,309
|
|
Deferred tax assets
|
|
|
1,939,110
|
|
|
|
2,038,913
|
|
Other receivables – long-term
|
|
|
3,231,327
|
|
|
|
2,197,961
|
|
Total long-term assets
|
|
|
61,567,125
|
|
|
|
61,506,166
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
110,851,345
|
|
|
$
|
93,043,494
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
18,867,691
|
|
|
$
|
13,114,202
|
|
Related party payable
|
|
|
272,690
|
|
|
|
296,325
|
|
Other payables
|
|
|
3,835,954
|
|
|
|
3,494,914
|
|
Current portion of capital lease obligations
|
|
|
3,212,818
|
|
|
|
3,171,246
|
|
Accrued expenses
|
|
|
880,146
|
|
|
|
980,075
|
|
Tax payable
|
|
|
9,280,652
|
|
|
|
6,401,831
|
|
Total current liabilities
|
|
|
36,349,951
|
|
|
|
27,458,593
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
|
549,186
|
|
|
|
515,662
|
|
Total long-term liabilities
|
|
|
549,186
|
|
|
|
515,662
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
$
|
36,899,137
|
|
|
$
|
27,974,255
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding
|
|
$
|
-
|
|
|
$
|
-
|
|
Common stock, no par value, 100,000,000 shares authorized; 14,095,620 and 12,930,620 shares issued and outstanding as of November 30, 2011 and May 31, 2011, respectively
|
|
|
44,616,151
|
|
|
|
43,279,066
|
|
Retained earnings
|
|
|
19,684,826
|
|
|
|
14,778,106
|
|
Accumulated other comprehensive income
|
|
|
5,367,792
|
|
|
|
4,107,477
|
|
Total China Infrastructure Construction Corporation Stockholder’s Equity
|
|
|
69,668,769
|
|
|
|
62,164,649
|
|
Non-controlling interests
|
|
|
4,283,439
|
|
|
|
2,904,590
|
|
|
|
|
|
|
|
|
|
|
TOTAL EQUITY
|
|
|
73,952,208
|
|
|
|
65,069,239
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
110,851,345
|
|
|
$
|
93,043,494
|
|
The accompanying
notes are an integral part of this statement.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE
AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
|
|
Three Months Ended November 30,
|
|
|
Six Months Ended November 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concrete Sales
|
|
$
|
15,033,366
|
|
|
$
|
22,927,983
|
|
|
$
|
30,861,619
|
|
|
$
|
41,148,150
|
|
Manufacturing Service
|
|
|
484,327
|
|
|
|
3,002,137
|
|
|
|
1,949,915
|
|
|
|
5,969,500
|
|
Total revenue
|
|
|
15,517,693
|
|
|
|
25,930,120
|
|
|
|
32,811,534
|
|
|
|
47,117,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concrete Sales
|
|
|
10,402,697
|
|
|
|
17,738,508
|
|
|
|
21,042,573
|
|
|
|
31,769,732
|
|
Manufacturing Service
|
|
|
131,312
|
|
|
|
964,560
|
|
|
|
583,278
|
|
|
|
1,987,353
|
|
Total cost of revenues
|
|
|
10,534,009
|
|
|
|
18,703,068
|
|
|
|
21,625,851
|
|
|
|
33,757,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,983,684
|
|
|
|
7,227,052
|
|
|
|
11,185,683
|
|
|
|
13,360,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
2,147,621
|
|
|
|
1,851,878
|
|
|
|
3,688,814
|
|
|
|
3,294,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,836,063
|
|
|
|
5,375,174
|
|
|
|
7,496,869
|
|
|
|
10,066,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
450
|
|
|
|
511
|
|
|
|
994
|
|
Interest expense
|
|
|
(10,295
|
)
|
|
|
(51,574
|
)
|
|
|
(11,377
|
)
|
|
|
(103,207
|
)
|
Other income
|
|
|
74,413
|
|
|
|
8,482
|
|
|
|
103,892
|
|
|
|
18,666
|
|
Other expense
|
|
|
-
|
|
|
|
(8,877
|
)
|
|
|
-
|
|
|
|
(8,877
|
)
|
Total other income (expense)
|
|
|
64,118
|
|
|
|
(51,519
|
)
|
|
|
93,026
|
|
|
|
(92,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before tax
|
|
|
2,900,181
|
|
|
|
5,323,655
|
|
|
|
7,589,895
|
|
|
|
9,973,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
|
936,502
|
|
|
|
174,175
|
|
|
|
2,267,659
|
|
|
|
580,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,963,679
|
|
|
$
|
5,149,480
|
|
|
$
|
5,322,236
|
|
|
$
|
9,393,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Common stockholders
|
|
|
1,805,933
|
|
|
|
4,878,251
|
|
|
|
4,906,720
|
|
|
|
8,854,700
|
|
-Non-controlling interest
|
|
|
157,746
|
|
|
|
271,229
|
|
|
|
415,516
|
|
|
|
538,323
|
|
|
|
$
|
1,963,679
|
|
|
$
|
5,149,480
|
|
|
$
|
5,322,236
|
|
|
$
|
9,393,023
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and Dilutive
|
|
$
|
0.13
|
|
|
$
|
0.38
|
|
|
$
|
0.37
|
|
|
$
|
0.68
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and Dilutive
|
|
|
13,539,466
|
|
|
|
12,930,620
|
|
|
|
13,277,095
|
|
|
|
12,929,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
1,963,679
|
|
|
$
|
5,149,480
|
|
|
$
|
5,322,236
|
|
|
$
|
9,393,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
26,408
|
|
|
|
985,304
|
|
|
|
1,315,049
|
|
|
|
1,221,507
|
|
Comprehensive Income (loss)
|
|
|
1,990,087
|
|
|
|
6,134,784
|
|
|
|
6,637,285
|
|
|
|
10,614,530
|
|
Comprehensive income attributable to non-controlling interests
|
|
|
158,898
|
|
|
|
320,500
|
|
|
|
470,250
|
|
|
|
597,868
|
|
Comprehensive income (loss) attributable to China Infrastructure
Construction Corporation
|
|
$
|
1,831,189
|
|
|
$
|
5,814,284
|
|
|
$
|
6,167,035
|
|
|
$
|
10,016,662
|
|
The
accompanying notes are an integral part of this statement.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED NOVEMBER 30, 2011 AND 2010
|
|
Six Months Ended
November 30,
|
|
|
|
2011
|
|
|
2010
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,322,236
|
|
|
$
|
9,393,023
|
|
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations:
|
|
|
|
|
|
|
|
|
Loss from property, plant and equipment disposal
|
|
|
-
|
|
|
|
8,877
|
|
Bad debt expenses
|
|
|
159,655
|
|
|
|
-
|
|
Depreciation
|
|
|
792,117
|
|
|
|
873,212
|
|
Shares issued for compensation
|
|
|
845,000
|
|
|
|
393,950
|
|
Stock option expenses
|
|
|
492,085
|
|
|
|
347,923
|
|
Changes in operating liabilities and assets:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(14,979,855
|
)
|
|
|
(11,812,272
|
)
|
Prepayments
|
|
|
789,984
|
|
|
|
(3,637,611
|
)
|
Inventories
|
|
|
(237,620
|
)
|
|
|
56,639
|
|
Other receivables
|
|
|
821,849
|
|
|
|
311,844
|
|
Deferred tax assets
|
|
|
137,084
|
|
|
|
-
|
|
Trade accounts payable
|
|
|
6,515,549
|
|
|
|
2,710,530
|
|
Other payables
|
|
|
112,389
|
|
|
|
1,599,842
|
|
Accrued expenses
|
|
|
70,764
|
|
|
|
23,230
|
|
Tax payable
|
|
|
2,737,013
|
|
|
|
1,024,659
|
|
Net cash provided by (used in) operating
activities
|
|
|
3,578,250
|
|
|
|
1,293,846
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Property, plant, and equipment additions
|
|
|
(4,336,823
|
)
|
|
|
(336,332
|
)
|
Property, plant, and equipment disposal
|
|
|
-
|
|
|
|
37,135
|
|
Payments to related party receivable
|
|
|
-
|
|
|
|
(93,000
|
)
|
Proceeds from related party receivable
|
|
|
-
|
|
|
|
31,751
|
|
Net cash provided by (used in) investing
activities
|
|
|
(4,336,823
|
)
|
|
|
(360,446
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Cash contributed by non controlling interest of Laoting
|
|
|
908,599
|
|
|
|
-
|
|
Restricted cash
|
|
|
10,567
|
|
|
|
76,680
|
|
Proceeds from Bank loan payable and capital lease obligations
|
|
|
6,074
|
|
|
|
31,111
|
|
Payment to Bank loan payable and capital lease obligations
|
|
|
-
|
|
|
|
(1,902,024
|
)
|
Proceeds from related party payable
|
|
|
-
|
|
|
|
540,894
|
|
Payments to related party payable
|
|
|
(16,927
|
)
|
|
|
-
|
|
Net cash provided
by (used in) financing activities
|
|
|
908,313
|
|
|
|
(1,253,339
|
)
|
|
|
|
|
|
|
|
|
|
Effect of rate changes on cash
|
|
|
3,471
|
|
|
|
20,530
|
|
|
|
|
|
|
|
|
|
|
Net Increase (decrease) of cash and cash equivalents
|
|
|
153,211
|
|
|
|
(299,409
|
)
|
Cash and cash equivalents–beginning of year
|
|
|
136,702
|
|
|
|
1,102,879
|
|
Cash and cash equivalents–end of period
|
|
$
|
289,913
|
|
|
$
|
803,470
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid in cash
|
|
$
|
1,637
|
|
|
$
|
102,044
|
|
Income taxes paid in cash
|
|
|
-
|
|
|
|
-
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment through other payable
|
|
|
3,312
|
|
|
|
-
|
|
Disposal of property, plant and equipment through long-term investment and accounts payable
|
|
|
1,038,629
|
|
|
|
-
|
|
Related party receivable offset by payable to related party payable
|
|
$
|
(272,690
|
)
|
|
$
|
-
|
|
The
accompanying notes are an integral part of this statement.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
