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 February 29, 2012

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 April 20, 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 February 29, 2012 (Unaudited) and May 31, 2011		1
Consolidated Statements of Operations And Comprehensive Income (Loss) for the three and nine months ended February 29, 2012 and February 28, 2011 (Unaudited)		2
Consolidated Statements of Cash Flows for the three and nine months ended February 29, 2012 and February 28, 2011 (Unaudited)		3
Notes to Consolidated Financial Statements (Unaudited)		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		23
Item 4T. Controls and Procedures
		27
PART II Other Information		6
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		27
Item 6. Exhibits.		27
Signatures		28
Exhibits/Certifications

 

 

PART I-FINANCIAL INFORMATION 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

 

		February 29,				May 31,
		2012				2011
			(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	73,498			$	136,702
Restricted cash			301				10,868
Trade accounts receivable, net			22,848,170				30,058,457
Other receivables			1,139,046				983,199
Inventories			469,614				348,102
Total current assets			24,530,629				31,537,328
Long-term assets
Property, plant and equipment, net			11,137,992				8,898,993
Prepayments			14,233,457				15,240,990
Accounts receivable, net – long-term			54,649,371				33,129,309
Deferred tax assets			1,950,470				2,038,913
Other receivables – long-term			2,341,569				2,197,961
Total long-term assets			84,312,859				61,506,166
TOTAL ASSETS		$	108,843,488			$	93,043,494
LIABILITIES AND EQUITY
Trade accounts payable		$	14,981,264			$	13,114,202
Related party payable			526,932				296,325
Other payables			4,279,916				3,494,914
Current portion of capital lease obligations			3,212,818				3,171,246
Accrued expenses			792,242				980,075
Tax payable			9,714,852				6,401,831
Bank loan payable			1,586,200				-
Total current liabilities			35,094,224				27,458,593
Long-term liabilities
Long-term portion of capital lease obligations			153,845				515,662
Total long-term liabilities			153,845				515,662
TOTAL LIABILITIES		$	35,248,069			$	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 February 29, 2012 and May 31, 2011, respectively			44,734,563				43,279,066
Retained earnings			18,443,131				14,778,106
Accumulated other comprehensive income			6,154,300				4,107,477
Total China Infrastructure Construction Corporation Stockholder’s Equity			69,331,994				62,164,649
Non-controlling interests			4,263,425				2,904,590
TOTAL EQUITY			73,595,419				65,069,239
TOTAL LIABILITIES AND EQUITY		$	108,843,488			$	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 NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

		Three Months Ended February 29,								Nine Months Ended February 29,
		2012				2011				2012				2011
Sales revenue, net
Concrete Sales		$	8,459,624			$	18,211,981			$	39,321,243			$	65,329,631
Manufacturing Service			113,038				2,571,701				2,062,953				2,571,701
Total revenue			8,572,662				20,783,682				41,384,196				67,901,332
Cost of revenues
Concrete Sales			6,657,232				11,549,212				27,699,805				45,306,297
Manufacturing Service			95,574				710,935				678,852				710,935
Total cost of revenues			6,752,806				12,260,147				28,378,657				46,017,232
Gross profit			1,819,856				8,523,535				13,005,539				21,884,100
Operating expenses:
General and administrative expenses			2,840,141				10,083,492				6,528,955				13,377,622
Operating income (loss)			(1,020,285	)			(1,559,957	)			6,476,584				8,506,478
Other income (expense):
Interest income			-				9,219				511				10,213
Interest expense			(12,314	)			(51,688	)			(23,691	)			(154,895	)
Other income			8,333				137,660				112,225				156,326
Other expense			-				-				-				(8,935	)
Total other income (expense)			(3,981	)			95,191				89,045				2,709
Earnings (loss) before tax			(1,024,266	)			(1,464,766	)			6,565,629				8,509,187
Income tax			272,056				273,429				2,539,715				854,359
Net income (loss)		$	(1,296,322	)		$	(1,738,195	)		$	4,025,914			$	7,654,828
Net income (loss) attributable to:
-Common stockholders			(1,241,695	)			(1,668,679	)			3,665,025				7,186,021
-Non-controlling interest			(54,627	)			(69,516	)			360,889				468,807
		$	(1,296,322	)		$	(1,738,195	)		$	4,025,914			$	7,654,828
Earnings (loss) per share
-  Basic and Dilutive		$	(0.09	)		$	(0.13	)		$	0.27			$	0.56
Weighted average shares outstanding
-  Basic and Dilutive			13,549,503				12,930,620				13,553,234				12,930,199
Comprehensive Income
Net Income (loss)		$	(1,296,322	)		$	(1,738,195	)		$	4,025,914			$	7,654,828
Foreign currency translation adjustment			821,121				887,918				2,136,170				2,109,425
Comprehensive Income (loss)			(475,201	)			(850,277	)			6,162,084				9,764,253
Comprehensive income attributable to non-controlling interests			(20,014	)			(15,937	)			450,236				581,931
Comprehensive income (loss) attributable to  China Infrastructure Construction Corporation		$	(455,187	)		$	(834,340	)		$	5,711,848			$	9,182,322

