TABLE OF CONTENTS

 

PART I
FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	2
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4(T).	CONTROLS AND PROCEDURES	41
PART II
OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	43
ITEM 1A.	RISK FACTORS	43
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	43
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	43
ITEM 5.	OTHER INFORMATION	43
ITEM 6.	EXHIBITS	43

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS.

CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.  AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and as of June 30, 2009	3
Consolidated Statements of Income and Other Comprehensive Income for the Three Months and Six Months Ended December 31, 2009 and 2008 (Unaudited)	4
Consolidated Statement of Stockholders’ Equity (Unaudited)	5
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2009 and 2008 (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	7

 

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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 $1,157,250 for the quarter ended December 31, 2009, an increase of $544,879, or 89.0%, as compared to $612,371 for the quarter ended December 31, 2008. The increase was principally due to an increase in salary and benefit expenses, and professional and consulting expenses resulting from our overall production expansion during the quarter, offset by bad debt allowance adjustments compared to the same quarter last year.

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 incurred net other income of $4,679,518 for the quarter ended December 31, 2009, as compared to net other income of $301,968 for the quarter ended December 31, 2008, an increase of $4,377,550. The increase in net other income was primarily due to a decrease in other non-operating expenses and a non-cash gain due to changes in the fair value of our outstanding warrant of $3,356,796, which was a result of the adoption of the accounting standard aforementioned in July 1, 2009, which requires us to record financial instruments such as warrants as derivative liabilities and a non-cash charge to income statement at fair market value (See Note 2, under Financial Instruments). We also experienced an increase in other subsidy income of $721,088 during the three months ended December 31, 2009, as compared to the same period of 2008. Due to the fact that we use recycled raw materials to manufacture our products, the State Administration of Taxation granted us VAT tax exemption from August 2005 to August 2009, and thereafter a two year extension on the VAT tax exemption from August 2009 to August 2011. 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 no interest expenses for the quarter ended December 31, 2009, as compared to $217,570 for the quarter ended December 31, 2008, a decrease of $217,570.

Provision for Income Taxes. Provision for income taxes amounted to $811,813 and $1,000,403 for the quarters ended December 31, 2009 and 2008, respectively. We have used recycled raw materials in our concrete production since our inception, which entitled us to an income tax exemption from January 1, 2003 through December 31, 2007, and an income tax rate reduction from January 1, 2009 to December 31, 2011, as granted by the State Administration of Taxation, PRC. From January 1, 2008 through December 31, 2008, we were subject to a 25% income tax rate. Since January 1, 2009, we have been subject to a 15% income tax rate.  Accordingly, our total income taxes incurred for the fiscal quarter ended December 31, 2009 comprised of a 15% income tax rate compared to a 25% income tax rate for the same quarter last year. The new tax rate was granted to the Company in June 2009, and the provision for income taxes provision was retro-actively applied to the beginning of the calendar year 2009 in the fourth quarter ended June 30, 2009. In the past, XinAo has paid the corporate income tax on behalf of China-ACMH, and there could be a potential liability for additional taxes for China-ACMH, though at present the Company is unable to determine the extent of any such liability, if any.

Net (Loss) Income. We recognized net income of $7,945,081 for the quarter ended December 31, 2009, as compared to net income of $2,645,002 for the same quarter in 2008, an increase of $5,300,079. Such increase in net income was attributable to an increase in our plant production in the Beijing area, higher gross profits on our thirteen railway projects, technical services, and rental income from mixing trucks, all of which was offset by an increase in selling, general, and administrative expense as well as a non-cash gain of $3,356,796 related to changes in the fair value of our outstanding warrant. As discussed above, we adopted an accounting standard in July 1, 2009, and the warrants issued in connection with our June 11, 2008 private placement were re-classed from equity to derivative warrant liabilities and marked to fair market value.  Our management believes that our profits should increase during the next 12 months as we continue to expand into service sectors that generate higher gross margins and because we are a direct beneficiary of Chinese government’s stimulus package on infrastructure projects. We also plan to lease or build new plants in order to increase our accessibility to construction sites located in Beijing, expand into other geographical areas, as well as vertically integrate our operations across the supply chain, which we believe will lower our costs and provide greater profitability.

Excluding the affect from non-cash gain related to changes in fair market of warrants, our net income would be $4,588,285 for the three months ended December 31, 2009, as compared to net income of $2,645,002 for the same period in 2008, during which we did not incur the same non-cash gain.  See the section “Use of Non-GAAP Financial Measures” above for a discussion regarding the presentation of net income excluding non-cash gain (loss).

