Edgar Filing: China Advanced Construction Materials Group, Inc

China Advanced Construction Materials Group, Inc.: Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2013

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 333-141568

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP,INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada	20-8468508
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9 North West Fourth Ring Road Yingu Mansion Suite 1708
Haidian District Beijing, People’s Republic of China 100190
(Address of principal executive offices, Zip Code)

+86 10 82525361
(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 Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [_]	Accelerated Filer [_]
Non-Accelerated Filer [_]	Smaller reporting company [X]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]

The number of shares outstanding of each of the issuer’s classes of common equity, as of November 8, 2013 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	1,486,871

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
		PAGE
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38
ITEM 4.	CONTROLS AND PROCEDURES	38

PART II
OTHER INFORMATION
ITEM 6.	EXHIBITS	39

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

		September 30,			June 30,
ASSETS		2013			2013

CURRENT ASSETS:
Cash	$	6,938,247		$	3,949,939
Restricted cash		12,967,373			6,491,175
Accounts and notes receivable, net of allowance for doubtful accounts of $39,511,457 and $36,469,156, respectively		52,634,995			59,696,331
Inventories		1,009,000			1,122,380
Short term investment		11,064,979			5,168,000
Other receivables		6,953,222			6,298,088
Other receivable from termination of lease, net		9,298,922			8,932,029
Prepayments and advances		32,966,821			27,827,638
Deferred tax assets		4,019,838			3,987,738
Total current assets		137,853,397			123,473,318

PROPERTY PLANT AND EQUIPMENT, net		15,407,790			14,357,349

OTHER ASSETS:
Other receivable from termination of lease, net		1,887,261			3,710,455
Advances on equipment purchases, net		3,751,014			4,015,294
Deferred tax assets		219,130			217,380
Total other assets		5,857,405			7,943,129

Total assets	$	159,118,592		$	145,773,796

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short term loans, banks and bank guarantees	$	59,666,200		$	43,766,500
Notes payable		3,256,000			-
Accounts payable		31,160,701			33,730,871
Customer deposits		1,670,133			1,732,662
Other payables		2,853,721			1,989,023
Other payables - shareholders		757,328			757,328
Accrued liabilities		890,475			988,598
Capital lease obligations - current		4,410,148			2,448,883
Taxes payable		26,878			107,013
Total current liabilities		104,691,584			85,520,878

OTHER LIABILITIES
Capital lease obligations - non current		3,131,285			3,560,819
Total liabilities		107,822,869			89,081,697

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:

Preferred stock $0.001 par value, 1,000,000 shares authorized, no shares issued or outstanding		-			-
Common stock, $0.001 par value, 74,000,000 shares authorized, 1,486,871 and 1,486,871 shares issued and outstanding as of September 30, 2013 and June 30, 2013, respectively		1,487			1,487
Additional paid-in-capital		35,233,305			35,233,305
(Accumulated deficit) Retained earnings		(422,997	)		5,412,387
Statutory reserves		6,248,357			6,248,357
Accumulated other comprehensive income		10,235,571			9,796,563
Total shareholders' equity		51,295,723			56,692,099
Total liabilities and shareholders' equity	$	159,118,592		$	145,773,796

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

		For the three months ended
		September 30,
		2013			2012
REVENUE
Sales of concrete	$	9,721,117		$	28,876,908
Manufacturing services		442,303			1,933,721
Total revenue		10,163,420			30,810,629

COST OF REVENUE
Concrete		8,614,755			21,861,154
Manufacturing services		411,143			1,616,527
Total cost of revenue		9,025,898			23,477,681

GROSS PROFIT		1,137,522			7,332,948

PROVISION FOR DOUBTFUL ACCOUNTS		(3,049,421	)		(9,341,595	)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		(2,910,625	)		(3,189,614	)
RESEARCH AND DEVELOPMENT EXPENSES		(203,999	)		(288,880	)
LOSS REALIZED FROM DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT		(1,369,461	)		(344,425	)

LOSS FROM OPERATIONS		(6,395,984	)		(5,831,566	)

OTHER (EXPENSE) INCOME, NET
Subsidy income		609,805			1,827,526
Non-operating (expense) income, net		132,246			(231,310	)
Change in fair value of warrant liability		-			123,097
Interest income		346,253			27,434
Interest expense		(527,704	)		(500,837	)
TOTAL OTHER INCOME, NET		560,600			1,245,910

LOSS BEFORE PROVISION FOR INCOME TAXES		(5,835,384	)		(4,585,656	)

PROVISION FOR INCOME TAXES		-			799,167

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$	(5,835,384	)	$	(5,384,823	)

COMPREHENSIVE INCOME (LOSS):
Net loss		(5,835,384	)		(5,384,823	)
Foreign currency translation adjustment		439,008			(160,273	)

COMPREHENSIVE LOSS	$	(5,396,376	)	$	(5,545,096	)

LOSS PER COMMON SHARE ALLOCATED TO COMMON SHAREHOLDERS
Weighted average number of shares (*):
Basic and diluted		1,486,871			1,486,538

Loss per share:
Basic and diluted (*)	$	(3.92	)	$	(3.62	)

(*) Retrospectively restated shares for a 1-for-12 reverse split.

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		For the three months ended
		September 30,
		2013		2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,835,384	)	(5,384,823	)
Adjustments to reconcile net loss to cash used in operating activitie
Depreciation		485,839		909,044
Stock-based compensation expense		-		18,386
Provision for doubtful accounts		3,049,421		9,341,595
Change in fair value of warrant liabilitie		-		(123,097	)
Loss realized from disposal of property, plant and equipmen		1,369,461		344,425
Imputed interest on other receivable from termination of lease		(199,273	)	-
Interest expense on capital lease		132,963		-
Changes in operating assets and liabilitie
Accounts and notes receivable		4,775,458		(8,912,188	)
Inventories		121,963		886,088
Other receivables		198,959		446,235
Other receivable from termination of lease		1,459,800		-
Prepayments		(6,056,971	)	(1,510,448	)
Long term prepayments		-		637,352
Accounts payable		(2,859,788	)	3,740,746
Customer deposits		(76,194	)	64,903
Other payables		846,094		(1,529,864	)
Accrued liabilities		(104,676	)	(432,979	)
Taxes payable		(80,697	)	339,938
Net cash used in operating activities		(2,773,025	)	(1,164,687	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of short-term investments, ne		(5,833,799	)	-
Purchase of property, plant and equipmen		(57,684	)	(52,813	)
Net cash used in investing activitie		(5,891,483	)	(52,813	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term loans and bank guarantees		22,789,100		10,671,750
Payments of short term loans and bank guarantees		(7,299,000	)	(5,927,500	)
Proceeds from notes payable		3,244,000		-
Principal payments on capital lease obligation		(720,457	)	-
Restricted cash		(6,400,271	)	(1,758,884	)
Net cash provided by financing activities		11,613,372		2,985,366

EFFECTS OF EXCHANGE RATE CHANGE IN CASH		39,444		(13,852	)

NET INCREASE IN CASH		2,988,308		1,754,014

CASH, beginning of period		3,949,939		2,409,914

CASH, end of period	$	6,938,247		4,163,928

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Note 1 – Organization and description of business

China Advanced Construction Materials Group, Inc. (“CADC Delaware”) was incorporated in the State of Delaware on February 15, 2007. CADC Delaware through its 100% owned subsidiaries and its variable interest entities (“VIEs”) (collectively, the “Company”), is engaged in producing general ready-mix concrete, customized mechanical refining concrete, and other concrete-related products that are mainly sold in the People’s Republic of China (“PRC”). CADC Delaware has a wholly-owned subsidiary in the British Virgin Islands, Xin Ao Construction Materials, Inc. (“BVI-ACM”), which is a holding company with no operations. BVI-ACM has a wholly-owned foreign enterprise, Beijing Ao Hang Construction Material Technology Co., Ltd. (“China-ACMH”), and China-ACMH has contractual agreements with an entity which is considered a VIE.

Beijing XinAo Concrete Group (“XinAo”), our VIE, is comprised of five 100% owned subsidiaries in the PRC for consulting, concrete mixing and equipment rental services: (1) Beijing Heng Yuan Zheng Ke Technical Consulting Co., Ltd (“Heng Yuan Zheng Ke”), (2) Beijing Hong Sheng An Construction Materials Co., Ltd (“Hong Sheng An”), (3) Beijing Heng Tai Hong Sheng Construction Materials Co., Ltd (“Heng Tai”), (4) Da Tong Ao Hang Wei Ye Machinery, Equipment Rental Co., Ltd (“Da Tong”) and (5) Luan Xian Heng Xin Technology Co., Ltd (Heng Xin). The purpose of these subsidiaries is to support the Company’s future growth.

On August 1, 2013, after the completion of the Reverse Split (See note 12), CADC Delaware consummated a reincorporation merger with its newly formed wholly-owned subsidiary, China Advanced Construction Materials Group, Inc. (“China ACM”), a Nevada corporation, for the purpose of changing CADC Delaware’s state of incorporation from Delaware to Nevada.

Note 2 – Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The financial statements include the accounts of all directly, indirectly owned subsidiaries and variable interest entity listed below. All material intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary to give a fair presentation have been included. Interim results are not necessarily indicative of results of a full year. The information in this Form 10-Q should be read in conjunction with information included in the 2013 annual report in the Form 10-K filed on September 25, 2013.

Principles of consolidation

The unaudited condensed consolidated financial statements reflect the activities of the following subsidiaries and VIEs. All material intercompany transactions have been eliminated.

		Ownership
Subsidiaries and VIEs	Place incorporated	percentage
BVI-ACM	British Virgin Island	100%
China-ACMH	Beijing, China	100%
Xin Ao	Beijing, China	VIE
Heng Yuan Zheng Ke	Beijing, China	VIE
Hong Sheng An	Beijing, China	VIE
Heng Tai	Beijing, China	VIE
Da Tong	Datong, China	VIE
Heng Xin	Luanxian, China	VIE

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

Management makes ongoing assessment of whether China ACM is the primary beneficiary of Xin Ao and its subsidiaries. Based upon a series of contractual arrangements, The Company determined that Xin Ao and its subsidiaries are VIEs subject to consolidation and that the Company is the primary beneficiary. Accordingly, the accounts of Xin Ao and its subsidiaries are consolidated with those of the Company.