 

The accompanying notes are an integral part of this statement.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED FEBRUARY 29, 2012 AND 2011

 

		Nine Months Ended February 29,
		2012				2011
Cash flows from operating activities
Net income (loss)		$	4,025,914			$	7,654,828
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
(Gain) Loss from property, plant and equipment disposal			-				8,935
Bad debt expenses			1,657,571				8,016,081
Depreciation			1,237,233				1,190,034
Shares issued for compensation			837,500				316,250
Stock option expenses			617,997				505,859
Changes in operating liabilities and assets:
Trade accounts receivable			(13,875,032	)			(15,597,087	)
Prepayments			1,445,799				(2,805,594	)
Inventories			(109,409	)			(161,797	)
Other receivables			213,891				(961,399	)
Deferred tax assets			148,547				-
Trade accounts payable			2,497,003				(342,068	)
Other payables			427,044				886,375
Accrued expenses			61,640				101,161
Shares to be issued			-				77,700
Tax payable			3,071,446				1,701,318
Net cash provided by (used in) operating activities			2,257,144				590,596
Cash flows from investing activities:
Property, plant, and equipment additions			(4,611,175	)			(506,657	)
Property, plant, and equipment disposal			-				37,375
Proceeds from related party receivable			-				1,079,179
Net cash provided by (used in) investing activities			(4,611,175	)			609,897
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			1,418,871				31,111
Payment to Bank loan payable and capital lease obligations			(280,815	)			(2,006,905	)
Proceeds from related party payable			8,538,597				-
Payments to related party payable			(8,308,175	)			(76,427	)
Net cash provided by (used in) financing activities			2,287,644				(1,975,541	)
Effect of rate changes on cash			3,183				23,185
Net Increase (decrease) of cash and cash equivalents			(63,204	)			(751,863	)
Cash and cash equivalents–beginning of year			136,702				1,102,879
Cash and cash equivalents–end of period		$	73,498			$	351,016
Supplementary cash flow information:
Interest paid in cash		$	1,637			$	102,703
Acquisition of property, plant and equipment through other payable			275,898				-
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		$	(526,932	)		$	-

 

The accompanying notes are an integral part of this statement.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

1.	Nature of Operations

 

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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

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.

 

2.	Basis of Presentation

 

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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

d.

Estimates

 

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.

 

f.

Restricted Cash

 

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.

 

h.

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.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

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 February 29, 2012, 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.

 

l.

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. 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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

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.

 

m.

Cost of Goods Sold

 

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.

 

o.

Advertising Costs

 

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.

 

q.

Income Taxes

 

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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

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 January 1, 2011, the Company is subject to an income tax at an effective rate of 25%.

 

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.

 

s.

Financial Instruments

 

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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

w.

Segment Reporting

 

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 No. 2011-12.

 

y.