China
Infrastructure Construction Corporation (“China Infrastructure”), formerly Fidelity Aviation Corporation, was organized
on February 28, 2003 as Fidelity Aircraft Partners LLC, a Colorado limited liability company (“Fidelity LLC”). On
December 16, 2004, Fidelity LLC converted itself into Fidelity Aviation Corporation by filing a Statement of Conversion and Articles
of Incorporation with the Colorado Secretary of State. Fidelity was formed to purchase large commercial (transport category) jet
airframes, salvage the usable aircraft parts and components from them and sell the parts and components. The Board of Directors
evaluated the future market for aircraft parts business and resolved not to pursue this line of business anymore.
On
October 8, 2008, China Infrastructure entered into and consummated the transactions contemplated under a Share Exchange Agreement
with Northern Construction Holdings, Ltd., a Hong Kong limited company (“NCH”) and its shareholder pursuant to which
China Infrastructure issued 1,200,000 (12,000,000 pre-reverse split) shares of China Infrastructure common stock (the
“Share Exchange”) in exchange for all issued and outstanding common stock of NCH.
The
Share Exchange resulted in (i) a change in control of China Infrastructure with the shareholder of NCH owning approximately 78%
of issued and outstanding shares of common stock of China Infrastructure, (ii) NCH becoming a wholly-owned subsidiary of China
Infrastructure, and (iii) appointment of certain nominees of the shareholder of NCH as directors and officers of China Infrastructure
and resignation of John Schoenauer as director, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer of
China Infrastructure.
As
a result of the Share Exchange Agreement, Beijing Fortune Capital Management Co., Ltd. (“BFCM”), a 95% owned subsidiary
of NCH, became our indirect majority-owned subsidiary. Also as a result of the Share Exchange Agreement, Beijing Chengzhi
Qianmao Concrete Co., Ltd., (“Beijing Concrete”), the operating company, and a 99.5% owned subsidiary of BFCM, also
became our indirect majority-owned subsidiary.
For
accounting purposes, the share exchange transaction was treated as a capital transaction where the acquiring corporation issued
stock for the net monetary assets of the shell corporation, accompanied by a recapitalization. The accounting is similar in form
to a reverse acquisition, except that goodwill or other intangibles are not recorded. All references to NCH common
stock have been restated to reflect the equivalent numbers of China Infrastructure common shares.
On
January 15, 2010, Beijing Concrete increased its registered capital from RMB 15 million (approximately $2.2 million) to RMB 30
million (approximately $4.4 million) and BFCM increased its investment in Beijing Concrete accordingly. Its share capital increased
from RMB 10 million (approximately $1.47 million) to RMB 15 million (approximately $2.2 million). As a result, BFCM owns 99.67%
of Beijing Concrete from January 15, 2010.
On
February 1, 2010, Beijing Concrete formed a subsidiary, Shaanxi Hongruida Concrete Ltd. (“Hongruida”) and contributed
RMB 10 million (approximately $1.47 million) to its capital. Beijing Concrete is the sole shareholder of Hongruida. Hongruida
was organized to implement the 10-year strategic cooperative agreement with one of the Company’s major clients, China Railway
Construction Group Co., Ltd (“CRCG”). Under the Agreement, the Company and CRCG will jointly manage the concrete mixing
stations to be operated by Hongruida. CRCG will provide the cement for manufacturing the concrete mix in such concrete mixing
stations, and will be able to purchase the concrete mix at discounted prices. Also, in accordance with the Agreement, each party
will lease certain equipment to the concrete mixing stations. The Company and CRCG will share 75% and 25% of the annual
profits of such concrete mixing stations in Xi’an. Hongruida commenced its operations at the end of March 2010.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
On
June 27, 2011, the Company formed a new subsidiary, Laoting County Kejian Concrete Co. Ltd, in Tangshan, Hebei Province. The new
subsidiary is a joint venture with 51% owned by Beijing Concrete and 49% owned by two other individuals. The total registered
capital is 12 million RMB, about USD $2.34 million.
When
we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition,
we are referring to the business and financial information of NCH on a consolidated basis unless the context suggests otherwise.
The
Company through its subsidiaries in Hong Kong and the People’s Republic of China (“PRC” or “China”),
engages in the production of ready-mixed concrete for developers and the construction industry in the PRC. In addition, we have
a technical service agreement with an independently owned concrete mixture station, pursuant to which we are paid by percentages
of sales for technical support provided.
The
accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”). This basis differs from that used in the statutory accounts of the Company, which were prepared
in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All
necessary adjustments have been made to present the financial statements in accordance with US GAAP.
3.
|
Summary of Significant
Accounting Policies
|
|
a.
|
Economic
and Political Risks
|
The
Company faces a number of risks and challenges as a result of having primary operations and marketing in the PRC. Changing political
climates in the PRC could have a significant effect on the Company’s business.
|
b.
|
Control
by Principal Stockholders
|
The
directors, executive officers and their affiliates or related parties own, beneficially and in the aggregate, the majority of
the voting power of the registered capital of the Company. Accordingly, the directors, executive officers and their affiliates,
if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing
the authorized capital stock of the Company and the dissolution, merger or sale of the Company’s assets.
|
c.
|
Principles
of Consolidation
|
The
consolidated financial statements include the financial statements of China Infrastructure, and its wholly-owned and majority-owned
subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The Company’s
foreign subsidiaries have fiscal year ends of May 31 and the results are consolidated up to that date. Non-controlling interests
consist of other stockholders’ ownership interests in majority-owned subsidiaries of the Company.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities,
at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
|
e.
|
Cash
and Cash Equivalents
|
For
purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. Deposits
held in financial institutions in the PRC are not insured by any government entity or agency.
Restricted
cash represents deposits held in the escrow account and are not insured by any government entity or agency.
|
g.
|
Trade
Accounts Receivable
|
The
Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing
credit checks and actively pursuing past due accounts. Trade accounts receivable are recognized and carried at original invoice
amount less an allowance for any uncollectible amounts. An allowance for doubtful accounts is established and determined based
on management’s regular assessment of known requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment. These factors continuously change, and can have an impact on collections and the
Company’s estimation process. These impacts may be material. Management reviews and maintains an allowance for doubtful
accounts that reflects the management’s best estimate of potentially uncollectible trade receivables. Certain accounts receivable
amounts are charged off against allowances after a designated period of collection efforts. Subsequent cash recoveries are recognized
as income in the period when they occur. 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 more than one year from the sale date 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 historical collection experience.