The carrying amount of the VIEs’ assets and liabilities are as follows:

		September 30,			June 30,
		2013			2013
Current assets	$	137,502,252		$	123,024,176
Property, plant and equipment		15,402,294			14,351,355
Other noncurrent assets		2,594,791			4,412,335
Total assets		155,499,337			141,787,866


Liabilities		(106,908,033	)		(88,101,262	)

Intercompany payables*		(7,436,028	)		(7,378,365	)

Total liabilities		(114,344,061	)		(95,479,627	)

Net assets	$	41,155,276		$	46,308,239

* Payables to China - ACMH and BVI-ACM are eliminated upon consolidation.

Use of estimates and assumptions

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The significant estimates and assumptions made in the preparation of the Company’s unaudited condensed consolidated financial statements include the valuation of warrants and share-based payments, deferred income taxes, income tax payable, allowance for doubtful accounts, capital lease obligations, the fair value and useful lives of property, plant and equipment. Actual results could be materially different from those estimates, upon which the carrying values were based.

Concentrations

For the three months ended September 30, 2013, the Company had three customers that represented approximately 16.7%, 15.9% and 12.4% of the total revenue. As of September 30, 2013, these customers accounted for approximately 2.3%, 0.9% and 3.2% of the total balance of accounts receivable. For the three months ended September 30, 2012, the Company had no customer that represented for more than 10% of the total revenue.

For the three months ended September 30, 2013, the Company had one vendor that represented approximately 12.5% of total purchases. As of September 30, 2013, this vendor accounted for approximately 2.4% of the total balance of accounts payable. For the three months ended September 30, 2012, the Company had no vendor that represented for more than 10% of the total purchases.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of China ACM and BVI-ACM is the U.S. dollar. China-ACMH and its VIEs use their local currency Chinese Renminbi (“RMB”) as their functional currency. In accordance with the US GAAP guidance on Foreign Currency Translation, the Company’s results of operations and cash flows are translated at the average exchange rates during the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at historical exchange rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Asset and liability accounts at September 30, 2013 and June 30, 2013, were translated at RMB 6.14 to $1.00 and RMB 6.19 to $1.00. The average translation rates applied to the consolidated statements of income and cash flows for the three months ended September 30, 2013 and 2012, were RMB 6.17 and RMB 6.33 to $1.00, respectively.

Translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive income.

Revenue recognition

Revenue is realized or realizable and earned when four criteria are met:

Persuasive evidence of an arrangement exists (the Company considers its sales contracts and technical service agreements to be pervasive evidence of an arrangement);
Delivery has occurred or services have been rendered;
The seller’s price to the buyer is fixed or determinable; and
Collectability of payment is reasonably assured.

The Company sells its concrete products and provides concrete technical services primarily to major local construction companies. Sales agreements are signed with each customer. The agreements list all terms and conditions with the exception of delivery date and quantity, which are evidenced separately in purchase orders. The purchase price of products is fixed in the agreement and customers are not permitted to renegotiate after the contracts have been signed. The agreements include a cancellation clause if the Company or customers breach the contract terms specified in the agreement.

The Company recognizes revenue when title and ownership of the goods are transferred upon shipment to the customer or services are provided by the Company.

Sales revenue represents the invoiced value of goods, net of a value added tax (“VAT”). All of the Company’s concrete products that are sold in the PRC are subject to a Chinese VAT at the rate of 6% of the gross sales price.

The Company includes the shipping and handling fee in both revenue and cost of revenue.

Financial instruments

The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The three levels of inputs are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable.

Cash, restricted cash, investment, accounts receivable, other assets, short term loans, accounts payable, and accrued expenses qualify and current capital lease obligations as financial instruments, and their carrying amounts are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

The fair value of non-current other receivable and long-term capital lease obligations approximate their fair value as interest rates approximate the market rate.

Stock-based compensation

The Company records stock-based compensation expense at fair value on the grant date and recognize the expense over the employee's requisite service period. The Company’s expected volatility assumption is based on the historical volatility of Company’s stock or the expected volatility of similar entities. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on the Company’s current and expected dividend policy.

Cash and cash equivalents

The Company considers all highly liquid investments with the original maturity of three months or less at the date of purchase to be cash equivalents. The Company currently maintains substantially all of its day-to-day operating cash balances with major financial institutions within PRC and US. As of September 30, 2013 and June 30, 2013, the Company had deposits in excess of federally insured limits totaling approximately $6.7 million and $3.8 million, respectively.

Restricted cash

Restricted cash consists of collateral totaling $13.0 million representing cash deposits for short term loans.

Accounts receivable

During the normal course of business, the Company extends unsecured credit to its customers. Accounts are considered past due after 30 days. In establishing the required allowance for doubtful accounts, management considers the historical experience, economy, trend in the construction industry, the expected collectability of amount receivable that past due and the expected collectability of overdue receivable. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovering is considered remote. There were no write offs for each of the three months ended September 30, 2013 and 2012. The allowance for doubtful accounts was approximately $39.5 million and $36.5 million at September 30, 2013 and June 30, 2013, respectively.

Other receivables

Other receivables primarily include other receivables from termination of lease, advances to employees, an unrelated entity, and receivables from an insurance company, VAT tax refund and other deposits. Management regularly reviews aging of receivables and changes in payment trends and records allowance when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off after exhaustive efforts at collection. The allowance for other receivables was approximately $2.2 million at September 30, 2013 and June 30, 2013.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Inventories

Inventories consist of raw materials and are stated at the lower of cost or market, as determined using the weighted average cost method. Management compare the cost of inventories with the market value and an allowance is made for writing down the inventory to its market value, if lower than cost. As of September 30, 2013 and June 30, 2013, the Company determined no reserves for obsolescence were necessary.

Short term investments

During May 2013, the Company entered into an investment agreement for a maximum period of two years with a financial investment company, whereby the Company could invest up to approximately RMB 100 million ($16.3 million). The Company can redeem the investment any time within the agreed period with a 30-day notice. The financial investment company invests the Company’s funds in certain financial instruments including bonds, mortgage trust or mutual funds. The rate of return on this investment was guaranteed to be no less than 7% per annum. In October 2013, the Company entered into another investment agreement with the same financial investment company for a maximum period of eighteen months and up to approximately RMB 100 million ($16.3 million). The rate of return on the additional investment was guaranteed to be no less than 10% per annum. The Company’s investment is not subject to market fluctuation; therefore, the Company did not experience gain or loss on its investment. However, the Company’s funds deposited with the financial investment company are not insured. The Company’s investments in the financial investment company were approximately $11.1 million as of September 30, 2013.

Prepayments and advances, and advances on equipment purchases, net

The Company advances monies to certain suppliers for raw materials, plant and equipment, and factory rent. These advances are interest free and unsecured. For the three months ended September 30, 2013, the Company recorded a bad debt allowance for advances on equipment purchases for approximately $0.3 million.

Property, plant and equipment

Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred while additions, renewals and betterments are capitalized. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method with 5% residual value. Leasehold improvements are amortized over the lesser of estimated useful lives or lease terms, as appropriate.

The estimated useful lives of assets are as follows:

	Useful life
Transportation equipment	10 years
Plant and machinery	10 years
Office equipment	5 years
Buildings and improvements	3-20 years

Accounting for long-lived assets

The Company classifies its long-lived assets into: (i) machinery and equipment; (ii) transportation equipment, (iii) office and equipment; and (iv) buildings and improvements.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. It is possible that these assets could become impaired as a result of technology or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

The Company makes various assumptions and estimates regarding estimated future cash flows and other factors in determining the fair values of the respective assets. The Company uses set criteria that are reviewed and approved by various levels of management, and estimates the fair value of the asset or asset group by using discounted cash flow analyses. If these estimates or their related assumptions change in the future, it is required to record impairment charges for the underlying assets at such time. Any such resulting impairment charges could be material to our results of operations.

If the value of an asset is determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value, less disposition costs. There were no impairment charges for the three months ended September 30, 2013 and 2012.

Competitive pricing pressure and changes in interest rates could materially and adversely affect our estimates of future net cash flows to be generated by the long-lived assets, and thus could result in future impairment losses.

Income taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forward. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.

ASC 740-10, Accounting for Uncertainty in Income Taxes defines uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.

United States federal, state and local income tax returns prior to 2011 are not subject to examination by any applicable tax authorities.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Value Added Tax

Enterprises or individuals, who sell commodities, engage in repair and maintenance, or import and export goods in the PRC are subject to a value added tax. The standard VAT rate is 6% of gross sales for the Company’s industry. A credit is available whereby VAT paid on the purchases of raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of finished products. Since the Company uses recycled raw materials to manufacture its products, the State Administration of Taxation has granted the Company a VAT exemption through June 2015.

Research and development, advertising and repair and maintenance

Research and development, advertising and repair and maintenance costs are expensed as incurred. The cost of materials and equipment that are acquired or constructed for research and development activities, and have alternative future uses, either in research and development, marketing, or sales, are classified as property and equipment, and depreciated over their estimated useful lives. Research and development costs for the three months ended September 30, 2013 and 2012, were approximately $0.2 million and $0.3 million, respectively. Advertising costs for the three months ended September 30, 2013 and 2012, were approximately $3,000. Repair and maintenance costs for the three months ended September 30, 2013 and 2012, were $0.03 million and $0.2 million, respectively.

Earnings (loss) per share

The Company reports earnings (loss) per share in accordance with the US GAAP, which requires presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants, options, restricted stock based grants and convertible preferred stock, to issue common stock were exercised and converted into common stock. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted earnings per share. Diluted loss per share is the same as basic loss per share since the addition of any contingently issuable share would be anti-dilutive.