Dividends and accretion on redeemable preferred stock.   The increase in dividends and accretion on redeemable convertible preferred stock of $9,799, compared to the quarter ended December 31, 2008, was due to our redeemable preferred stock offering in June 2008.  It included preferred dividend expense of $110,843 and $158,795 for the quarter ended December 31, 2009 and 2008, respectively; and accretion of a discount on the preferred stock of $207,992 and $150,241 for the quarter ended December 31, 2009 and 2008, respectively.

 

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Comparison of the six months Ended December 31, 2009 and 2008

The following table sets forth key components of our results of operations for the six months ended December 31, 2009 and 2008, in US dollars:

		Six Months Ended December 31,
		2009				2008
		(Unaudited)				(Unaudited)				Increase (decrease)				Percentage Increase (decrease)
Total revenue		$	45,645,448			$	15,964,947			$	29,680,501				185.9	%
Total cost of revenue			37,123,786				9,320,725				27,803,061				298.3	%
Gross profit			8,521,662				6,644,222				1,877,440				28.3	%
Selling, general and administrative (expenses) Credit			(2,052,281	)			(1,269,480	)			(782,801	)			61.7	%
Other (expense) income, net			(1,698,610	)			304,329				(2,002,939	)			(658.1	)%
Income (Loss) before provision for income taxes			4,770,771				5,679,071				(908,300	)			(16.0	)%
Income taxes (expense) credit			(1,348,627	)			(1,575,230	)			226,603				(14.4	)%
Net income (Loss)			3,422,144				4,103,841				(681,697	)			(16.6	)%
Dividends and accretion on redeemable preferred			659,699				618,132				41,567				6.7	%
Net income (Loss) available to Common shareholders		$	2,762,445			$	3,485,709			$	(723,264	)			(20.7	)%

Revenue. Our revenue is generated from sales of our advanced ready-mix concrete products, manufacturing services, technical consulting services, mixer rental, marketing cooperation, and sales of raw material. For the six months ended December 31, 2009, we generated revenue of $45,645,448 compared to $15,964,947 during the same period of 2008, an increase of $29,680,501, or 185.9%. We increased our production volumes by adding five additional fixed concrete plants in the Beijing area during this fiscal year compared to the same period last year.  As a result, our revenue from sales of concrete increased by $25,365,694, despite a decrease in unit sale price, compared to the same period last year. During the six months ended in December 31, 2009, we continued to supply concrete products to thirteen railway projects throughout China through our portable plants, specifically the projects located in Jiangsu Province, Hebei Province, Guangxi Province, Zhejiang Province, Guangdong Province, Henan Province, Liaoning Province, and Beijing. These thirteen projects contributed $6,468,728 to our total revenue for the six months ended December 31, 2009, compared to $3,996,539 in revenue from the three projects we worked on during the same period in 2008. The revenue increase with respect to our manufacturing services was principally due to the addition of four portable plants during this fiscal year as compared to the same period last year. For our railway projects, the general contractors generally supplied their own raw materials while we provided manufacturing and transportation services. In addition, revenues generated from our technical consulting services was $2,479,655 during the six months ended in December 31, 2009, an increase of $1,439,528, or 138.4%, compared to the same period in 2008. During the six month period ended December 31, 2009, we also generated $247,796 in revenue from marketing cooperation, an increase of $153,661, or 163.2%, rented our mixer trucks to mixture stations which generated mixer rental revenues of $960,640, a decrease of $35,941, or 3.6%, and sold raw materials for $285,370 to an independent third party which we did not have such activities for the same period last year. We anticipate our overall sales revenue will continue to grow due to the Chinese government’s announcement of a 4 trillion Yuan (USD$586 billion) stimulus package in November 2008 as well as the Chinese government’s railroad project plans which are expected to cost a total of $730 billion through 2020. We anticipate that we will be a direct beneficiary of transportation and infrastructure build-out from China’s stimulus package. In addition, we plan to continue expanding our business into new geographical markets by leveraging our strong relationships with major contractors throughout China.