Inventories
are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Net realizable value is the
estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
|
i.
|
Property
and Equipment
|
Property,
plant and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method
over the useful lives of the assets. Major renewals are capitalized and depreciated; maintenance and repairs that do not extend
the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property and equipment
is reported in cost of revenues. Property, plant and equipment are depreciated over their estimated useful lives as follows:
Office trailers
|
|
|
10 years
|
|
Machinery and equipment
|
|
|
3-8 years
|
|
Furniture and office equipment
|
|
|
5-8 years
|
|
Motor vehicles
|
|
|
3-5 years
|
|
|
j.
|
Impairment
of Long-Lived and Intangible Assets
|
Long-lived
assets of the Company are reviewed annually to assess whether the carrying value has become impaired according to the guidelines
established in FASB Codification (ASC) 360
.
The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation to
determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of November 30, 2011, the
Company expects these assets to be fully recoverable. No impairment of assets was recorded in the periods reported.
|
k.
|
Accumulated
Other Comprehensive Income
|
Accumulated
other comprehensive income represents foreign currency translation adjustments.
The
Company receives revenue from sales of concrete products and from provision of manufacturing service. The Company's revenue recognition
policies are in compliance with ASC 605. Revenue is recognized at the date of shipment to customers or manufacturing services
have been rendered when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably assured. Both of our product sales and manufacturing service
are non-returnable. Therefore, we do not estimate deductions or allowance for returns. Revenues are presented net of any discounts,
reward, or incentive given to customers. Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as unearned revenue.
Our
products delivered to customers are checked on site by customers and, once the products are accepted by customers, they will sign
the acceptance notice. There is no warranty issue after the delivery.
Similar
to sales of concrete products, we delivered products on which we provided manufacturing service to customers or provided manufacturing
service on site. Customers check products upon receipt and will sign the acceptance notice once the products are accepted. There
is no warranty issue after the acceptance.
Reward
or incentive given to our customers is an adjustment of the selling prices of our products; therefore, the consideration is characterized
as a reduction of revenue when recognized in our income statement.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company enjoys a free VAT policy
according to the national policy, which encourages the development of the cement industry if the manufacturer satisfies the
environmental protection requirements. The Company has enjoyed the free VAT policy from January 1, 2006 to December 31, 2010.
Starting from January 1, 2011, the Company is subject to VAT which is levied at the rate of 6% on the invoiced value of sales.
Cost
of goods sold consists primarily of the costs of the raw materials, freight charges, direct labor, depreciation of plant and machinery,
warehousing cost and overhead associated with the manufacturing process and commission expenses.
|
n.
|
Shipping
Income and Expense
|
ASC
605-45-20 “Shipping and Handling Costs” establishes standards for the classification of shipping and handling costs.
All amounts billed to a customer related to shipping and handling are classified as revenue.
The
Company expenses advertising costs as incurred. Advertising costs, if any, are included in selling, general and administrative
expense on the income statement.
|
p.
|
Foreign
Currency and Comprehensive Income
|
The
accompanying financial statements are presented in US dollars. The functional currency of the Company is U.S. Dollars and that
of Beijing Concrete is the Renminbi (“RMB”) of the PRC. The financial statements are translated into US dollars from
RMB at period-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital transactions occurred.
On
July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/USD exchange rate into a flexible rate under
the control of the PRC’s government. We use the Closing Rate Method in currency translation of the financial statements
of the Company.
RMB
is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized
institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.
The
Company accounts for income taxes in accordance with ASC 740 (formerly SFAS 109, “Accounting for Income Taxes.”) Under
the asset and liability method as required by ASC 740 , 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 the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under ASC 740, 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.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
ASC
740 (formerly FIN 48) clarifies the accounting and disclosure for uncertain tax positions and prescribes a recognition threshold
and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC
740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
Under
ASC 740, 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 likely 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.
The
Company’s operations are subject to income and transaction taxes in the United States, Hong Kong, and the PRC jurisdictions.
Significant estimates and judgments are required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or regulations, and as a result the ultimate amount of tax
liability may be uncertain. However, the Company does not anticipate any events that would lead to changes to these uncertainties.
The
Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction
in which they operate. Effective January 1, 2009, the PRC government implemented a new 25% tax rate across the board for all enterprises
regardless of whether domestic or foreign enterprise without any tax holiday which is defined as "two-year exemption followed
by three-year half exemption" hitherto enjoyed by taxpayers. As a result of the new tax law of a standard 25% tax rate, tax
holidays terminated as of December 31, 2008. However, the PRC government has established a set of transition rules to allow enterprises
who had already started tax holidays, before January 1, 2009, to continue enjoying the tax holidays until being fully utilized.
The exemption of income tax to the Company lasted until December 31, 2010 and from year 2011, the Company is subject to an income
tax at an effective rate of 25%. The Company is charged at 25% from January 1, 2011 to November 30, 2011 and 0% income tax expense
for calendar year 2010.
|
r.
|
Restrictions
on Transfer of Assets Out of the PRC
|
Dividend
payments by the Company are limited by certain statutory regulations in the PRC. No dividends may be paid by the Company without
first receiving prior approval from the Foreign Currency Exchange Management Bureau. However, no such restrictions exist with
respect to loans and advances.
ASC
825 (formerly SFAS 107, “Disclosures about Fair Value of Financial Instruments”) defines financial instruments and
requires disclosure of the fair value of those instruments. ASC 820 (formerly SFAS 157, “Fair Value Measurements”),
adopted July 1, 2008, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement
and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
Level 1: inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: inputs to the
valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3: inputs to the
valuation methodology are unobservable and significant to the fair value.
The
carrying amounts reported in the balance sheets for current receivables and payables, including short-term loans, qualify as financial
instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments,
their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available.
|
t.
|
Stock-Based
Compensation
|
The
Company records stock-based compensation expense pursuant to ASC 718 (formerly SFAS 123R, “Share Based Payment.”)
The Company uses the Black-Scholes option pricing model which requires 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 Black-Scholes option pricing 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 ASC 718 using an option pricing model, that value may not be indicative of
the fair value observed in a willing buyer/willing seller market transaction.
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. ASC 718 (formerly SFAS 123R) requires forfeitures to be estimated at the time of grant and
revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
|
u.
|
Basic
and Diluted Earnings Per Share
|
The
Company reports earnings per share in accordance with the provisions of ASC 260 (formerly SFAS No. 128, "Earnings Per Share.") ASC
260 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 stockholders 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 to issue common stock were exercised and converted
into common stock. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the
time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during
the period.
|
v.
|
Statement
of Cash Flows
|
In
accordance with FASB ASC 230, cash flows from the Company's operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the
corresponding balances on the balance sheet.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
ASC
280 “Segment reporting” (formerly SFAS 131) requires use of the management approach model for segment reporting. The
management approach model is based on the way a company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company. Since management does not disaggregate Company data,
the Company has determined that only one segment exists.
|
x.
|
Recent
Accounting Pronouncements
|
In
January 2011, the FASB issued an Accounting Standard Update (“ASU”) No, 2011-01, “Receivables Topic 310): Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to be concurrent with the effective date
of the guidance for determining what constitutes a troubled debt restructuring, as presented in proposed Accounting Standards
Update, Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors. The amendments in
this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements
about troubled debt restructurings in Update 2010-20. Under the existing effective date in Update 2010-20, public-entity creditors
would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments
in this Update temporarily defer that effective date, enabling public-entity creditors to provide those disclosures after the
Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will
result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of
the other disclosure requirements in Update 2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring,
the Board proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the
new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to
the beginning of the fiscal year in which the proposal is adopted. The Company does not expect the adoption of ASU 2011-01 to
have a significant impact on its consolidated financial statements.
The
Company has reviewed the Accounting Standards Updates up through 2011-12.
Certain
prior period amounts have been reclassified to conform to the current period presentation.