ASC 260-10-55 requires that stock dividends or stock splits be accounted for retroactively if the stock dividends or stock splits during the period, or retroactively if the stock dividends or stock splits occur after the end of the period but before the release of the financial statements, by considering it outstanding of the entirety of each period presented. Dilution is computed by applying the treasury stock method. 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.

All share and per share amounts used in the Company’s unaudited condensed consolidated financial statements and notes thereto have been retroactively restated to reflect the 1-for-12 reverse stock split effective on August 1, 2013 (See Note 12).

Comprehensive income

Comprehensive income consists of net income and foreign currency translation adjustments.

Note 3 – Supplemental disclosure of cash flow information

For the three months ended September 30, 2013 and 2012, the Company paid interest in the amount of approximately $0.5 million and $0.4 million, respectively.

Cash payments for income tax for the three months ended September 30, 2013 and 2012 were $0.5 million.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Non-cash investing and financing activities

For the three months ended September 30, 2013, the Company acquired property, plant and equipment under capital lease agreements for approximately $3.6 million (See note 6).

For the three months ended September 30, 2013, the Company had other payables of approximately $0.03 million as a result of purchases of property, plant and equipment that had not been paid for yet. The Company had other receivables of approximately $0.9 million as a result of disposal of property, plant and equipment during the three months ended September 30, 2013. The Company offset other payables from acquisitions of property, plant and equipment of approximately $0.4 million with other receivables from termination of leases with during the three months ended September 30, 2013. The Company offset prepayments with addition of property, plant and equipment for approximately $1.2 million during the three months ended September 30, 2013.

Note 4 – Accounts and notes receivable

Accounts and notes receivable are generated from concrete products sold and technological consulting services provided to the Company’s customers and other concrete companies with which the Company conducts business. The payment terms are defined in the respective contracts.

The Company’s estimate of its allowance for doubtful accounts as of September 30, 2013 and June 30, 2013 was as follows: 15% for accounts receivable past due more than 180 days but less than one year, 60% for accounts receivable past due from one to two years and 75% for accounts receivable past due beyond two years. The allowance for doubtful accounts was approximately $39.5 million and $36.5 million at September 30, 2013 and June 30, 2013, respectively.

Accounts and notes receivable and allowance for doubtful accounts consisted of the following:

		September 30,			June 30,
		2013			2013
Accounts receivable, current	$	91,983,652		$	96,092,812
Notes receivable, current		162,800			72,675
		92,146,452			96,165,487
Less: Allowance for doubtful accounts, current		(39,511,457	)		(36,469,156	)
Total accounts and notes receivable, net	$	52,634,995		$	59,696,331

Note 5 – Other receivables and other receivable from termination of lease

Other receivables from termination of lease

On September 25, 2012, the Company entered an agreement with a third party to terminate one operating lease, which was originally effective from June 15, 2009 to June 14, 2014. Under the agreement, the fair value of net assets of the related operation was determined to be RMB 130.1 million (approximately $20.6 million) on September 25, 2012 (the closing date), and were sold for total cash proceeds of RMB 112 million (approximately $17.8 million). As of September 30, 2013 and June 30, 2013, the Company has received approximately $5.9 million and $4.0 million of the total $17.8 million, and the remaining $11.9 million proceeds will be paid in installments with no interest by December 31, 2014. In connection with this transaction, we have returned $1.2 million to the lessor as it was considered as part of the $20.6 million net assets. Since the note is interest-free, the Company has imputed the interest rate based on bank borrowing rate of 7%, imputed interest was approximately $1.2 million. At September 30, 2013 and June 30, 2013, the receivables from termination of lease had a net balance of approximately $11.2 million and $12.6 million, net of allowance of $0.6 million and $0.7 million and discount on note of $0.5 million $0.7 million, respectively.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Other receivables and allowance for doubtful accounts consisted of the following:

		September 30,			June 30,
		2013			2013
Other receivables, current	$	8,582,564		$	7,807,391
Less: Allowance for doubtful accounts, current		(1,629,342	)		(1,509,303	)
Other receivables - current, net	$	6,953,222		$	6,298,088

Other receivables from termination of lease	$	12,311,923		$	14,049,440
Less: Discount on note		(510,144	)		(704,484	)
Allowance for doubtful accounts, non current		(615,596	)		(702,472	)
Other receivables from termination of lease, net		11,186,183			12,642,484
Less: Other receivables from termination of lease - current		(9,298,922	)		(8,932,029	)
Other receivables from termination of lease – non current	$	1,887,261		$	3,710,455

As of the disposal date, the book value of the net assets underlying the lease and the determination of the $4.1 million loss is as follows:

Total consideration	$	17,752,000
Less:
Interest expense		(1,227,078	)
Total consideration (less cash held in Huacheng station and imputed interest)		16,524,922
Net assets
Cash held in Huacheng station as of disposal date		1,141,427
Account receivables		34,664,492
Inventories		88,617
Fixed assets		306,108
Long term deferred lease expenditure		1,299,700
Other long term deferred expenses		16,322
Account payables		(16,512,117	)
Salary payable		(184,092	)
Tax payable		(2,514	)
Other payables		(198,119	)
Total net assets		20,619,824
Total		(4,094,902	)
Exchange rate effect		(22,761	)
Loss	$	(4,117,663	)

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Note 6 – Property, plant and equipment

Property, plant and equipment consist of the following:

		September 30,			June 30,
		2013			2013
Machinery and equipment	$	5,562,072		$	5,653,211
Transportation equipment		944,701			5,377,121
Leased equipment (A)		11,225,386			7,542,050
Office equipment		1,288,584			1,272,683
Buildings and improvements		230,326			228,487
Total		19,251,069			20,073,552
Less: Accumulated depreciation		(3,843,279	)		(5,716,203	)
Plant and equipment, net	$	15,407,790		$	14,357,349

Depreciation expense for the three months ended September 30, 2013 and 2012 amounted to approximately $0.5 million and $0.9 million, respectively. Depreciation expense for the leased equipment was $0.2 million for the three months ended September 30, 2013. Accumulated depreciation for the leased equipment as of September 30, 2013 was $0.4 million.

(A) Capital lease

In January 2013, the Company entered into two lease agreements with a third party to lease eight concrete pump trucks for total lease payments of approximately $6.6 million. The lease term is for three years, starting in January 2013 and ending in January 2016 with monthly lease payment of approximately $0.2 million and an interest rate per annum of 7.68% . The ownership of the equipment will be transferred to the Company if there is no default of the lease payment within the three-year lease term (see Note 9). The Company recognized approximately $0.1 million of interest expense and $0.1 million of depreciation expense for the three months ended September 30, 2013.

In June 2013, the Company entered into lease agreements with a third party to lease twenty-eight concrete mixer trucks for total lease payments of approximately $1.0 million. The lease terms range from 5 to 27 months, between June 2013 and September 2015, and the interest rate per annum was 7.98% .. The ownership of the equipment will be transferred to the Company if there is no default of the lease payment within the lease term (see Note 9). The Company recognized approximately $0.02 million of interest expense and $0.04 million of depreciation expense for the three months ended September 30, 2013.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

In July 2013, the Company entered into five lease agreements with the third parties to lease fifty concrete mixer trucks, two concrete pump trucks and one sedan for total lease payments of approximately $2.2 million. The lease terms range from 10 to 22 months, from August 2013 to June 2015, with interest rates ranging from 0% to 7.28% per annum. The ownership of the equipment will be transferred to the Company if there is no default of the lease payment within the lease term (see Note 9). The Company recognized approximately $0.02 million of interest expense and $0.03 million of depreciation expense for the three months ended September 30, 2013.

Note 7 – Prepayments and advances

Prepayments consisted of the following:

		September 30,		June 30,
		2013		2013
Advances on inventory purchases	$	32,747,464	$	27,714,588
Rent prepayments (see Note 16)		219,357		113,050
Total prepayments, current	$	32,966,821	$	27,827,638

Note 8 – Short term loans, banks, Bank guarantees and Notes payable

Short term loans, banks:

Short term loans represent amounts due to banks that are due within one year or on demand. The outstanding balances on these loans consisted of the following:

		September 30,		June 30,
		2013		2013
Loan from Shanghai Pudong Development Bank, interest rate of 7.2% per annum, $2,442,000 due November 12, 2013 and $2,442,000 due December 12, 2013, guaranteed by Beijing Jinshengding Products Co., LTD		4,884,000		4,845,000

Loan from Construction Bank, interest rate of 6.00% per annum, due November 14, 2013, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Han Xianfu.		5,698,000		5,652,500

Loan from Citibank, interest rate of 7.50% per annum, $1,221,000 due January 23, 2014, $1,628,000 due October 31, 2013, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Han XianFu and Mr. He Weili. *		2,849,000		4,037,500

Loan from Beijing Bank, interest rate of 7.2% per annum, due March 29, 2014, guaranteed by Beijing Shouchuang Financing Inc.		5,046,800		5,006,500

Loan from Hana Bank, interest rate of 6.90% per annum, due September 1, 2014, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Han Xianfu and Mr. He Weili.		6,512,000		-

Loan from Citic Bank, interest rate of 7.80% per annum, due August 4, 2014, guaranteed by Jinshengding Mineral Products Co., LTD, Mr. Han Xianfu and Mr. He Weili.		3,256,000		-
	$	28,245,800	$	19,541,500

* On October 31, 2013, $1.6 million was repaid.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

The above guarantors are various suppliers of the Company. Mr. Han Xianfu and Mr. He Weili are the Company’s Chief Executive Officer and interim Chief Financial Officer, respectively. Also see Note 10 – Related party transactions.

Interest expense on short-term loans for the three months ended September 30, 2013 and 2012 amounted to approximately $0.4 million.