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

4.	Restricted Cash

 

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 February 29, 2012 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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

5.	Trade Accounts Receivable

 

		February 29, 2012				May 31, 2011
Trade Accounts Receivable		$	26,194,811			$	32,787,147
Less: Allowance for Bad Debt			(3,346,641	)			(2,728,690	)
		$	22,848,170			$	30,058,457

 

		February 29, 2012				May 31, 2011
Long Term Accounts Receivable		$	61,817,345			$	38,973,730
Less: Allowance for Bad Debt			(7,167,974	)			(5,844,421	)
		$	54,649,371			$	33,129,309

 

6.	Other Receivables

 

Other receivables in current assets amounted to $1,139,046 and $983,199 as of February 29, 2012 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 $2,341,569 and $2,197,961 as of February 29, 2012 and May 31, 2011, respectively.

 

As of February 29, 2012, 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 February 29, 2012 and May 31, 2011.

 

7.	Inventories

 

Inventories consist of the following:

 

		February 29, 2012				May 31, 2011
Raw materials		$	469,614			$	348,102
		$	469,614			$	348,102

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

8.	Property, Plant and Equipment

 

Plant and equipment consist of the following:

 

		February 29, 2012				May 31, 2011
Office trailers		$	911,941			$	798,993
Machinery and equipment			5,476,127				2,840,269
Machinery and equipment, capital lease			6,315,838				6,348,228
Motor vehicles			679,838				499,808
Motor vehicles, capital lease			288,380				279,854
Furniture and office equipment			637,353				601,619
Construction in progress			1,730,432				1,906,796
Total property, plant and equipment			16,039,909				13,275,567
Accumulated depreciation			(2,668,288	)			(2,685,392	)
Accumulated depreciation, capital lease			(2,233,629	)			(1,691,182	)
Net property, plant and equipment		$	11,137,992			$	8,898,993

 

Depreciation expense included in general and administrative expenses for the nine months ended February 29, 2012 and 2011 was $207,239 and $144,504, respectively. Depreciation expense included in cost of sales for the nine months ended February 29, 2012 and 2011 was $1,029,994 and $1,045,530, 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 $2,169,070 and $2,874,586 as of February 29, 2012 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 nine months ended February 29, 2012 and 2011.

 

9.	Prepayments

 

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 $14,233,457 and $15,240,990 as of February 29, 2012 and May 31, 2011, respectively. There is no provision made for the prepayment at February 29, 2012 and May 31, 2011.

 

		February 29, 2012				May 31, 2011
Advance to suppliers		$	2,153,551			$	8,561,700
Prepaid expenses			8,844,058				2,769,473
Performance bond			3,235,848				3,909,817
		$	14,233,457			$	15,240,990

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

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 $526,932 and $296,325 as of February 29, 2012 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:

 

		February 29, 2012				May 31, 2011
Yang Rong (CEO)		$	526,932			$	151,711
Xiuqiong Long			-				144,614
Total		$	526,932			$	296,325

 

Total outstanding amount of related party receivables was $0 and $0 as of February 29, 2012 and May 31, 2011, respectively.

 

11.	Other Payables

 

Other payables in current liabilities consist of the following as of February 29, 2012 and May 31, 2011:

 

		February 29, 2012				May 31, 2011
Commission payable		$	1,654,812			$	814,224
Payable to CRCG (note 1)			563,111				311,035
Beijng Xin Hai Wang Yue Commercial Ltd.			454,020				1,250,191
Staff  and other companies deposit			1,607,973				1,119,464
Total other payables		$	4,279,916			$	3,494,914

 

Commission expense has been included in cost of goods sold.

 

12.	Accrued Expenses

 

Accrued expenses amounted to $792,242 and $980,075 as of February 29, 2012 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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

13.

Debt

 

Interest

 

Total interest expense and financial charges for the nine months ended February 29, 2012 and 2011 on all debt amounted to $23,691 and $154,895, respectively. Total interest income for the nine months ended February 29, 2012 and 2011 amounted to $511 and $10,213, 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 February 29, 2012. Delinquency in lease payments may result in termination of the contracts.