In
accordance with the Escrow Agreement and the Subscription Agreement (note 15) signed by China Infrastructure Construction Corporation,
Trillion Growth China General Partner and Anslow & Jaclin, LLP (the “Escrow Agent”) in October 2009, the Company
was required to keep with the Escrow Agent $120,000 immediately on the Closing Date of the Subscription Agreement. This fund can
only be disbursed when certain criteria are met. As of November 30, 2011 and May 31, 2011, the amount not disbursed was $301 and
$10,868, respectively.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
5.
|
Trade Accounts Receivable
|
|
|
November 30, 2011
|
|
|
May 31, 2011
|
|
Trade Accounts Receivable
|
|
$
|
47,864,676
|
|
|
$
|
32,787,147
|
|
Less
:
Allowance for Bad Debt
|
|
|
(356,258
|
)
|
|
|
(2,728,690
|
)
|
|
|
$
|
47,508,418
|
|
|
$
|
30,058,457
|
|
|
|
November 30, 2011
|
|
|
May 31, 2011
|
|
Long Term Accounts Receivable
|
|
$
|
40,314,884
|
|
|
$
|
38,973,730
|
|
Less
:
Allowance for Bad Debt
|
|
|
(8,537,989
|
)
|
|
|
(5,844,421
|
)
|
|
|
$
|
31,776,895
|
|
|
$
|
33,129,309
|
|
Other
receivables in current assets amounted to $891,828 and $983,199 as of November 30, 2011 and May 31, 2011, respectively. Other
receivables in current assets consists of other receivables related to the sale of construction in progress in Tangshan.
Other
receivables in long-term assets amounted to $3,231,327 and $2,197,961 as of November 30, 2011 and May 31, 2011, respectively.
As
of November 30, 2011, other receivables includes $2.93 million related to a construction in progress disposal to an unrelated
party. On February 28, 2010, we sold construction in progress in Tangshan to an unrelated third party at a price of approximately
$3.8 million. The amount is due in 4 annual equal installments starting September 1, 2010. The receivable is unsecured, interest
free, and with fixed repayment dates. It also includes insurance claims and deposits, that are from unrelated parties, interest
free, unsecured, and with no fixed repayment date, and advances to employees for business purposes.
The
allowances on the other accounts receivable are recorded when circumstances indicate collection is doubtful for particular accounts
receivable. The Company provides for allowances on a specific account basis. Even though there is a default on payment,
the Company expects payment in the next quarter; therefore, there is no provision for bad debt allowance made for the other receivables
at November 30, 2011 and May 31, 2011.
Inventories
consist of the following:
|
|
November 30, 2011
|
|
|
May 31, 2011
|
|
Raw materials
|
|
$
|
593,760
|
|
|
$
|
348,102
|
|
|
|
$
|
593,760
|
|
|
$
|
348,102
|
|
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
8.
|
Property, Plant and Equipment
|
Plant and equipment
consist of the following:
|
|
November 30, 2011
|
|
|
May 31, 2011
|
|
Office trailers
|
|
$
|
851,479
|
|
|
$
|
798,993
|
|
Machinery and equipment
|
|
|
5,197,856
|
|
|
|
2,840,269
|
|
Machinery and equipment, capital lease
|
|
|
6,412,619
|
|
|
|
6,348,228
|
|
Motor vehicles
|
|
|
489,921
|
|
|
|
499,808
|
|
Motor vehicles, capital lease
|
|
|
285,090
|
|
|
|
279,854
|
|
Furniture and office equipment
|
|
|
635,576
|
|
|
|
601,619
|
|
Construction in progress
|
|
|
424,581
|
|
|
|
1,906,796
|
|
Total property, plant and equipment
|
|
|
14,297,122
|
|
|
|
13,275,567
|
|
Accumulated depreciation
|
|
|
(2,436,442
|
)
|
|
|
(2,685,392
|
)
|
Accumulated depreciation, capital lease
|
|
|
(1,966,995
|
)
|
|
|
(1,691,182
|
)
|
Net property, plant and equipment
|
|
$
|
9,893,685
|
|
|
$
|
8,898,993
|
|
Depreciation
expense included in general and administrative expenses for the six months ended November 30, 2011 and 2010 was $169,615 and $104,983,
respectively. Depreciation expense included in cost of sales for the six months ended November 30, 2011 and 2010 was $622,502
and $768,229, respectively.
Construction
in progress represents direct costs of construction and design fees incurred for the Company’s new project in Tangshan.
All construction costs associated with this project are accumulated and capitalized as construction in progress. The construction
in progress is closed out to the appropriate asset classification when the project is substantially complete, occupied, or placed
into service. No depreciation is provided until it is completed and ready for its intended use.
On
February 28, 2010, we sold construction in progress in Tangshan to an unrelated third party at a price of approximately $3.8 million.
The amount is due in 4 annual equal installments starting September 1, 2010. As of May 31, 2010, the book value of the construction
in progress sold was approximately $3.3 million. A gain from property, plant and equipment disposal of $496,816 was recorded.
Total other receivable for sales of Tangshan construction in progress was $2,928,369 and $2,874,586 as of November 30, 2011 and
May 31, 2011, respectively.
After
the Tangshan project was sold, construction in progress represents direct costs of construction and design fees incurred for the
Company’s new location for the production facility in Beijing Daxing. Similar to the Tangshan project, all construction
costs associated with this project are accumulated and capitalized as construction in progress. The construction in progress is
closed out to the appropriate asset classification when the project is substantially complete, occupied, or placed into service.
No depreciation is provided until it is completed and ready for its intended use.
Interest
costs totaling $0 were capitalized into construction in progress for the six months ended November 30, 2011 and 2010.
Prepayments
consist of the long-term refundable performance bond, prepaid expenses, mainly prepaid rent expense, and the monies deposited
with the suppliers for raw materials and capital lease lessor for lease payment. The total outstanding amount was $14,726,108
and $15,240,990 as of November 30, 2011 and May 31, 2011, respectively. There is no provision made for the prepayment at November
30, 2011 and May 31, 2011.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
|
|
November 30, 2011
|
|
|
May 31, 2011
|
|
Advance to suppliers
|
|
$
|
2,628,932
|
|
|
$
|
8,561,700
|
|
Prepaid expenses
|
|
|
8,898,330
|
|
|
|
2,769,473
|
|
Performance bond
|
|
|
3,198,846
|
|
|
|
3,909,817
|
|
|
|
$
|
14,726,109
|
|
|
$
|
15,240,990
|
|
10.
|
Related Party Transactions
|
Parties,
which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly,
to control the other party or exercise significant influence over the other party in making financial and operating decisions.
Companies are also considered to be related if they are subject to common control or common significant influence.
Total
outstanding amount of related party payable was $272,690 and $296,325 as of November 30, 2011 and May 31, 2011, respectively.
These payables bear no interest and have no fixed payment terms. Currently, the related party payable consists of the following:
|
|
November 30, 2011
|
|
|
May 31, 2011
|
|
Yang Rong (CEO)
|
|
$
|
272,690
|
|
|
$
|
151,711
|
|
Xiuqiong Long
|
|
|
-
|
|
|
|
144,614
|
|
Total
|
|
$
|
272,690
|
|
|
$
|
296,325
|
|
Total outstanding amount
of related party receivables was $0 and $0 as of November 30, 2011 and May 31, 2011, respectively.
Other payables in current
liabilities consist of the following as of November 30, 2011 and May 31, 2011:
|
|
November 30, 2011
|
|
|
May 31, 2011
|
|
Commission payable
|
|
$
|
1,022,362
|
|
|
$
|
814,224
|
|
Payable to CRCG (note 1)
|
|
|
520,433
|
|
|
|
311,035
|
|
Beijng Xin Hai Wang Yue Commercial Ltd.
|
|
|
795,311
|
|
|
|
1,250,191
|
|
Staff and other companies deposit
|
|
|
1,497,848
|
|
|
|
1,119,464
|
|
Total other payables
|
|
$
|
3,835,954
|
|
|
$
|
3,494,914
|
|
Commission expense
has been included in cost of goods sold.
Accrued
expenses amounted to $880,146 and $980,075 as of November 30, 2011 and May 31, 2011. The accrued expenses mainly include accrued
land lease expenses, accrued electricity and utility expenses, professional fees, and accrued interest.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
Interest
Total
interest expense and financial charges for the six months ended November 30, 2011 and 2010 on all debt amounted to $11,377 and
$103,207, respectively. Total interest income for the six months ended November 30, 2011 and 2010 amounted to $511 and $994, respectively.