Bank guarantees:

Bank guarantees represent amounts due to issuing banks after beneficiary vendors completed shipments and presented the letters of credit to advising banks. Bank guarantees are noninterest-bearing and due within six months. The outstanding balances on these bank guarantees consisted of the following:

		September 30,		June 30,
		2013		2013
Bank guarantees due to Construction Bank, various due dates from October 2013 to March 2014, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Han Xianfu, a related party. *	$	31,420,400	$	24,225,000

* On October 11 and October 17, 2013, $2.0 million was repaid.

As of September 30, 2013 and June 30, 2013, the Company had restricted cash for short-term loans and bank guarantees of approximately $12.0 million and $6.5 million, respectively.

Notes payable:

During the three months ended September 30, 2013, bank notes were issued to a third party for inventory purchase. The notes amounted to $3.3 million (RMB 20 million) as of September 30, 2013, and are non-interest bearing with an expiration date of January 17, 2014. The restricted cash for the notes was approximately $1.0 million as of September 30, 2013.

Note 9 – Capital lease obligations

Capital lease obligations consist of the following:

		September 30,			June 30,
		2013			2013
Lease obligations for concrete pump trucks expiring in January 2016, lease payment at $185,000 per month with interest at 7.68% per annum	$	5,478,642		$	5,596,394
Lease obligations for concrete mixer trucks expiring in October 2013 and September 2015, lease payment at $62,000 per month with interest at 7.98% per annum		818,601			994,670
Lease obligations for concrete mixer trucks expiring in May 2014, lease payment at $155,000 per month with interest at 7.28% per annum		1,243,694			-
Lease obligations for concrete pump trucks expiring in January 2015, lease payment at $33,000 per month with interest at 6.76% per annum		515,753			-
Lease obligations for a sedan expiring in June 2015, lease payment at $1,000 per month with no interest *		17,942			-
Total
		8,074,632			6,591,064
Less: Deferred interest		(533,199	)		(581,362	)
		7,541,433			6,009,702
Less: Capital lease obligations - current		(4,410,148	)		(2,448,883	)
Capital lease obligations - non current	$	3,131,285		$	3,560,819

*This lease was paid off in entirety in Oct 2013.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Future annual capital lease payments approximately consist of the following:

Twelve months ending September 30,		Amount
2014	$	4,790,000
2015		2,730,000
2016		560,000
	$	8,080,000

Note 10 – Related party transactions

Other payables – shareholders

Two shareholders advanced funds to BVI-ACM, for working capital purposes. The loans are non-interest bearing, unsecured, and are payable in cash on demand. These two shareholders and officers of the Company also guarantee some of the Company’s short-term loans payable to banks (see Note 8).

Total other payables - shareholders consisted of the following:

		September 30,		June 30,
		2013		2013
Han Xianfu, shareholder	$	450,540	$	450,540
He Weili, shareholder		306,788		306,788
	$	757,328	$	757,328

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Note 11 – Income taxes

(a) Corporate income tax

China ACM was organized in the United States. China ACM had no taxable income for income tax purposes for the three months ended September 30, 2013. As of September 30, 2013, net operating loss carry forward for United States income taxes was approximately $1.7 million. The net operating loss carry forwards are available to reduce future years’ taxable income through year 2033. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and continued losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. There were no changes in the valuation allowance for the three months ended September 30, 2013 and 2012. Management reviews this valuation allowance periodically and makes adjustments accordingly.

BVI-ACM was incorporated in the British Virgin Islands (“BVI”) and is not subject to income taxes under the current laws of the British Virgin Islands.

China-ACMH and VIEs-Chinese operations

All of the Company’s income is generated in the PRC, through VIEs. The Company’s VIE entities have cumulative undistributed earnings of approximately $12.0 million and $17.8 million as of September 30, 2013 and June 30, 2013, respectively, included in consolidated retained earnings and will continue to be indefinitely reinvested in the PRC. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings.

China-ACMH and VIEs are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Chinese Enterprise Income Tax (“EIT”) law, the statutory corporate income tax rate applicable to most companies is 25%. In 2009, Xin Ao applied and received the Enterprise High-Tech Certificate. The certificate was awarded based on Xin Ao’s involvement in producing high-tech products, its research and development, as well as its technical services. As granted by the State Administration of Taxation of the PRC, Xin Ao is entitled to an income tax reduction from 25% to 15% until June 12, 2015.

In accordance with the EIT Law, enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC territory are considered PRC resident enterprises and subject to the PRC income tax at the rate of 25% on worldwide income. The definition of “place of effective management” refers to an establishment that exercises, in substance, and among other items, overall management and control over the production and business, personnel, accounting, and properties of an enterprise. No detailed interpretation of guidance has been issued to define “place of effective management”. Furthermore, the administrative practice associated with interpreting and applying the concept of “place of effective management” is unclear. If the Company’s non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax under the New EIT Law. The Company has analyzed the applicability of this law, and for each of the applicable periods presented, the Company has not accrued for PRC tax on such basis. The Company continues to monitor changes in the interpretation and/or guidance of this law.

The EIT Law also imposes a 10% withholding income tax, subject to reduction based on tax treaty where applicable, for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. Such dividends were exempted from PRC tax under the previous income tax law and regulations. The Company considers permanently reinvested undistributed earnings of Chinese operations located in the PRC. As a result, there is no deferred tax expense related to withholding tax on the future repatriation of these earnings.

Loss before provision for income taxes consisted of:

		Three Months Ended
		September 30,
		2013			2012

USA and BVI		(33,302	)		(401,818	)
China		(5,802,082	)		(4,183,838	)
	$	(5,835,384	)	$	(4,585,656	)

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

Provision for income taxes consisted of:

		Three Months Ended
		September 30,
		2013		2012
Current provision:
USA	$	-	$	-
China		-		799,167
Total current provision		-		799,167
Deferred provision:
USA		-		-
China		-		-
Total deferred provision		-		-
Total provision for income taxes	$	-	$	799,167

Significant components of deferred tax assets were as follows:

		September 30,			June 30,
		2013			2013
Deferred tax assets - current
Allowance for doubtful accounts	$	5,742,625		$	5,696,769
Valuation allowance *		(1,722,787	)		(1,709,031	)
Total deferred tax assets - current	$	4,019,838		$	3,987,738
Deferred tax assets - non-current
Net operating loss carryforward in the U.S.	$	590,613		$	590,613
Impairment loss of long-lived assets		219,130			217,380
		809,743			807,993
Valuation allowance *		(590,613	)		(590,613	)
Total deferred tax assets - non-current	$	219,130		$	217,380

*Changes to valuation allowance were due to exchange rate difference.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

As of September 30, 2013 and June 30, 2013, the Company believes it is more likely than not that future pre-tax income from its China operations will be generated to realize its deferred tax. The Company also provided approximately $1.7 million valuation allowance against deferred tax assets related to its allowance for doubtful accounts as management estimates that certain bad debts were more than likely not to be allowed to deduct future pre-tax income by the Chinese tax authorities.

The Company has incurred losses from operations during all periods presented. Accordingly, management provided approximately $0.6 million valuation allowances against the deferred tax assets related to the Company’s U.S. operations as of September 30, 2013, since the deferred tax benefits of the net operating loss carry forwards in the U.S. might not be utilized.

Taxes payable consisted of the following:

		September 30,		June 30,
		2013		2013
Income taxes payable	$	-	$	79,718
Other taxes payable		26,878		27,295
Total taxes payable	$	26,878	$	107,013

(b) Uncertain tax positions

There were no unrecognized tax benefits as of September 30, 2013 and June 30, 2013. Management does not anticipate any potential future adjustments in the next twelve months which would result in a material change to its tax positions. For the three months ended September 30, 2013 and 2012, the Company did not incur any interest and penalties.

Note 12 – Shareholders’ equity

Reverse stock split

On August 1, 2013, the Company effectuated a 1-for-12 reverse stock split of its issued and outstanding shares of common stock. All share and per share amounts used in the Company’s unaudited condensed consolidated financial statements and notes thereto have been retroactively restated to reflect the stock. The reverse stock split did not change the authorized number of shares of the Company’s common stock or its par value.

Note 13 – Reserves and dividends

The laws and regulations of the PRC require that before a foreign invested enterprise can legally distribute profits, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, after the statutory reserves. The statutory reserves include the surplus reserve fund and the common welfare fund.

The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The remaining reserve to fulfill the 50% registered capital requirement amounted to approximately $2.0 million as of September 30, 2013 and June 30, 2013.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

The transfer to this reserve must be made before distribution of any dividends to the Company’s shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

The Chinese government restricts distributions of registered capital and the additional investment amounts required by foreign invested enterprises. Approval by the Chinese government must be obtained before distributions of these amounts can be returned to the shareholders.

Note 14 – Loss per share

The basic and diluted loss per share for the three months ended September 30, 2013 and 2012 are as follows:

		September 30,			September 30,
		2013			2012
Net loss attributed to common shareholders	$	(5,835,384	)	$	(5,384,823	)
Weighted average shares outstanding
- Basic & Diluted		1,486,871			1,486,538

Loss per share - Basic & Diluted	$	(3.92	)	$	(3.62	)

For the three months ended September 30, 2013 and 2012, 0 and 585,125 warrants outstanding were excluded in the diluted EPS calculation because their effect was anti-dilutive, respectively.

Note 15 – Employee pension

The Company offers a discretionary pension fund, a defined contribution plan, to eligible employees. The pension includes two parts: the first to be paid by the Company is 20% of the employee’s actual salary from the prior year and the other part, paid by the employee, is 8% of the actual salary. The Company’s contributions of employment benefits, including pension were approximately $0.2 million for the three months ended September 30, 2013 and 2012.