 

The minimum future lease payments for this property at February 29, 2012 are shown in the following table:

 

						Lease Commitments
From		To				Buildings				Trucks				Automobiles				Equipment				Total
2/29/2012			5/31/2012			$	1,132,865			$	1,233,316			$	67,048			$	138,698			$	2,571,927
6/1/2012			5/31/2013				566,311				59,150				39,589				46,979				712,029
6/1/2013			5/31/2014				299,701				-				-				-				299,701
						$	1,998,877			$	1,292,466			$	106,637			$	185,677			$	3,583,657

 

The outstanding lease commitment as of February 29, 2012 was $3,583,657, which consists of principal of $3,366,663 and interest of $216,994. Delinquent lease payments as of February 29, 2012 totaled $1,970,177.

 

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 February 29, 2012 and May 31, 2011, the balance of non-controlling interest was $4,263,425 and $2,904,590, respectively.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

15.	Shareholder’s Equity

 

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 February 29, 2012, 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 February 29, 2012, 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 $555,000 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.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

The assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model are as follows:

 

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 February 29, 2012			590,000			$	3.90			$	0.00

 

Following is a summary of the status of options outstanding at February 29, 2012:

 

Outstanding Options							Exercisable Options
	Exercise Price		Number		Average Remaining Contractual Life in Years			Average Exercise Price		Number
$	3.90		590,000		1.13		$	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 FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

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, February 29, 2012			1,504,160				1,504,160			$	5.69				1.30

 

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 $66,938 and $78,572 for the nine months ended February 29, 2012 and 2011, respectively.

 

17.	Income Tax

 

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended February 29, 2012 and 2011:

 

		2012				2011
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			-				(15.0	)%
Accruals in foreign jurisdictions			6.7	%			-
Total provision for income taxes			31.7	%			10.0	%

 

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 February 29, 2012 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.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

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 February 29, 2012 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 exemption of income tax to the Company lasted until December 31, 2010, and from January 1, 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 nine months ended February 29, 2012 and 2011 are as follows:

 

		February 29, 2012				February 28, 2011
Current income tax		$	2,688,262			$	854,359
Deferred tax expense			(148,547	)			-
Income tax		$	2,539,715			$	854,359

 

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 $1,950,470 and $2,038,913 as of February 29, 2012 and May 31, 2011, respectively, from its Chinese operations, mainly due to bad debt allowance.

 

		2012				2011
Deferred tax assets, China subsidiary		$	1,950,470			$	2,038,913
Bad debt allowance			-				-
Valuation allowance			-				-
Total		$	1,950,470			$	2,038,913

 

The exemption of income tax to the Company lasted until December 31, 2010, and from January 1, 2011, the Company is subject to an income tax. As such, the estimated tax savings due to the tax exemption for the nine months ended February 29, 2012 and 2011 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 nine months ended February 29, 2012 and 2011 by $0.00 and $0.34, respectively.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

18.	Other Income (Expenses)

 

Other income was $112,225 for the nine months ended February 29, 2012. It consists of income from selling recycled paper, and vehicle accident compensation. Other expenses were $0 for the nine months ended February 29, 2012.

 

Other income was $156,326 for the nine months ended February 28, 2011. It mainly consists of gain on property, plant and equipment disposal. Other expenses were $8,935 for the nine months ended February 28, 2011.

 

19.	Earnings Per Share

 

The following is a reconciliation of the basic and diluted earnings per share for the nine months ended February 29, 2012 and 2011:

 

		2012				2011
Net income (loss) for earnings per share		$	3,665,025			$	7,186,021
Weighted average shares used in basic computation			13,553,234				12,930,199
Diluted effect of warrants and options			-				-
Weighted average shares used in diluted computation			13,553,234				12,930,199
Earnings (loss) per share, basic		$	0.27			$	0.56
Earnings (loss) per share, diluted		$	0.27			$	0.56

 

Weighted average stock prices for the nine months ended February 29, 2012 and 2011 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 nine months ended February 29, 2012. Two major customers, China Railway Construction Group and Jiangxi Jinggangshan Road and Bridge Construction Company accounted for 23% and 12% of the Company’s total sales for the nine months ended February 28, 2011, respectively.