Capital
Leases
The
Company has entered into operating lease agreements for six mixing buildings, twenty-nine mixing trucks, two automobiles, and
equipments which are located at various production facilities. The leases were entered on or about May 2010 and will expire on
various dates. Lease terms range from one year to three years, and annual interest rates range from 5.94% to 11.13%. The Company
has been delinquent on some of the lease payments, which have yet to be resolved as of November 30, 2011. Delinquency in lease
payments may result in termination of the contracts.
The
minimum future lease payments for this property at November 30, 2011 are shown in the following table:
|
|
|
|
|
Lease Commitments
|
|
|
|
|
From
|
|
To
|
|
|
Buildings
|
|
|
Trucks
|
|
|
Automobiles
|
|
|
Equipment
|
|
|
Total
|
|
12/1/2011
|
|
|
5/31/2012
|
|
|
$
|
1,240,415
|
|
|
$
|
1,554,511
|
|
|
$
|
43,178
|
|
|
$
|
117,212
|
|
|
$
|
2,959,316
|
|
6/1/2012
|
|
|
5/31/2013
|
|
|
|
559,849
|
|
|
|
71,249
|
|
|
|
64,768
|
|
|
|
66,346
|
|
|
|
762,212
|
|
6/1/2013
|
|
|
5/31/2014
|
|
|
|
296,281
|
|
|
|
-
|
|
|
|
11,015
|
|
|
|
-
|
|
|
|
307,296
|
|
|
|
|
|
|
|
$
|
2,009,545
|
|
|
$
|
1,629,760
|
|
|
$
|
118,961
|
|
|
$
|
183,558
|
|
|
$
|
4,028,824
|
|
The
outstanding lease commitment as of November 30, 2011 was $4,028,824, which consists of principal of $3,762,004 and interest of
$266,820. Delinquent lease payments as of November 30, 2011 totaled $572,039.
14.
|
Non-controlling Interest
|
Non-controlling
interest consists of other stockholders’ ownership interest in majority-owned subsidiaries of the Company, which is about
5.48% of the total ownership of Beijing Concrete before the change of the non-controlling interest and 5.32% of the total ownership
after the change of the non-controlling interest (Note 1). Non-controlling interest also consists of 49% of the total ownership
of the newly formed subsidiary, Laoting County Kejian Concrete Co. Ltd, which is owned by two other individuals. As of November
30, 2011 and May 31, 2011, the balance of non-controlling interest was $4,283,439 and $2,904,590, respectively.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
Stock
Issuance for Compensation
On
June 1, 2010, the Company hired a consulting company. As compensation, the Company paid $45,000 and issued 115,000 shares of restricted
common stock, and another 100,000 shares of restricted common stock will be issued upon certain terms. The shares are valued at
market price of a total of $316,250 at $2.75 per share. The cash paid was first recorded as prepaid expenses. The shares issued
are recorded as deferred consulting fee. Both the prepaid expenses and deferred consulting fee will amortize to expense over the
agreement term of the six-month period. As of November 30, 2011, prepaid expenses for this service have a balance of $0 and deferred
consulting fee has a balance of $0. On November 18, 2010, the Company hired an investor relations company. As compensation, the
Company agreed to issue 30,000 shares of restricted common stock. The shares are valued at a market price of $77,700 at $2.59
per share. As of November 30, 2011, the shares have not been issued and the payable is included in the liabilities section of
the balance sheet. On July 30, 2011, the Company issued to its legal counsel as compensation 250,000 shares of common stock,
which shares are valued at $212,500. On October 19, 2011, the Company issued to various employees a total of 740,000 shares for
employee reward, which shares are valued at $562,500 at $0.75 per share. On November 21, 2011, the Company issued to its consulting
company as compensation 175,000 shares of common stock, which shares are valued at $70,000 at $0.40 per share.
Options
On
December 17, 2009, we granted to the previous CFO options to purchase 300,000 shares of common stock, with an exercise price of
$3.90 per share, which was the closest stock issuance price of the date of grant. The options will vest over 2 years and expire
3 years after the vesting date or after a termination date whichever is earlier. All the options were forfeited immediately when
the CFO resigned the position on October 25, 2010.
On
February 12, 2010, we granted to our CEO options to purchase 400,000 shares of common stock, with an exercise price of $3.90 per
share. The options will vest over 2 years and no option can be exercised after 5 years from the vesting date.
The
assumptions used in calculating the fair value of the above options granted using the Black-Scholes option- pricing model are
as follows:
Risk-free interest rate
|
|
|
0.86
|
%
|
Expected life of the options
|
|
|
2-
3 years
|
|
Expected volatility
|
|
|
45
|
%
|
Expected dividend yield
|
|
|
0
|
|
On
February 12, 2010, we granted three independent directors each, options to purchase 10,000 shares of common stock, with an exercise
price of $3.90 per share. The options will vest over 1 year and no option can be exercised after 3 years from the grant date.
On
March 22, 2010, we granted one independent director options to purchase 10,000 shares of common stock, with an exercise price
of $3.90 per share. The options will vest over 1 year and no option can be exercised after 3 years from the grant date.
The
assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model are as follows:
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
Risk-free interest rate
|
|
|
0.35
|
%
|
Expected life of the options
|
|
|
1-2
years
|
|
Expected volatility
|
|
|
45
|
%
|
Expected dividend yield
|
|
|
0
|
|
On
October 25, 2010, we granted to our newly appointed CFO options to purchase 150,000 shares of common stock, with an exercise price
of $3.90 per share. The options will vest over 1 year and expire 3 years after the vesting date or after a termination date whichever
is earlier.
The
assumptions used in calculating the fair value of the above option granted using the Black-Scholes option- pricing model are as
follows:
Risk-free interest rate
|
|
|
0.22
|
%
|
Expected life of the options
|
|
|
3
years
|
|
Expected volatility
|
|
|
81
|
%
|
Expected dividend yield
|
|
|
0
|
|
Following
is a summary of the stock option activity:
|
|
Options
outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, May 31, 2011
|
|
|
590,000
|
|
|
$
|
3.90
|
|
|
$
|
0.00
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding November 30, 2011
|
|
|
590,000
|
|
|
$
|
3.90
|
|
|
$
|
0.00
|
|
Following is a summary of the status
of options outstanding at November 30, 2011:
Outstanding Options
|
|
Exercisable Options
|
|
Exercise
Price
|
|
Number
|
|
|
Average
Remaining
Contractual Life
in Years
|
|
|
Average
Exercise
Price
|
|
|
Number
|
|
$3.90
|
|
|
590,000
|
|
|
|
1.38
|
|
|
$
|
3.90
|
|
|
|
240,000
|
|
Warrants
On
October 16, 2009, in connection with the Share Purchase Agreement in October 2009, the Company issued 153,846 warrants to Hunter
Wise Financial Group, LLC, the Placement Agent. The warrants carry an exercise price of $3.90 and a 5-year term. The Warrants
contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of
control transaction.
On
March 22, 2010, in connection with the Share Purchase Agreement in March 2010, the Company issued 69,231 warrants to various parties
as part of placement cost. The warrants carry an exercise price of $3.90 and a 5-year term. The Warrants contain standard adjustment
provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
On
March 22, 2010, in connection with the Share Purchase Agreement in March 2010, the Company issued 1,281,083 warrants to October
2010 investors. The warrants carry an exercise price of $6.00 and a 3-year term. The Warrants contain standard adjustment provisions
upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction.
Placement
Agent Warrants meet the conditions for equity classification pursuant to FASB ASC 815 “Derivatives and Hedging” and
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock.” Therefore, these warrants were classified as equity and accounted for as common stock issuance cost.