Note 16 – Commitments and contingencies

Lease Commitments

The Company entered into a lease agreement for a manufacturing plant with an unrelated party which expires on October 31, 2014, with annual payments of approximately $218,000. Certain lease payments have been prepaid and included in the prepayments, which are being amortized over the life of these leases. On August 31, 2010, the Company entered a lease agreement to lease office space from a third party, starting from November 1, 2010 to October 31, 2013, with annual payments of approximately $389,000. On April 30, 2012, the Company entered a lease agreement to lease new office space from a third party, from May 1, 2012 to March 28, 2021, with annual payments of approximately $427,000, with three different lease terms, each having three-year expiration periods which will be automatically renewed for ensuring three-year terms and so on if the office building is not acquired or demolished by the city government.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

The Company entered into three five-year and one four-year operating lease agreements for four manufacturing plants with various unrelated parties for a total monthly payment of $232,000. Three of the lease agreements were terminated early on November 30, 2010, September 25, 2012 and March 31, 2013, respectively. The four-year lease was renewed in September 2013 through December 31, 2018, with a monthly payment of $68,000.

In August 2013, the Company entered into an eight-year operating lease agreement for a manufacturing plant with an unrelated party for a monthly payment of $54,000.

Total operating lease expenses for the three months ended September 30, 2013 and 2012, were approximately $0.5 million and $0.7 million, respectively. Operating lease expense is included in cost of revenue, selling, general, and administrative expenses. Future annual lease payments, net of rent prepayment non-cancelable operating leases with a term of one year or more consist of the following:

Years ending September 30,		Amount
2014	$	2,016,000
2015		1,905,000
2016		1,887,000
2017		1,887,000
2018		1,279,000
Thereafter		2,906,000
Total	$	11,880,000

Legal Contingencies

From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s unaudited consolidated financial position, results of operations and cash flows.

Note 17 – Business Segments

The Company’s operations are classified into three reportable segments that provide different products or services. The Company is engaged in the business of selling concrete and manufacturing concrete. Separate segments are required because each business unit is subject to different production and technology strategies.

For the three months ended September 30, 2013:

		Sales of			Manufacturing
		concrete			services			Corporate (1)			Total
Net revenue	$	9,721,117		$	442,303		$	-		$	10,163,420
Depreciation	$	(319,362	)	$	(59,940	)	$	(106,537	)	$	(485,839	)
Segment profit (loss) (2)	$	(347,291	)	$	31,160		$	(6,079,853	)	$	(6,395,984	)
Other income (expenses)	$	584,558		$	26,538		$	130,955		$	742,051
Interest income	$	156		$	-		$	346,097		$	346,253
Interest expense	$	-		$	-		$	(527,704	)	$	(527,704	)
Capital expenditures	$	(55,174	)	$	(2,510	)	$	-		$	(57,684	)
Total assets as of September 30, 2013	$	152,193,892		$	6,924,700		$	-		$	159,118,592

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

For the three months ended September 30, 2012:

		Sales of			Manufacturing
		concrete			services			Corporate (1)			Total
Net revenue	$	28,876,908		$	1,933,721		$	-		$	30,810,629
Depreciation	$	(478,935	)	$	(361,452	)	$	(68,657	)	$	(909,044	)
Segment profit (loss) (2)	$	6,043,935		$	274,663		$	(12,150,164	)	$	(5,831,566	)
Other income (expenses)	$	1,829,374		$	118,396		$	(228,457	)	$	1,719,313
Interest income	$	-		$	-		$	27,434		$	27,434
Interest expense	$	-		$	-		$	(500,837	)	$	(500,837	)
Capital expenditures	$	(48,655	)	$	-		$	(4,158	)	$	(52,813	)
Total assets as of June 30, 2013	$	135,651,579		$	10,122,217		$	-		$	145,773,796

(1) All amounts shown in the Corporate column were incurred at the company headquarter level and did not relate specifically to any of the other reportable segments. Included in the segment loss was the provision for doubtful accounts which management determined by customers and not by segment.

(2) Segment loss of corporate reflected general and administrative expenses not specifically allocated by segments.

INTRODUCTORY NOTE

In this report, unless indicated otherwise, references to

“China,” “Chinese” and “PRC,” are references to the People’s Republic of China;
“BVI” are references to the British Virgin Islands
“China Advanced,” “China-ACM,” “the Company,” “we,” “us,” or “our,” are references to the combined business of China Advanced Construction Materials, Group, Inc. and its wholly-owned subsidiaries, BVI-ACM and China-ACMH, as well as Xin Ao, but do not include the stockholders of China Advanced;
“BVI-ACM” are references to Xin Ao Construction Materials, Inc.
“China-ACMH” are references to Beijing Ao Hang Construction Materials Technology Co., Ltd.;
“AIH” are references to Advance Investment Holding Co., Inc.
“Xin Ao” are references to Beijing Xin Ao Concrete Group;
“RMB” are references to the Renminbi, the legal currency of China; and
“U.S. dollars,” “dollars” and “$” are references to the legal currency of the United States.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. You can identify such forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:

our expectations regarding the market for our concrete products and services;
our expectations regarding the continued growth of the concrete industry;
our beliefs regarding the competitiveness of our products;
our expectations regarding the expansion of our manufacturing capacity;
our expectations with respect to increased revenue growth and our ability to maintain profitability resulting from increases in our production volumes;
our future business development, results of operations and financial condition;
competition from other manufacturers of concrete products;
the loss of any member of our management team;
our ability to integrate acquired subsidiaries and operations into existing operations;
market conditions affecting our equity capital;
our ability to successfully implement our selective acquisition strategy;
changes in general economic conditions; and
changes in accounting rules or the application of such rules.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report, or that we filed as exhibits to this report, in their entirety and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We are a holding company whose primary business operations are conducted through our wholly-owned subsidiaries BVI-ACM and China-ACMH, and our variable interest entity, Xin Ao and its subsidiaries. We engage in the production and supply of advanced construction materials for large scale commercial, residential, and infrastructure developments, and are primarily focused on producing and supplying a wide range of advanced ready-mix concrete materials for highly technical, large scale, and environmentally-friendly construction projects.

During the three month ended September 30, 2013, we supplied materials and provided services to our high speed railway projects through our network of ready-mixed concrete plants throughout Beijing (two as of September 30, 2013) and our portable plants (one as of September 30, 2013) located in An Hui province in China. We own one concrete plant and its related equipment.

We produce ready-mix concrete at portable plants, which can be dismantled and moved to new sites for new projects. Our management believes that we have the ability to capture a greater share of the Beijing market and further expand our footprint in China via expanding relationships and networking, signing new contracts, and continually developing market-leading innovative and eco-friendly ready-mix concrete products.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect our financial performance:

Large Scale Contractor Relationships. We have contracts with major construction contractors which are constructing key infrastructure, commercial and residential projects. Our sales efforts focus on large-scale projects and large customers which place large recurring orders and present less credit risk to us. For the three months ended September 30, 2013, five customers accounted for approximately 62.1% of the Company’s sales and 9.4% of the Company’s accounts receivable as of September 30, 2013. Should we lose any of these customers in the future and are unable to obtain additional customers, our revenues will suffer.
Experienced Management. Management’s technical knowledge and business relationships give us the ability to secure major infrastructure projects, which provides us with leverage to acquire less sophisticated operators, increase production volumes, and implement quality standards and environmentally sensitive policies. If there be any significant turnover in our senior management, it could deplete the institutional knowledge held by our existing senior management team.
Innovation Efforts. We strive to produce the most technically and scientifically advanced products for our customers and maintain close relationships with Tsinghua University, Xi’an University of Architecture and Technology and Beijing DongfangJianyu Institute of Concrete Science & Technology (the “Institute”) which assist us with our research and development activities. During our five year agreement with the Institute, we have realized an advantage over many of our competitors by gaining access to a wide array of resources and knowledge. One payment of approximately $2.3 million to DongfangJianyu Institute of Concrete Science and Technology was paid under the agreement.
Competition. Our competition includes a number of state-owned and large private PRC-based manufacturers and distributors that produce and sell products similar to ours. We compete primarily on the basis of quality, technological innovation and price. Essentially all of the contracts on which we bid are awarded through a competitive bid process, with awards often being made to the lowest bidder though other factors such as shorter schedules or prior experience with the customer are often just as important. Within our markets, we compete with many national, regional and local state-owned and private construction entities some of which have achieved greater market penetration or have greater financial and other resources than us. In addition, there are a number of larger national companies in our industry that could potentially establish a presence in our markets and compete with us for contracts. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.

PRC Taxation

China-ACMH and the VIEs are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. After January 1, 2008, under the new Chinese Enterprise Income Tax (“EIT”) law, the statutory corporate income tax rate applicable to most companies is 25%. As granted by the State Administration of Taxation of the PRC, Xin Ao was entitled to an income tax reduction from 25% to 15% from January 1, 2009 to June 12, 2012. The Company has received the approval for an income tax reduction from 25% to 15% for the period from June 13, 2012 to June 12, 2015.

In accordance with the EIT Law and related regulations, enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC territory are considered PRC resident enterprises and subject to the PRC income tax at the rate of 25% on worldwide income. The regulations define the term “place of effective management” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued a SAT Circular 82 on April 22, 2009, which provides that the “place of effective management” of a Chinese-controlled overseas incorporated enterprise is located in China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function are mainly located in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies located in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) no less than half of the enterprise’s directors or senior management with voting rights reside in the PRC. SAT Circular 82 applies only to overseas registered enterprises controlled by PRC enterprises, not to those controlled by PRC individuals. If the Company’s non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax under the EIT Law. The Company has analyzed the applicability of this law, and for each of the applicable periods presented, the Company has not accrued for PRC tax on such basis. The Company continues to monitor changes in the interpretation and/or guidance of this law.

Business Segments and Periods Presented

We have provided a discussion of our results of operations on a consolidated basis and have also provided certain detailed segment information for each of our business segments below for the three months ended September 30, 2013 and 2012, in order to provide a meaningful discussion of our business segments. We have organized our operations into three principal segments: concrete sales, manufacturing services, and corporate. We present our segment information along the same lines that our chief executives review our operating results in assessing performance and allocating resources.