 

No customer accounted for more than 10% of the Company’s accounts receivable balance at February 29, 2012. One major customer, China Construction Group accounted for 18% of the Company’s accounts receivable balance at February 28, 2011.

 

One major vendor, Hebei Province Linzhang Village Construction Engineering, Inc, accounted for 13% of the Company’s total inventory purchases for the nine months ended February 29, 2012. One major vendor, Hekai Stone and Sand Company accounted for 12% of the Company’s total inventory purchases for the nine months ended February 28, 2011.

 

No customer accounted for more than 10% of the Company’s accounts payable at February 29, 2012. One major vendor, Shuhong Liu accounted for 11% of the Company’s accounts payable at February 28, 2011.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

21.	Contingencies

 

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 February 29, 2012, the Company was committed to minimum rentals for the leased land under long-term non-cancellable operating leases as follows:

 

Twelve Months Ended February 29,
2013		$	189,939
2014			177,376
2015			178,434
2016			177,376
2017			180,549
Thereafter			2,463,093
Total:		$	3,366,767

 

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. We also lease land for our Xi’an production facility. The annual payment is approximately $63,448. 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 $114,175. 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 $16,750. 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 $212,027 and $184,911 for the nine months ended February 29, 2012 and 2011, respectively.

 

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 February 29, 2012, the Company was committed to pay $34,068 for 2011 and $51,000 for calendar year 2012.

 

 

CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF FEBRUARY 29, 2012 (Unaudited) AND MAY 31, 2011

AND FOR THE NINE MONTHS ENDED FEBRUARY, 2012 AND 2011

 

24.	Subsequent Events

 

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”), (v) Northern Construction Holdings, Ltd. (NCH”) and (vi) Laoting County Kejian Concrete Co. Ltd. (“Laoting”).

 

Overview

China Infrastructure Construction Corporation (the “Company,” “China Infrastructure,” “CHNC,” “we” or “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 services. 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 RMB, or approximately USD $2.34 million.

 

 

Results of Operations

 

Three months ended February 29, 2012 Compared to Three months ended February 28, 2011

 

Net Revenue

 

Net Revenue for the three months ended February 29, 2012 was $8,572,662 as compared to $20,783,682 for the same period last year, a decrease of $12,211,020, or approximately 58.75%. The decrease in net revenue is mainly caused by the slowdown of the real estate and infrastructure build out affected by the slowdown of the Chinese economy. 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 February 29, 2012 was $6,752,806 as compared to $12,260,147 for the same period last year, a decrease of $5,507,341, or approximately 44.92%. The decrease in cost of goods sold is due to reduced revenue caused by the slowdown of the Chinese economy and also 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 February 29, 2012 was $1,819,856, a decrease of $6,703,679 or approximately 78.65%, as compared to $8,523,535 for the same period last year. The decrease in gross profit is attributable to the decreased revenue and the increase of price of raw material as well as less portion of manufacturing service in the revenue.

 

Gross Profit Margin

 

Gross profit margin for the three months ended February 29, 2012 was 21.23% compared to 41.01% for the same period last year. The decrease of the gross profit margin is mainly the result of higher raw material price and less manufacturing service proportion in the revenue mix.

 

General and administrative Expenses

 

General and administrative expenses for the three months ended February 29, 2012 were $2,840,141, as compared to $10,083,492 for the same period last year, a decrease of $7,243,351, or approximately 71.83%. The decrease of the general and administrative expenses was primarily due to decrease of bad debt expense.

 

Operating income (loss)

 

Our operating loss for the three months ended February 29, 2012 was $1,020,285, a decrease of $539,672 or approximately 34.59% as compared to a loss of $1,559,957 for the same period last year. The decrease of operating loss was due to the decreased general and administrative expenses and offset by decreased net revenue.

 

Income Taxes

 

For the three months ended February 29, 2012, 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 February 29, 2012 were $272,056, a decrease of $1,373, or approximately 0.50%, compared to $273,429 for the same period last year.