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
|
Average Remaining
Contractual Life in Years
|
|
Outstanding, May 31, 2011
|
|
|
1,504,160
|
|
|
|
1,504,160
|
|
|
$
|
5.69
|
|
|
|
2.05
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, November 30, 2011
|
|
|
1,504,160
|
|
|
|
1,504,160
|
|
|
$
|
5.69
|
|
|
|
1.55
|
|
16.
|
Employee Welfare Plan
|
The
Company has established its own employee welfare plan in accordance with Chinese law and regulations. The Company makes contributions
to an employee welfare plan. The total expense for the above plan was $52,194 and $35,558 for the six months ended
November 30, 2011 and 2010, respectively. In 2011, all branches of Beijing Concrete were in operation for the full year, whereas
in 2010, Shi Du branch was in operation for three months, Jingxin branch Sand Stone Factory was for three months, Tanghai branch
was for seven months, and Hongruida was for five months. More employees were employed in 2011 compared with 2010 and therefore
employee welfare plan expense has increased substantially.
The
following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six months ended November
30, 2011 and 2010:
|
|
2011
|
|
|
2010
|
|
U.S. Statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign income not taxable in USA
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
China income taxes
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
China income tax exemption
|
|
|
-
|
|
|
|
(19.1
|
)%
|
Accruals in foreign jurisdictions
|
|
|
4.9
|
%
|
|
|
-
|
|
Total provision for income taxes
|
|
|
29.9
|
%
|
|
|
5.9
|
%
|
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
USA
The
Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction
in which they operate. As the Group has only net loss generated in the United States, there was no tax expense or tax liability
due to the Internal Revenue Service of the United States as of November 30, 2011 and May 31, 2011. The Group believes that the
realization of the benefits arising from this loss appears to be uncertain due to its limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has provided 100% valuation allowance at the period end
for its United States operation.
Hong
Kong
As
the Group has no income generated in Hong Kong, there was no tax expense or tax liability due to the tax rule of Hong Kong as
of November 30, 2011 and May 31, 2011.
People’s
Republic of China (PRC)
Under
the Income Tax Laws of the PRC, the Company’s subsidiaries are generally subject to an income tax at an effective rate of
25% on income reported in the statutory financial statements after appropriate tax adjustments. The Company is charged at 25%
from January 1, 2011 to November 30, 2011 and 0% income tax expense for calendar year 2010. The exemption of income tax to the
Company lasted until December 31, 2010 and from year 2011, the Company is subject to an income tax at an effective rate of 25%.
The Company over accrued income tax and therefore total provision for income tax is over 25%. The current income tax expense and
deferred tax expense for the six months ended November 30, 2011 and 2010 are as follows:
|
|
November 30, 2011
|
|
|
November 30, 2010
|
|
Current income tax
|
|
$
|
2,130,575
|
|
|
$
|
580,930
|
|
Deferred tax expense
|
|
|
137,084
|
|
|
|
-
|
|
Income tax
|
|
$
|
2,267,659
|
|
|
$
|
580,930
|
|
The
Company adopted accounting policies in accordance with U.S. GAAP with regard to provisions, reserves, inventory valuation method,
and depreciation that are consistent with requirements under Chinese income tax laws. The Company had deferred tax assets of $1,939,110
and $2,038,913 as of November 30, 2011 and May 31, 2011, respectively, from its Chinese operations, mainly due to bad debt allowance.
|
|
2011
|
|
|
2010
|
|
Deferred tax assets, China subsidiary
|
|
$
|
1,939,110
|
|
|
$
|
2,038,913
|
|
bad debt allowance
|
|
|
-
|
|
|
|
-
|
|
Valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,939,110
|
|
|
$
|
2,038,913
|
|
The exemption of income tax to the
Company lasted until December 31, 2010 and from year 2011, the Company is subject to an income tax. As such, the estimated tax
savings due to the tax exemption for the six months ended November 30, 2011 and 2010 amounted to approximately $0 and $2,800,486,
respectively. The net effect on earnings per share if the income tax had been applied would decrease the basic and diluted earnings
per share for the six months ended November 30, 2011 and 2010 by $0.00 and $0.22, respectively.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
18.
|
Other Income (Expenses)
|
Other
income was $103,892 for the six months ended November 30, 2011. It consists of income from selling recycled paper, and vehicle
accident compensation. Other expenses were $0 for the six months ended November 30, 2011.
Other
income was $18,666 for the six months ended November 30, 2010. It consists of income from selling recycled paper and vehicle accident
compensation. Other expenses were $8,877 for the six months ended November 30, 2010.
The
following is a reconciliation of the basic and diluted earnings per share for the six months ended November 30, 2011 and 2010:
|
|
2011
|
|
|
2010
|
|
Net income (loss) for earnings per share
|
|
$
|
4,906,720
|
|
|
$
|
8,854,700
|
|
Weighted average shares used in basic computation
|
|
|
13,277,095
|
|
|
|
12,929,992
|
|
Diluted effect of warrants and options
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares used in diluted computation
|
|
|
13,277,095
|
|
|
|
12,929,992
|
|
Earnings (loss) per share, basic
|
|
$
|
0.37
|
|
|
$
|
0.68
|
|
Earnings (loss) per share, diluted
|
|
$
|
0.37
|
|
|
$
|
0.68
|
|
Weighted average stock prices for
the six months ended November 30, 2011 and 2010 are lower than warrants and option exercise prices (disclosed in note 15) so there
is no diluted effect.
20.
|
Concentration of Credit Risks and
Uncertainties
|
Concentration
of credit risk exists when changes in economic, industry or geographic factors similarly affect groups of counter parties whose
aggregate credit exposure is material in relation to the Company’s total credit exposure.
No
customer accounted for more than 10% of the Company’s total sales for the six months ended November 30, 2011. Three major
customers, China Railway Construction Group, Jiangxi Jinggangshan Roand and Bridge Construction Company and China Construction
Group accounted for 17%, 16%, and 10% of the Company’s total sales for the six months ended November 30, 2010, respectively.
No
customer accounted for more than 10% of the Company’s accounts receivable balance at November 30, 2011. Three customers,
China Construction Group, China Railway Construction Group, and Guangzhou Tianli Construction Group accounted for 11%, 11%, and
10% of the Company’s accounts receivable balance at November 30, 2010.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
One
major vendor, Ren Pei Xiong Stone and Sand Factory, accounted for 11% of the Company’s total inventory purchases for the
six months ended November 30, 2011. Two major vendors, Tangshan Jidong Cement Company and Hekai Stone and Sand Company, accounted
for 12% and 10% of the Company’s total inventory purchases for the six months ended November 30, 2010.
No
vendor accounted for more than 10% of the Company’s accounts payable at November 30, 2011 and November 30, 2010, respectively.
The
Company has not, historically, carried any property or casualty insurance. No amounts have been accrued for any liability that
could arise from the lack of insurance. Management feels the chances of such an obligation arising are remote.
Deposits
in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management
believes the probability of a bank failure, causing loss to the Company, is remote.
22.
|
Operating Lease Commitment
|
As
of November 30, 2011, the Company was committed to minimum rentals for the leased land under long-term non-cancellable operating
leases as follows:
Twelve Months Ended November, 30,
|
|
|
|
2012
|
|
$
|
244,771
|
|
2013
|
|
|
175,352
|
|
2014
|
|
|
175,352
|
|
2015
|
|
|
175,352
|
|
2016
|
|
|
178,489
|
|
Thereafter
|
|
|
2,541,695
|
|
Total:
|
|
$
|
3,491,011
|
|
We
currently have a ten-year lease with an annual payment of approximately $48,000, from March 1, 2008 to February 28, 2018, for
our Beijing production base. We have built our offices and manufacturing facilities on this site. On April 30, 2011, this lease
was ended due to demolition and we moved to a new location and entered into a new lease, which is from April 2011 to January 23,
2034 with a total payment of RMB 16,400,000. This lease requires us to make the total payment in full by October 2011. We also
lease land for our Xi’an production facility. The annual payment is approximately $59,000. We also leased two offices in
Beijing as our headquarter office. One office lease is from December 15, 2009 to December 14, 2011, with an annual payment of
approximately $106,000. We decided to lease a new office instead of renewing this lease after it ended. The new lease is a one-year
lease, starting on November 28, 2011, with annual payment of approximately $16,559. The other one is from July 11, 2010 to July
10, 2012, with an annual payment of approximately $48,000. However, this lease was ended on January 10, 2011 as we decided one
office is enough.
Operating
lease expenses amounted to $178,982 and $66,654 for the three months ended November 30, 2011 and 2010, respectively. Operating
lease expenses amounted to $275,128 and $126,888 for the six months ended November 30, 2011 and 2010, respectively.