For the three months ended September 30, 2013:

		Sales of			Manufacturing			Corporate
		concrete			services			(1)			Total
Net revenue	$	9,721,117		$	442,303		$	-		$	10,163,420
Depreciation	$	(319,362	)	$	(59,940	)	$	(106,537	)	$	(485,839	)
Segment profit (loss) (2)	$	(347,291	)	$	31,160		$	(6,079,853	)	$	(6,395,984	)
Other income	$	584,558		$	26,538		$	130,955		$	742,051
Interest income	$	156		$	-		$	346,097		$	346,253
Interest expense	$	-		$	-		$	(527,704	)	$	(527,704	)
Capital expenditures	$	(55,174	)	$	(2,510	)	$	-		$	(57,684	)
Total assets as of September 30, 2013	$	152,193,892		$	6,924,700		$	-		$	159,118,592

For the three months ended September 30, 2012:

		Sales of			Manufacturing			Corporate
		concrete			services			(1)			Total
Net revenue	$	28,876,908		$	1,933,721		$	-		$	30,810,629
Depreciation	$	(478,935	)	$	(361,452	)	$	(68,657	)	$	(909,044	)
Segment profit (loss) (2)	$	6,043,935		$	274,663		$	(12,150,164	)	$	(5,831,566	)
Other income (expenses)	$	1,829,374		$	118,396		$	(228,457	)	$	1,719,313
Interest income	$	-		$	-		$	27,434		$	27,434
Interest expense	$	-		$	-		$	(500,837	)	$	(500,837	)
Capital expenditures	$	(48,655	)	$	-		$	(4,158	)	$	(52,813	)
Total assets as of June 30, 2013	$	135,651,579		$	10,122,217		$	-		$	145,773,796

(2) Segment profit reflects general and administrative expenses not specifically allocated by segments.

Concrete Sales Business

Our concrete sales business segment is comprised of the formulation, production and delivery of the Company’s line of C10-C100 concrete mixtures primarily through our current fixed plant network of two ready-mix concrete batching plants in Beijing. During the three months ended September 30, 2013, we entered into a new lease agreement for a manufacturing plant in the suburban area of Beijing. We expect to commence production at this facility in late 2013. For this segment of our business, we procure all of our own raw materials, mix them according to our measured mixing formula, ship the final products in mounted transit mixers to the destination work sites, and, for more sophisticated structures, will pump the mixture and set it into structural frame molds as per structural design parameters.

Manufacturing Services Business

Our manufacturing services business segment is comprised of the formulation, production and delivery of project-specific concrete mixtures primarily through our current portable plant network of 10 rapid assembly and deployment batching plants, located in various provinces throughout China. Our clients will purchase and provide the raw materials in volume on a separate account which we will then proportion and mix according to our formulation for a given project’s specifications. At present, our manufacturing services business segment is primarily dedicated to various high-speed rail projects in China which demand very high quality standards on a time sensitive work schedule.

Consolidated Results of Operations

The following table sets forth key components of our results of operations for the three months ended September 30, 2013 and 2012, in US dollars:

		Three months ended
		September 30,
		2013			2012					Percentage
								Increase /		Increase /
								(Decrease)		(Decrease)
Total revenue	$	10,163,420		$	30,810,629		$	(20,647,209	)	(67)%
Total cost of revenue		9,025,898			23,477,681			(14,451,783	)	(62)%
Gross profit		1,137,522			7,332,948			(6,195,426	)	(84)%
Provision for doubtful accounts		(3,049,421	)		(9,341,595	)		(6,292,174	)	(67)%
Selling, general and administrative expenses		(2,910,625	)		(3,189,614	)		(278,989	)	(9)%
Research and development expenses		(203,999	)		(288,880	)		(84,881	)	(29)%
Loss realized from disposal of property, plant and equipment		(1,369,461	)		(344,425	)		1,025,036		298%
Loss from operations		(6,395,984	)		(5,831,566	)		(564,418	)	10%
Other income, net		560,600			1,245,910			(685,310	)	(55)%
Loss before provision for income taxes		(5,835,384	)		(4,585,656	)		(1,249,728	)	27%
Income taxes provision		-			(799,167	))		(799,167	)	(100)%
Net loss available to Common shareholders	$	(5,835,384	)	$	(5,384,823	)	$	(450,561	)	8%

Revenue. Our revenue is primarily generated from sales of our advanced ready-mix concrete products and manufacturing services. For the three months ended September 30, 2013, we generated total revenue of approximately $10.2 million, as compared to approximately $30.8 million during the three months ended September 30, 2012, a decrease of approximately $20.6 million, or 67%. Such decrease was primarily due to our sales generated from the concrete division for the three months ended September 30, 2013, which was approximately $9.7 million, a decrease of approximately $19.2 million, or 66%, as compared to $28.9 million for the three months ended September 30, 2012. The decrease in revenue attributable to concrete sales was principally due to the decreased sales in the areas in which we operate. Operations at one of our concrete producing plants were suspended due to the China International Garden Expo and a temporary suspension order imposed by the Beijing government for industrial activities in the area. In addition, China’s central government continues to impose restrictions on the purchase of residential apartments in order to regulate housing prices in China, China’s economic growth has been decelerating since 2012, which has caused an adverse impact on the construction industry in China.

During the three months ended September 30, 2013, we continued to supply concrete products to three railway projects in China through our portable plants, specifically our projects located in Anhui Province. We suspended the operations of some portable plants in the three months ended March 31, 2013 due to inspections of high speed railroad projects by the government in China. The three railway projects contributed approximately $0.4 million to our total revenue for the three months ended September 30, 2013, a decrease of approximately $1.5 million, or 77%, as compared $1.9 million for the three months ended September 30, 2012. The decrease in revenues attributable to our manufacturing services was principally due to the suspension of operations of a number of our portable plants during the three months ended September 30, 2013.

Cost of Revenue. Total cost of revenue, which consists of direct labor, rentals, depreciation, other overhead and raw materials, including inbound freight charges, was approximately $9.0 million for the three months ended September 30, 2013, as compared to approximately $23.5 million for the three months ended September 30, 2012, a decrease of approximately $14.5 million, or 62%. The decrease of cost of revenue was primarily due to the overall decrease in production from our fixed concrete plants in the Beijing area and decreased production on manufacturing services compared to the three months ended September 30, 2012.

The cost of revenue on concrete decreased by approximately $13.2 million, or 61%, for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. Such decrease was due to a decrease in our concrete production volume.

Cost of revenue with respect to our manufacturing services was primarily due to our manufacturing services, which decreased by approximately $1.2 million, or 75%, during the three months ended September 30, 2013, as compared to the same period last year.

Gross Profit. Gross profit is equal to the difference between our revenue and cost of sales. Total gross profit was approximately $1.1 million for the three months ended September 30, 2013, as compared to approximately $7.3 million for the three months ended September 30, 2012. Our gross profit for sale of concrete was approximately $1.1 million, or 11% of revenue, for the three months ended September 30, 2013, as compared to approximately $7.0 million, or 24% of revenue for the year ended, 2012, a decrease of approximately $5.9 million. The decrease in gross profit for concrete sales for the three months ended September 30, 2013, as compared with the same period last year, was primarily due to lower production volume while we were subject to similar level of fixed costs.

Our gross profit with respect to our manufacturing services was approximately $0.03 million, or 7%, for the three months ended September 30, 2013, a decrease of $0.3 million from $0.3 million during the three months ended September 30, 2012, while the gross profit margin decreased from 16% for the three months ended September 30, 2012 to 7% for the three months ended September 30, 2013. Such decrease was principally due to the decrease in revenue from manufacturing services for the three months ended June 30, 2013, as a result of the decrease in the number of portable plants and lower production rates at our plants.

Provision for Doubtful Accounts. The provision for doubtful accounts was approximately $3.0 million for the three months ended September 30, 2013, a decrease of approximately $6.3 million, as compared to approximately $9.3 million for the three months ended September 30, 2012. In accordance with our allowance for doubtful accounts policy, at the end of each quarter, we conduct an aging analysis of each customer’s arrears to determine whether the allowance for doubtful accounts is adequate. In establishing the allowance for doubtful accounts, we consider the historical experience, economy, the trend in the construction industry, the expected collectability of amounts receivable that are past due and the expected collectability of overdue receivables. An estimate of doubtful accounts is recorded when collection of the full amount is no longer probable. Known bad debts are written off against allowance for doubtful accounts when identified. The provision is 15% for accounts receivable past due more than 180 days but less than one year, 60% for accounts receivable past due from one to two years and 75% for accounts receivable past due beyond two years. The allowance for doubtful accounts increased to approximately $39.5 million at September 30, 2013, as compared to approximately $36.5 million at June 30, 2013, as a result of a tightening monetary policy by the Chinese government which caused shortages in cash and declining business for certain of our customers.

As of September 30, 2013, our accounts and notes receivable aging are as follows:

		Accounts and notes receivable aging as of September 30, 2013:
		Balance			1-90		91-180		181-360			361-720			over 720
					days		days		days			days			days
Accounts receivable and notes	$	92,146,452		$	10,675,804	$	11,011,322	$	13,610,920		$	34,443,234		$	22,405,172
Allowance for doubtful accounts		(39,511,457	)		-		-		(2,041,638	)		(20,665,940	)		(16,803,879	)
Accounts receivable and notes, net	$	52,634,995		$	10,675,804	$	11,011,322	$	11,569,282		$	13,777,294		$	5,601,293

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of sales commissions, advertising and marketing costs, office rent and expenses, costs associated with staff and support personnel who manage our business activities, and professional and legal fees paid to third parties. We incurred selling, general and administrative expenses of approximately $2.9 million for the three months ended September 30, 2013, a decrease of approximately $0.3 million, or 9%, as compared to approximately $3.2 million for the three months ended September 30, 2012. The decrease was principally due to a $0.1 million decrease in meals and entertainment expenses, a $0.1 million decrease in office expenses and a $0.1 million decrease in rental expenses.

Research and development expenses. Research and development expenses were approximately $0.2 million and $0.3 million for the three months ended September 30, 2013 and 2012, respectively. The Company’s R&D expenditure was maintained at a certain percentage of revenue. The $0.1 million decrease was mainly due to lower R&D expenditures resulting from decreased revenue.