 

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Cost of Sales. Cost of Sales, which consists of direct labor, rentals, depreciation, other overhead and raw materials, including inbound freight charges, was $37,123,786 for the six months ended December 31, 2009, as compared to $9,320,725 for the six months ended December 31, 2008, an increase of  $27,803,061, or 298.3%.  During the fiscal quarter prior to the celebration of National Day of the People's Republic of China in Beijing, our primary area of operation, all construction surrounding the city was halted and delayed due to severe restrictions on traffic controls. The increase on our cost of revenue was due to overall increase in production from five fixed concrete plants in the Beijing area, and increased production due to our manufacturing and technical services, as well as other services compared to the same period in 2008. The increase in our cost of sales was also due to increases in crude oil prices, which increased the costs of raw materials and transportation during the six months ended in December 31, 2009. The cost of sales with respect to concrete sales increased $27,803,061 during the first six months of this fiscal year as compared to the same period last year.  Such increase was due to an increase in our concrete production in the Beijing area as a result of the addition of five new plants during the first six months of this fiscal year, as well as the increase in crude oil prices as indicated above. Although our production volume increased during the six months ended December 31, 2009, our overall plant utilization rate was down, primarily due to severe traffic and construction restrictions in Beijing in anticipation of the National Day of the PRC and the increase in the price of crude oil. Cost of sales with respect to our manufacturing service increased $2,527,725 during the six months ended December 31, 2009, as compared to the same period last year.  Such increase was due to an increase in total operational capacity and a decrease in utilization rate for our new portable plants, as well as an increase in transportation costs.

Gross Profit. Our gross profit is equal to the difference between our revenue and cost of sales. Gross profit was $8,521,662 for the six months ended December 31, 2009, as compared to $6,644,222 for the six months ended December 31, 2008. The gross profit for sale of concrete was $2,413,247, or 6.9%, for the six months ended December 31, 2009, compared to $2,283,361, or 23.2%, for the same period last year, an increase of $129,886. The decrease in gross margin percentage with respect to our sales of concrete this fiscal quarter compared to the same period last year was primarily due to the increase in costs of raw materials and transportation as a result of the increase in the price of crude oil, as well as the low utilization rate from our newly leased plants and traffic restrictions due to the National Day of the PRC as discussed above.  Gross profit with respect to our manufacturing services was $2,647,915, or 40.9%, for the fiscal year ended December 31, 2009, a decrease of $55,536. Such decrease was principally due to fixed costs incurred on our new portable plants before they commenced production during the period, as well as the increase in costs of transportation.  Gross margin with respect to our technical services was $2,343,656, or 94.5%, for the six months ended December 31, 2009, compared to $942,444, or 90.6%, for the same period last year, an increase of $1,401,212.  Gross margins with respect to our mixer rentals, marketing cooperation and sales of materials were 90.5%, 81.0%, and 16.2% respectively during the six months ended December 31, 2009.  We plan to continue expanding our manufacturing and technical services, which produce the highest gross profits among our revenue sectors.

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 $2,052,281 for the six months ended December 31, 2009, an increase of $782,801, or 61.7%, as compared to $1,269,480 for the six months ended December 31, 2008. The increase was principally due to an increase in salary and benefit expenses, lease expenses, and professional and consulting expenses resulting from our overall production expansion this quarter, offset by bad debt allowance adjustments compared to the same period last year.

Other Income (Expense), net. Our other income (expenses) consists of a valued added tax exemption from the PRC government, interest income (expense), changes in fair value of warrants, and other non-operating income (expense). We incurred net other expenses of $1,698,610 for the six months ended December 31, 2009, as compared to net other income of $304,329 for the six months ended December 31, 2008, a decrease of $2,002,939. The decrease in net other income was primarily due to a non-cash loss due to changes in the fair value of our outstanding warrants of $3,916,645, which was a result of the adoption of the aforementioned accounting standard in July 1, 2009, which requires us to record financial instruments such as warrants as derivative liabilities and a non-cash charge to income statement at fair market value (See Note 2, Financial Instruments). We also experienced an increase in other subsidy income of $1,420,266 during the six months ended December 31, 2009, as compared to the same period of 2008. In addition, we had interest expenses of $23,753 for the six months ended December 31, 2009, as compared to $446,344 for the six months ended December 31, 2008, a decrease of $422,591. The decrease of interest expense was primarily due to the repayment of a short-term loan in July 2009.