CHINA INFRASTRUCTURE
CONSTRUCTION CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AS OF NOVEMBER
30, 2011 (Unaudited) AND MAY 31, 2011
AND FOR THE SIX
MONTHS ENDED NOVEMBER 30, 2011 AND 2010
23.
|
Cooperation with Institute of Building
Materials (“IBM”)
|
On
December 31, 2009, the Company reached a three year agreement with the Institute of Building Materials (“IBM”), a
subsidiary of the China Academy of Building Research ("CABR"). Under the Agreement, CHNC will work exclusively with
the Institute of Building Materials to obtain technical research, development and support. The Institute of Building Materials
will also provide training courses to CHNC employees. CHNC will feature the Institute of Building Materials as CHNC’s technological
partner in its corporate material. The Institute of Building Materials will use its relationships and brand influence in the construction
industry to assist CHNC in business development. The Company agrees to pay IBM approximately $51,000 each year. As of November
30, 2011, the Company was committed to pay $34,068 for 2011 and $51,000 for calendar year 2012.
The
Company has evaluated subsequent events through the date of the filing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING
STATEMENTS
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING
STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD-LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS
ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE.
WORDS SUCH AS "PLANS", "INTENDS", "WILL", "HOPES", "SEEKS", "ANTICIPATES",
"EXPECTS "AND THE LIKE OFTEN IDENTIFY SUCH FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT
IS A FORWARD-LOOKING STATEMENT. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT
TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS
WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS
AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS
TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED
IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-Q AND IN THE COMPANY'S OTHER FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE
OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.
Unless the context otherwise requires, The
"Company", "we," "us," and "our," refer to (i) China Infrastructure Construction Corporation;
(ii) Beijing Chengzhi Qianmao Concrete Co., Ltd. (“Beijing Concrete”), (iii) Beijing Fortune Capital Management, Ltd.
(“BFCM”), (iv) Shaanxi Hongruida Concrete Ltd. (“Hongruida”) and (v) Northern Construction Holdings, Ltd.
(“NCH”); (vi)
Laoting County Kejian Concrete Co. Ltd.(“Laoting”).
Overview
China Infrastructure Construction Corporation
(the “Company”, “China Infrastructure”, “CHNC”, “We”, “Our”) was organized
in Colorado on February 28, 2003. The Company through its subsidiaries in Hong Kong and the People’s Republic of China (“PRC”
or “China”), engages in production of ready-mixed concrete for developers and the construction industry in the PRC.
The Company primarily operates through its indirect majority-owned subsidiary, Beijing Chengzhi Qianmao Concrete Co., Ltd. (“Beijing
Concrete”), a company organized under the laws of the PRC.
Beijing Concrete currently has four production
facilities. One facility is located in Beijing’s Daxing District, one is in Shidu, a suburban area of Beijing, one is in
Xi’an West New High-tech Zone, and another one is located at the Tangshan harbor, about two hundred kilometers from Beijing.
The plant located in Xi’an was put into operation at the end of March 2010.
Our facilities generate revenues by selling
concrete and providing manufacturing service. Since March 2010, our Caifeidian facility has been providing manufacturing services
to our customers. In this business model, the customer provides to us raw materials to be used for production of concrete for the
customer. Our customers, mostly large contractors working on big projects, have more bargaining power to negotiate lower prices
for raw materials. The Company benefits from this as well because it does not need to advance cash to buy raw materials. Starting
from 2011, the Caifeidian facility provides only manufacturing services to its customers. In October 2010, the Shidu facility also
switched to providing only manufacturing services to its customers.
On June 27, 2011, the Company formed a new
subsidiary, Laoting County Kejian Concrete Co. Ltd., in Tangshan, Hebei Province. The new subsidiary is a joint venture with 51%
equity interest held by Beijing Concrete and 49% held by two other individuals. The total registered capital is 12 million RBM,
or approximately USD $2.34 million.
Results of Operations
Three months ended November 30, 2011
Compared to Three months ended November 30, 2010
Net Revenue
Net Revenue for the three months ended November
30, 2011 was $15,517,693 as compared to $25,930,120 for the same period last year, a decrease of $10,412,427, or approximately
40.16%. The decrease in net revenue is mainly caused by the relocation of Beijing Concrete, resulting in equipment replacement
and reducing concrete production and sales. Beijing Concrete has a decrease of approximately 35.01% in concrete sales for the three
months ended November 30, 2011, compared to the same period last year. Additionally, one major project for Tangshan Harbor Construction
Engineering Co., Ltd in the Caifeidian facility was completed in June 2011, therefore the sales volume of concrete products decreased.
Manufacturing services also decreased due to the completion of this project.
Cost of Goods Sold
Cost of goods sold for the three months
ended November 30, 2011 was $10,534,009 as compared to $18,703,068 for the same period last year, a decrease of $
8,169,059
,
or approximately 43.68%. The decrease in cost of goods sold is mainly due to the reduced production in Beijing Concrete
caused by the relocation and the equipment replacement as well as the completion of the project for Tangshan Harbor
Construction Engineering Co., Ltd in the Caifeidian facility.
Gross Profit
Gross profit for the three months ended November
30, 2011 was $
4,983,684
, a decrease of $
2,243,368
or approximately
31.04%, as compared to $
7,227,052
for the same period last year. The decrease in gross profit
is attributable to the decreased revenue and offset by the decrease of raw material price.
Gross Profit Margin
Gross profit margin for the three months ended
November 30, 2011 was 32.12% compared to 27.87%
for the same period last year. The increase
of the gross profit margin is mainly the result of lower raw material price.
General and administrative Expenses
General and administrative expenses for the
three months ended November 30, 2011 were $
2,147,621
, as compared to $
1,851,878
for the same period last year, an increase of $
295,743
, or approximately 15.97
%.
The increase of the general and administrative expenses was primarily due to increase of one subsidiary of Laoting Kejiang
offset by the decrease of revenue. Another reason is most salary expense in the Shidu facility was classified into G&A expense
instead of cost of goods sold – salaries compared in the same period last year.
Operating Income
Our operating income for the three months ended
November 30, 2011 was $2,836,063, a decrease of $
2,539,111
or approximately 47.24
%
as compared to $5,375,174 for the same period last year. The decrease of operating income was due to the increased general
and administrative expenses and the decreased net revenue.
Income Taxes
For the three months ended November 30, 2011,
our business operations were solely conducted by our subsidiaries incorporated in the PRC and we are governed by the PRC Enterprise
Income Tax Laws. PRC enterprise income tax is calculated based on taxable income determined under PRC GAAP. In accordance with
the Income Tax Laws, a PRC domestic company is subject to enterprise income tax at the rate of 25%.
Our Income taxes during the three months ended
November 30, 2011 were $
936,502
, an increase of $
762,327,
or
approximately
437.68%,
compared to $
174,175
for the same period
last year. This is because Beijing Concrete, our PRC subsidiary, was considered by the respective tax authorities a resource multipurpose
utilization enterprise, which qualified it for an exemption from income tax until December 31, 2010.
Net Income Attributable To China Infrastructure
Construction Corporation
Net income was $1,805,933
for
the three months ended November 30, 2011, a decrease of $3,072,318
or
approximately 62.98
%,
as compared to $
4,878,251
for the
same period last year. The decrease was primarily due to the decreased operating income and the increased income tax
resulting from cancellation of tax exemption enjoyed by Beijing Concrete in 2010.
Six months ended November 30, 2011 Compared
to Six months ended November 30, 2010
Net Revenue
Net Revenue for the six months ended
November 30, 2011 was $32,811,534 as compared to $47,117,650 for the same period last year, a decrease of $14,306,116, or
approximately 30.36%. The decrease in net revenue is mainly caused by the relocation of Beijing Concrete resulting in
equipment replacement and reducing concrete production and sales. Beijing Concrete has a decrease of approximately 39.79% in
concrete sales for the six months ended November 30, 2011 compared to the same period last year. Additionally, one major
project in the Caifeidian facility was completed in June 2011 therefore the sales volume of concrete products decreased.
Manufacturing services also decreased due to the completion of this project.