Loss realized from disposal of property, plant and equipment. For the three months ended September 30, 2013, we incurred a $1.4 million loss realized from disposal of property, plant and equipment. During the three months ended September 30, 2012, we incurred a $0.4 million loss realized from disposal of property, plant and equipment. The increase of $1.0 million was due to disposal of certain vehicles.

Loss from Operations. We recognized a loss from operations of approximately $6.4 million for the three months ended September 30, 2013, as compared to a loss from operations of approximately $5.8 million for the three months ended September 30, 2012, an increase of approximately $0.6 million in the loss from operations. Such an increase in our loss from operations was primarily due to a $6.2 million decrease in gross profit from our concrete sales and manufacturing services, a $1.0 million increase in loss realized from disposal of property, plant and equipment, offset by a $6.3 million decrease in provision of doubtful accounts and a $0.3 million decrease in selling, general and administration expenses.

The loss from operations of our concrete sales business for the three months ended September 30, 2013, was approximately $0.3 million, as compared to income from operations from this segment of $6.0 million for the three months ended September 30, 2012. The change from profit to loss was primarily due to a decrease in our concrete production resulting from a lower overall volume of traditional concrete sales and a lower gross profit margin.

Income from operations of our manufacturing services business for the three months ended September 30, 2013, was approximately $0.03 million, a decrease of $0.2 million from approximately $0.3 million income from operations of this segment for the three months ended September 30, 2012. The decrease was primarily due to a decrease in volume and gross profit during the three months ended September 30, 2013 as compared to the same period in 2012.

Our Corporate segment recorded depreciation of approximately $0.1 for the three months ended September 30, 2013 and 2012. Corporate recorded a segment loss of approximately $6.1 million for the three months ended September 30, 2013, as compared to a recorded segment loss of approximately $12.2 million for the three months ended September 30, 2012. The $6.1 million decrease in corporate segment loss was primarily due to a $6.3 million decrease in provision for doubtful accounts, which was partially offset by a $0.2 million increase in general and administrative expenses during the three months ended September 30, 2012.

Other Income (Expense), net. Our other income (expense) consists of valued added tax exemption from the PRC government, interest income (expense), change in fair value of warrants, and other non-operating income (expense). We recorded net other income of approximately $0.6 million for the three months ended September 30, 2013, as compared to net other income of approximately $1.2 million for the three months ended September 30, 2012, a decrease of approximately $0.6 million, or 55%. The decrease in net other income was mainly due to a $1.2 million decrease in other subsidy income and a $0.1 million decrease in change in fair value of warrants liability, offset by a $0.3 million increase in interest income and $0.4 million increase in other income. Due to the fact that we use recycled raw materials to manufacture our products, the State Administration of Taxation granted us a VAT tax exemption from August 2005 to June 2013, and thereafter a two year extension on the VAT tax exemption from June 2013 through June 2015. The VAT tax collected during the aforementioned period from our customers is retained by the Company and recorded as other subsidy income. In addition, we had interest expense of $0.5 million for the three months ended both September 30, 2013 and 2012. The Company also had interest income of $0.3 million for the three months ended September 30, 2013, as compared to $0.03 million in the three months ended September 30, 2012, an increase of $0.3 million related to increased short term investments.

Provision for Income Taxes. We did not incur any provision for income taxes for the three months ended September 30, 2013, as compared to income tax provision of $0.8 million for the three months ended September 30, 2012. The Company had a loss from operations since the three months ended September 30, 2012. We have used recycled raw materials in our concrete production since our inception, which has entitled us to an income tax rate reduction from 25% to 15% through June 12, 2015, as granted by the State Administration of Taxation, PRC. Since January 1, 2009, we have been subject to a 15% income tax rate. In the past, Xin Ao has paid the corporate income tax on behalf of China-ACMH, and there could be a potential liability for additional taxes for China-ACMH, though at present the Company is unable to determine the extent of such liability, if any.

Net Loss. We recognized a net loss of approximately $5.8 million for the three months ended September 30, 2013, as compared to a net loss of approximately $5.4 million for the three months ended September 30, 2012, an increase of $0.4 million in net loss. Such increase in net loss was primarily due to the decrease in gross profits of concrete sales and manufacturing service, and the increase in loss realized from disposal of property, plant and equipment, offset by the decrease in provision of doubtful accounts and provision for income taxes.

Liquidity and Capital Resources

As of September 30, 2013, we had cash and cash equivalents of approximately $6.9 million and restricted cash of approximately $13.0 million, which was 100% held by subsidiaries outside the U.S. We would be required to accrue and pay U.S. taxes if we were to repatriate these funds. Any company which is registered in mainland China must apply to the State Foreign Exchange Administration for approval in order to remit foreign currency to any foreign country. We currently do not intend to repatriate to the U.S. the cash and short-term investments held by our foreign subsidiaries. However, if we were to repatriate funds to the U.S., we would assess the feasibility and plan any transfer in accordance with foreign exchange regulations, taking into account tax consequences. As we conduct all of our operations in China, the inability to convert cash and short-term investments held in RMB to other currencies should not affect our liquidity. As of September 30, 2013, we had working capital of approximately $33.2 million. We believe that our cash and cash equivalents along with our working capital will be sufficient to fund our operations for the next twelve months.

The following table provides summary information about our net cash flow for financial statement periods presented in this report:

		For the three months ended
		September 30,
		2013			2012
Net cash used in operating activities	$	(2,773,025	)	$	(1,164,687	)
Net cash used in investing activities		(5,891,483	)		(52,813	)
Net cash provided by financing activities		11,613,372			2,985,366
Effect of foreign currency translation on cash and cash equivalents		39,444			(13,852	)
Net increase in cash and cash equivalents	$	2,988,308		$	1,754,014

Principal demands for liquidity are for construction or acquisition of concrete mixture stations, purchases of concrete mixers and pump trucks, working capital and general corporate purposes assuming the economy improves.

Operating Activities. Net cash used in operating activities totaled approximately $2.8 million for the three months ended September 30, 2013, was primarily attributable to the net loss adjusted to reconcile to net cash provided by operating activities of $1.0 million, including the adjustments for $0.5 million of depreciation, $3.0 million of provision for doubtful accounts and $1.4 million of loss realized from disposal of property, plant and equipment. Net cash used in changes in operating assets and liabilities resulted in a net cash outflow of $1.8 million, which mainly included cash outflow in prepayments of $6.1 million and cash outflow in accounts payable $2.9 million, offset by $4.8 million collection of accounts and notes receivable, a $1.5 million collection of other receivable from termination of lease and $0.9 million from additional other payables.

Net cash used in operating activities totaled approximately $1.2 million for the three months ended September 30, 2012, which was primarily attributable to net loss and adjustments to reconcile to net cash provided by operating activities of $5.1 million, which primarily included adjustments for $0.9 million of depreciation and a $9.3 million of provision for doubtful accounts. Net cash used in changes in operating assets and liabilities resulted in a net cash outflow of $6.3 million, which mainly included cash outflow from accounts and notes receivable of $8.9 million, cash outflow in prepayments of $1.5 million and cash outflow in other payables of $1.5 million, offset by $0.9 million inflow in inventories and $3.7 million from additional accounts payable.

One factor that had an impact on our net cash used in operating activities was increased prepayments for raw material purchases. Prices of raw materials for our productions had a tendency to increase as the Chinese government increased restrictions on the quality of concrete materials as part of the efforts to reduce air pollution. We adopted the strategy of increased prepayments for raw material purchases as an approach to stabilize our cost of productions in the near future.

We aim to make improvements in our cash flow from operating activities stemming from anticipated increases in construction industry activity in Beijing, combined with winning more favorable terms with our suppliers and customers which will be offset by greater working capital needs for our expanding operations.

Investing Activities. Net cash used in investing activities was approximately $5.9 million for the three months ended September 30, 2013, which was primarily attributable to $5.8 million acquisition of short term investments. Net cash used in investing activities was approximately $0.01 million for the three months ended September 30, 2012, and was attributable to purchases of property, plant and equipment.

Financing Activities. Net cash provided by financing activities totaled approximately $11.6 million for the three months ended September 30, 2013, which was primarily attributable to $22.8 million cash proceeds from bank loans and letters of credit and $3.2 million proceeds from notes payable, which was offset by $7.3 million for repayments of bank loans and bank guarantees, $0.7 million of principal payments for capital lease equipment and an increase in restricted cash of approximately $6.4 million. Net cash provided by financing activities totaled approximately $3.0 million for the three months ended September 30, 2012, was primarily attributable to $10.7 million of cash proceeds from bank loans, offset by $5.9 million of loan repayments and increase in restricted cash of approximately $1.8 million.

Cash. As of September 30, 2013, we had cash of approximately $6.9 million as compared to approximately $3.9 million as of June 30, 2013. We believe that our cash and revenues from ongoing operations, in addition to closely managing our accounts payable and accounts receivable, is sufficient to meet our liquidity and capital requirements for all of our ongoing operations. However, we may need to raise additional capital in order to undertake our plans for expansion.

Loan Facilities

We had a total of $59.7 million and $43.8 million outstanding on loans and credit facilities as of September 30, 2013 and June 30, 2013, respectively.

Short term loans, banks and bank guarantees:

		September 30,		June 30,
		2013		2013
Loan from Shanghai Pudong Development Bank, interest rate of 7.2% per annum, $2,442,000 due November 12, 2013 and $2,442,000 due December 12, 2013, guaranteed by Beijing Jinshengding Products Co., LTD	$	4,884,000	$	4,845,000
Loan from Construction Bank, interest rate of 6.00% per annum, due November 14, 2013, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Han Xianfu.		5,698,500		5,652,500
Loan from Citibank, interest rate of 7.50% per annum, $1,221,000 due January 23, 2014, $1,628,000 due October 31, 2013, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Han XianFu and Mr. He Weili. *		2,849,000		4,037,500
Loan from Beijing Bank, interest rate of 7.2% per annum, due March 29, 2014, guaranteed by Beijing Shouchuang Financing Inc.		5,046,080		5,006,500
Loan from Hana Bank, interest rate of 6.90% per annum, due September 1, 2014, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Han Xianfu and Mr. He Weili		6,512,000		-
Loan from Citic Bank, interest rate of 7.80% per annum, due August 4, 2014, guaranteed by Jinshengding Mineral Products Co., LTD, Mr. Han Xianfu and Mr. He Weili.		3,256,000		-
Bank guarantees due to Construction bank, various due dates from October 2013 to March 2014, guaranteed by Beijing Jinshengding Mineral Products Co., LTD, Mr. Han Xianfu, a related party. **		31,420,400		24,225,000
	$	59,666,200	$	43,766,500

*On October 31, 2013, $1.6 million was repaid.
**On October 11 and October 17, 2013, $2.0 million was repaid.