 

Net Income (loss) Attributable To China Infrastructure Construction Corporation

 

Net loss was $1,241,695 for the three months ended February 29, 2012, a decrease of $426,984 or approximately 25.59%, as compared to net loss of $1,668,679 for the same period last year. The decrease was primarily due to the decreased bad debt expenses offset by the decrease of revenue.

 

Nine months ended February 29, 2012 Compared to Nine months ended February 28, 2011

 

Net Revenue

 

Net Revenue for the nine months ended February 29, 2012 was $41,384,196 as compared to $67,901,332 for the same period last year, a decrease of $26,517,136 or approximately 39.05%. The decrease in net revenue is mainly caused by the slowdown of the Chinese economy and the relocation of Beijing Concrete starting from March 2011 till October 2011 resulting equipment replacement and reducing concrete production and sales. 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 nine months ended February 29, 2012 was $28,378,657 as compared to $46,017,232 for the same period last year, a decrease of $17,638,575, or approximately 38.33%. 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 nine months ended February 29, 2012 was $13,005,539, a decrease of $8,878,561 or approximately 40.57%, as compared to $21,884,100 for the same period last year. The decrease in gross profit is attributable to the decreased revenue.

 

Gross Profit Margin

 

Gross profit margin for the nine months ended February 29, 2012 was 31.42% compared to 32.23% for the same period last year. The decrease of the gross profit margin is mainly the result of the decreased proportion of manufacturing service in the total revenue.

 

General and administrative Expenses

 

General and administrative expenses for the nine months ended February 29, 2012 were $6,528,955, as compared to $13,377,622 for the same period last year, a decrease of $6,848,667, or approximately 51.19%. The decrease of the general and administrative expenses was primarily due to the decrease of bad debt allowance offset by the decrease of revenue.

 

Operating Income

 

Our operating income for the nine months ended February 29, 2012 was $6,476,584, a decrease of $2,029,894, or approximately 23.86%, as compared to $8,506,478 for the same period last year. The decrease of operating income was due to the decreased net revenue offset by the decreased general and administrative expenses.

 

Income Taxes

 

For the nine months ended February 29, 2012, 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 nine months ended February 29, 2012 were $2,539,715, an increase of $1,685,356, or approximately 197.26%, compared to $854,359 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 $3,665,025 for the nine months ended February 29, 2012, a decrease of $3,520,996 or approximately 49.00%, as compared to $7,186,021 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 February 29, 2012, we had cash and cash equivalents of $73,498. 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:

 

		Nine Months Ended
		February 29, 2012				February 28, 2011
		Unaudited				Unaudited
Net cash provided by (used in) operating activities		$	2,257,144			$	590,596
Net cash provided by (used in) investing activities			(4,611,175	)			609,897
Net cash provided by (used in) financing activities			2,287,644				(1,975,541	)
Effect of exchange rate change on cash and cash equivalents			3,183				23,185
Increase (Decrease) in cash and cash equivalents			(63,204	)			(751,863	)
Cash and cash equivalents, beginning balance			136,702				1,102,879
Cash and cash equivalents, ending balance			73,498				351,016

 

 

Operating Activities

 

Net cash provided by operating activities was $2,257,144 for the nine months ended February 29, 2012, an increase of $1,666,548, or 282.18%, as compared to $590,596 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 by less amount of 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 February 29, 2012, trade accounts receivable that are expected to be collected in more than one year amounted to $54,649,371, or 70.52% of total trade accounts receivable.

  

Investing Activities

 

Net cash used in investing activities was $4,611,175 for the nine months ended February 29, 2012, an increase of $5,221,072 as compared to $609,897 net cash provided by investing activities 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 $2,287,644 for the nine months ended February 29, 2012, an increase of $4,263,185 compared to cash used in financing activities of $1,975,541 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 and due to increase of proceeds from bank loan payable and capital lease obligation.

 

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 February 29, 2012, 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

 

None.

 

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.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

 

  

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:  April 20, 2012