Cost of Goods Sold
Cost of goods sold for the six months ended
November 30, 2011 was $21,625,851 as compared to $33,757,085 for the same period last year, a decrease of $
12,131,234
,
or approximately 35.94%. The decrease in cost of goods sold is mainly due to the reduced production in Beijing Concrete caused
by relocation and equipment replacement as well as the completion of the customer’s project in the Caifeidian facility.
Gross Profit
Gross profit for the six months ended November
30, 2011 was $
11,185,683
, a decrease of $
2,174,882
or approximately
16.28%, as compared to $
13,360,565
for the same period last year. The decrease in gross profit
is attributable to the decreased revenue offset by the decrease of raw material price.
Gross Profit Margin
Gross profit margin for the six months ended
November 30, 2011 was 34.09% compared to 28.36%
for the same period last year. The increase
of the gross profit margin is mainly the result of lower raw material price.
General and administrative Expenses
General and administrative expenses for the
six months ended November 30, 2011 were $
3,688,814
, as compared to $
3,294,188
for the same period last year, an increase of $394,626, or approximately
11.98%.
The increase
of the general and administrative expenses was primarily due to the newly formed subsidiary, Laoting County Kejian Concrete Co.
Ltd.
Operating Income
Our operating income for the six months ended
November 30, 2011 was $
7,496,869
, a decrease of $
2,569,508,
or
approximately
25.53%,
as compared to $10,066,377 for the same period last year. The decrease
of operating income was due to the increased general and administrative expenses and the decreased net revenue.
Income Taxes
For the six months ended November 30, 2011,
our business operations were solely conducted by our subsidiaries incorporated in the PRC and we are governed by the PRC Enterprise
Income Tax Laws. PRC enterprise income tax is calculated based on taxable income determined under PRC GAAP. In accordance with
the Income Tax Laws, a PRC domestic company is subject to enterprise income tax at the rate of 25%.
Our Income taxes during the six months ended
November 30, 2011 were $
2,267,659
, an increase of $
1,686,729
,
or approximately
290.35%,
compared to $
580,930
for the same
period last year. This is because Beijing Concrete, our PRC subsidiary, was considered by the respective tax authorities a resource
multipurpose utilization enterprise, which qualified it for an exemption from income tax until December 31, 2010.
Net Income Attributable To China Infrastructure
Construction Corporation
Net income was $
4,906,720
for
the six months ended November 30, 2011, a decrease of $
3,947,980
or approximately
44.59%,
as
compared to $
8,854,700
for the same period last year. The decrease was primarily due to the
decreased operating income and the increased income tax resulting from cancellation of tax exemption enjoyed by Beijing
Concrete in 2010.
Liquidity and Capital Resources
As of November 30, 2011, we had cash and cash
equivalents of $289,913. We have historically funded our working capital needs from operations, advance payments from customers,
bank borrowings, and capital from shareholders. Our working capital requirements are influenced by the level of our operations,
the numerical and dollar volume of our project contracts, the progress of our contract execution, and the timing of accounts receivable
collections.
The following table sets forth a summary of
our cash flows for the periods indicated:
|
|
Six Months Ended
November 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
Net cash provided by (used in) operating activities
|
|
$
|
3,578,250
|
|
|
$
|
1,293,846
|
|
Net cash provided by (used in) investing activities
|
|
|
(4,336,823
|
)
|
|
|
(360,446
|
)
|
Net cash provided by (used in) financing activities
|
|
|
908,313
|
|
|
|
(1,253,339
|
))
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
3,471
|
|
|
|
20,530
|
|
Increase (Decrease) in cash and cash equivalents
|
|
|
153,211
|
|
|
|
(299,409
|
)
|
Cash and cash equivalents, beginning balance
|
|
|
136,702
|
|
|
|
1,102,879
|
|
Cash and cash equivalents, ending balance
|
|
|
289,913
|
|
|
|
803,470
|
|
Operating Activities
Net cash provided by operating activities
was $3,578,250 for the six months ended November 30, 2011, an increase of $2,284,404, or 176.56%, as compared to $1,293,846 for
the same period last year. The increase of net cash provided by operating activities was due to the decrease of prepayments,
increase in trade accounts payable and tax payable and offset by an increase in accounts receivable. Regarding accounts
receivable, we typically had long-term annual and multi-year contracts with our major customers. We entered into varying payment
terms with our customers ranging from payment before delivery, payment on delivery or up to 1 year after the project completion.
As of November 30, 2011, trade accounts receivable that are expected to be collected in more than one year amounted to $31,776,895,
or 40.08% of total trade accounts receivable.
Investing Activities
Net cash used in investing activities was
$4,336,823 for the six months ended November 30, 2011, an increase of $3,976,377 or approximately 1,103.18%, as compared to $360,446
for the same period last year. The increase of net cash used by investing activities was primarily due to the increased investments
of property, plant, and equipment and fewer proceeds from related party receivable.
Financing Activities
Net cash provided by financing activities was
$908,313 for the six months ended November 30, 2011, an increase of $2,161,652, or 172.47%, compared to cash used in financing
activities of $1,253,339 for the same period last year. The increase was primarily due to deceased payment to bank loan payable
and capital lease obligations combined with increased cash from Laoting’s non-controlling interest, which amounted to $908,599
offset by increase of payment to related party payable.
Critical Accounting Policies and Estimates
Management's discussion and analysis of its
financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and
application of accounting policies which require management to make significant estimates and judgments. See note 3 to our consolidated
financial statements, "Summary of Significant Accounting Policies." Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies
that currently affect our financial condition and results of operations.
Revenue recognition
The Company receives revenue from sales of
concrete products and from provision of manufacturing service. The Company's revenue recognition policies are in compliance with
ASC 605. Sales revenue is recognized at the date of shipment to customers or services have been rendered when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Our sales are non-returnable. Therefore, we do not estimate deductions or allowance for sales
returns. Sales are presented net of any discounts, reward, or incentive given to customers. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
Our products delivered to customers would be
checked on site by customers and, once the products are accepted by customers, they will sign the acceptance notice. There is no
warranty issue after the delivery. Reward or incentive given to our customers is an adjustment of the selling prices of our products
and therefore the consideration is characterized as a reduction of revenue when recognized in our income statement.
The Company recognizes its revenues net of
value-added taxes (“VAT”). The Company enjoyed a free VAT policy according to the national policy, which encourages
the development of the cement industry if the manufacturer satisfies the environmental protection requirements. The Company has
enjoyed the free VAT policy from January 1, 2006 to December 31, 2010. Starting from January 1, 2011, the Company is subject to
VAT which is levied at the rate of 6% on the invoiced value of sales.
Use of estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Management believes
that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from
these estimates.
Inventories
Inventories are stated at the lower of cost,
determined on a weighted average basis, and net realizable value. Net realizable value is the estimated selling price, in the ordinary
course of business, less estimated costs to complete and dispose.
Off-Balance Sheet Arrangements
The Company does not have any off-balance
sheet arrangements.
ITEM 4T. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
The Securities and Exchange Commission defines
the term “disclosure controls and procedures” to mean controls and other procedures of an issuer that are designed
to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of
1934 is accumulated and communicated to the issuer’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The
Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to
disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated
to principal executive and principal financial officers to allow timely decisions regarding disclosure.
As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this
evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were
not effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
Except for the above, there was no other change
in the Company's internal control over financial reporting during the period ended November 30, 2011, that has materially affected,
or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II-OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
On November 21, 2011, the Company issued to
its consulting company 175,000 shares of common stock as compensation, which shares are valued at a total of $70,000, or $0.40
per share.
The foregoing issuances of the shares were
effectuated pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”), provided by Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder.
ITEM 6. EXHIBITS.
(a) The following exhibits are filed herewith:
31.1
|
|
Certifications by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certifications by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
101
|
|
Interactive data files pursuant to Rule 405 of Regulation S-T.
|
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION
By:
|
/s/ Rong Yang
|
|
|
Rong Yang
|
|
|
Chief Executive Officer, Director
|
|
|
(principal executive officer)
|
|
By:
|
/s/ John Bai
|
|
|
John Bai
|
|
|
Chief Financial Officer
|
|
|
(principal financial and accounting officer)
|
|
Date: January 23, 2012
China Infrastructure Con... (PK) (USOTC:CHNC)
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China Infrastructure Con... (PK) (USOTC:CHNC)
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