Each of the guarantors identified above are suppliers of the Company. Mr. Xianfu Han and Mr. Weili He are the Company’s Chief Executive Officer and interim Chief Financial Officer, respectively. Also see Note 10 - Related Party Transactions in Notes to the unaudited condensed consolidated financial statements.

Obligations Under Material Contracts

Below is a table setting forth our contractual obligations as of June 30, 2013:

		Payments due by period
										More
				Less than		1 – 3		3 – 5		than 5
		Total		1 year		years		years		years
Loan obligations	$	59,666,200	$	59,666,200	$	-	$	-	$	-
Notes payable		3,256,000		3,256,000		-		-		-
Capital lease payments, including interests		8,074,632		4,789,949		3,284,683		-		-
Operating lease obligations		11,880,000		2,016,000		3,792,000		3,166,000		2,906,000
Total	$	82,876,832	$	69,728,149	$	7,076,683	$	3,166,000	$	2,906,000

Seasonality

Our manufacturing operations are primarily located in northeastern China, which is extremely cold during the winter months. During such time, we are able to manufacture our advanced ready-mix concrete materials, however many construction projects operate on an abbreviated work schedule, if at all.

Critical Accounting Policies and Estimates

The accompanying unaudited condensed consolidated financial statements include the financial statements of China ACM and its wholly owned subsidiaries, BVI-ACM, China-ACMH, its variable interest entity Xin Ao and its subsidiaries (collectively, the “Company”). All significant inter-company transactions and balances have been eliminated in consolidation. In accordance with FASB ASC 810, Consolidation of Variable Interest Entities, variable interest entities, or VIEs, are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. The Company concludes that Xin Ao is a VIE and China ACM is the primary beneficiary. The financial statements of Xin Ao are then consolidated with China ACM’s financial statements.

Our management’s discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our unaudited condensed consolidated financial statements included, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:

Revenue recognition

Revenue is realized or realizable and earned when four criteria are met:

Persuasive evidence of an arrangement exists (the Company considers its sales contracts and technical service agreements to be pervasive evidence of an arrangement);
Delivery has occurred or services have been rendered;
The seller’s price to the buyer is fixed or determinable; and
Collectability of payment is reasonably assured.

There is no right of return after the product has been delivered into the location specified by the contract and accepted by the customer. The Company recognizes revenue when title and ownership of the goods are transferred upon shipment to the customer or services are provided by the Company.

The Company includes shipping and handling fees in both revenue and cost of revenue.

Due to the fact that we use recycled raw materials to the manufacture of our products, the State Administration of Taxation granted us a VAT tax exemption from August 2005 to June 2013, and thereafter a two year extension on the VAT tax exemption from June 2013 through June 2015. The VAT tax collected during the aforementioned period from the Company’s customers is retained by the Company and recorded as other subsidy income.

Accounts receivable

During the normal course of business, the Company extends unsecured credit to its customers. Accounts are considered past due after 30 days. In establishing the required allowance for doubtful accounts, management considers the historical experience, economy, trend in the construction industry, the expected collectability of amounts receivable that past due and the expected collectability of overdue receivables. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovering is considered remote.

Impairment review for long-lived assets.

We classify our long-lived assets into: (i) plant and machinery; (ii) transportation equipment, (iii) office and equipment; and (iv) buildings and improvements. The classification is based on the Company’s accounting policy which is set by management. For example, Machinery and equipment is broken down into categories such as plant and machinery, transportation equipment, and office and equipment.

We conduct our review of the long-lived assets held and used by us in accordance with ASC 36-10-35. Whenever events or changes in circumstances (such as technological or other industry changes) indicate that the carrying value of the assets groups may not be recoverable, we will perform a two-step approach to estimate the fair value of our assets groups by first preparing the undiscounted cash flows analysis to obtain such value. If the undiscounted cash value is greater than the carrying value of the assets groups, no impairment is recognized. If the undiscounted cash flows value is less than our carrying costs of our assets groups, then we will perform step 2 by obtaining the fair value by using the discounted cash flows method. Impairment is recognized to the extent that the carrying value of the assets groups exceeds its fair value which was determined through the discounted cash flows method.

We must make various assumptions and estimates regarding estimated future cash flows and other factors in determining the fair values of the respective assets. We use set criteria that are reviewed and approved by various levels of management, and estimate the fair value of our asset groups. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for the underlying assets at such time. Any such resulting impairment charges could be material to our results of operations.

As of September 30, 2013, the fair value of our property, plant and equipment other than the portable plants used in the manufacturing segment exceeded our carrying value of these assets by approximately 656.7% . We used the cash flows model to determine the fair value of these assets. The key assumptions that were included in the model are the revenue generated by the estimated revenue and other subsidy income forecasted by our historical revenues data with no projected growth. We believed these assumptions provided us the best estimates of projecting our future cash flows on these assets, net of any related cash outflow of our cost, expenses and taxes in related to these revenues.

There were no impairment charges for the three months ended September 30, 2013 and, 2012.

As of September 30, 2013, the fair value of our portable plants used in the manufacturing segment exceeded our carrying value of these assets by approximately 13.9% . We used the cash flows model to determine the fair value of these assets. The key assumptions that were included in the model are the revenue generated by the existing services contracts and the current reselling value of the assets. We believed these assumptions provided us the best estimates of projecting our future cash flows on these assets, net of any related cash outflow of our cost, expenses and taxes in related to these revenues.

The estimated fair value of these assets might be lower than their current fair value, thus could result in future impairment charge if potential events will occur to further reduce the current selling price of our production unit sold or increase our cost that are associated with our revenues. In addition, competitive pricing pressure and changes in interest rates could materially and adversely affect our estimates of future net cash flows to be generated by our long-lived assets, and thus could result in future impairment losses.

Income taxes

The Company uses the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forward. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.

The determination whether uncertainty in income taxes exists and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. United States federal, state and local income tax returns prior to 2010 are not subject to examination by any applicable tax authorities. Value Added Tax

Financial instruments

The three levels of inputs are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 3 inputs to the valuation methodology are unobservable.

Cash, restricted cash, investment, accounts receivable, other assets, short term loans, accounts payable, and accrued expenses and current capital lease obligations qualify as financial instruments, and their carrying amounts are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.

Interest Rate Risk

At times when we have short-term loans outstanding, we are exposed to interest rate risk due primarily to our short-term bank loans. Although the interest rates for our short-term loans are typically fixed for the terms of the loans, the terms are typically twelve months and interest rates are subject to change upon renewal. The interest rates are approximately 6.0% for Renminbi bank loans with a term of 12 months or less. Our total borrowings that were subject to interests were approximately $28.2 million as of September 30, 2013.

Credit Risk

The Company is exposed to credit risk from its cash in bank and fixed deposits, and accounts receivable. The credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions. However, the Company’s cash in bank deposited in the financial institutions in PRC is not insured. Accounts receivable are subjected to credit evaluations. An allowance has been made for estimated irrecoverable amounts which have been determined by reference to past default experience and the current economic environment.

Foreign Exchange Risk

The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. The Renminbi does not fluctuate with the U.S. Dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.

Because substantially all of our earnings and cash assets are denominated in Renminbi, but our reporting currency is the U.S. dollar, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect our balance sheet and our earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue in the future that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies.

Most of the transactions of the Company are settled in Renminbi and U.S. dollars. In the opinion of the directors, the Company is not exposed to significant foreign currency risk.

Inflation

Inflationary factors, such as increases in the cost of raw materials and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures. The term “disclosure controls and procedures,” as defined by regulations of the SEC, means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of our Chief Executive Officer and our Interim Chief Financial Officer have evaluated the design and operating effectiveness of our disclosure controls and procedures as of September 30, 2013. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures were not effective as of September 30, 2013, due to the ineffective internal controls over financial reporting that stemmed from the fact that we do not have any full-time accounting personnel who have U.S. GAAP experience.

In an effort to remedy this material weakness in the future, we intend to:

Develop a comprehensive training and development plan, for our finance, accounting and internal audit personnel, including our Chief Financial Officer, Financial Manager, and others, in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof.

Design and implement a program to provide ongoing company-wide training regarding the Company’s internal controls, with particular emphasis on our finance and accounting staff.
Implement an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatment identified in such report have been fully implemented and confirmed by our internal control department. In the future, we will continue to improve our ongoing review and supervision of our internal control over financial reporting.
Hire an individual that possesses the requisite U.S. GAAP experience and education.

Despite the material weakness reported above, our management believes that our unaudited condensed consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented due to the fact that we have retained a consultant who has U.S. GAAP experience to assist us in the preparation of our consolidated financial statements.

Changes in Internal Controls Over Financial Reporting

During the quarter ended September 30, 2013, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 6. EXHIBITS

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 13, 2013	CHINA ADVANCED CONSTRUCTION
	MATERIALS GROUP, INC.

	By:	/s/ Xianfu Han
		Xianfu Han, Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Weili He
		Weili He, Interim Chief Financial Officer
		(Interim Principal Financial Officer and
		Interim Principal Accounting Officer)

EXHIBIT INDEX

Exhibit No.	Description
31.1	Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications of Interim Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certifications of Interim Chief Financial Officer furnished 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