Provision for Income Taxes. Provision for income taxes amounted to $1,348,627 and $1,575,230 for the six months ended December 31, 2009 and 2008, respectively. We have used recycled raw materials in our concrete production since our inception, which entitled us to an income tax exemption from January 1, 2003 through December 31, 2007 and an income tax rate reduction from January 1, 2009 to December 31, 2011 as granted by the State Administration of Taxation, PRC. From January 1, 2008 through December 31, 2008, we were subject to a 25% income tax rate.  Since and as of January 1, 2009, we have been subject to a 15% income tax rate.  Accordingly, our total income taxes incurred during the fiscal quarter ended December 31, 2009, comprised of a 15% income tax rate compared to a 25% income tax rate for the same quarter last year. The new tax rate was granted to the Company in June 2009 and the provision for income taxes provision was retro-actively applied to the beginning of calendar year 2009 during the fourth quarter ended June 30, 2009. We paid $1,682,537 in corporate income taxes during the six months ended December 31, 2009.  In the past, XinAo has paid the corporate income tax on behalf of China-ACMH, and there could be a potential liability for additional taxes for China-ACMH, though at present the Company is unable to determine the extent of any such liability, if any

 

 

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Net (Loss) Income. We recognized net income of $3,422,144 for the six months ended December 31, 2009, as compared to net income of $4,103,841 for the same period in 2008, a decrease of $681,697. Such decrease in net income was attributable to an increase in subsidy income, a decrease in interest expense, an increase in our plant production in the Beijing area, higher gross profits on our thirteen railway projects, technical services, marketing cooperation, sales of raw material and rental income from mixing trucks, all of which was offset by an increase in selling, general, and administrative expenses as well as a non-cash loss of $3,916,645 related to changes in the fair value of our outstanding warrants. As discussed above, we adopted an accounting standard on July 1, 2009, and the warrants issued in connection with our June 11, 2008 private placement were re-classed from equity to derivative warrant liabilities and marked to fair market value.  Our management believes that our profits should increase during the next 12 months as we continue to expand into service sectors that generate higher gross margins and because we are a direct beneficiary of Chinese government’s stimulus package on infrastructure projects. We also plan to lease or build new plants in order to increase our accessibility to construction sites located in Beijing, expand into other geographical areas, as well as vertically integrate our operations across the supply chain, which should lower our costs and provide greater profitability 

Excluding the affect from the non-cash loss related to changes in the fair market value of warrants, our net income would be $7,338,789 for the six months ended December 31, 2009, as compared to net income of $4,103,841 for the same period in 2008, during which we did not incur the same non-cash loss.  See the section “Use of Non-GAAP Financial Measures” above for a discussion regarding the presentation of net income excluding non-cash expense.

Dividends and accretion on redeemable preferred stock.   The increase in dividends and accretion on redeemable convertible preferred stock of $41,567 compared to the six months ended December 31, 2008, was due to our redeemable preferred stock offering in June 2008.  It included preferred dividend expense of $259,969 and $317,650 for the six months ended December 31, 2009 and 2008, respectively and accretion of discount on the preferred stock of $399,728 and $300,482 for the period ended December 31, 2009 and 2008, respectively.

Liquidity and Capital Resources

 

As of December 31, 2009, we had cash and cash equivalents of $1,696,339, and restricted cash of $260,863. The following table provides detailed information about our net cash flow for financial statement periods presented in this Form 10-Q:

Summary of Cash Flow Statements
		For the Six Months Ended December 31,
		(Unaudited)				(Unaudited)
		2009				2008
Net cash (used in) provided by operating activities		$	1,055,871			$	1,063,412
Net cash provided by (used in)  investing activities			(260,835	)			(31,666	)
Net cash provided by (used in) financing activities			(2,726,172	)			275,412
Effect of foreign currency translation on cash and cash equivalents			(7,330	)			7,525
Net (decrease) increase in cash and cash equivalent		$	(1,938,466	)		$	1,314,683

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.

Comparison of the Six Months Ended December 31, 2009 and 2008

Net Cash Provided by Operating Activities. Net cash provided by operating activities totaled $1,055,871 for the six months ended December 31, 2009, as compared to net cash provided in operating activities of $1,063,412 for the six months ended December 31, 2008. The decrease in net cash provided by operating activities was primarily due to an increase of accounts receivable and prepayment, which were partially offset by an increase of accounts payable and payment of income tax during the six month ended December 31, 2009. We expect our cash flow from operating activities to improve as the construction industry in Beijing increases its activity following the PRC National Day holiday, and we strengthen our efforts to negotiate more favorable terms with our suppliers and customers.

 

Net Cash Used In Investing Activities.  Net cash used in investing activities was $260,835 for the six month ended December 31, 2009, as compared to $31,666 for the six month ended December 31, 2008. The cash was principally used to purchase new production equipment and office equipment during the six months ended December 31, 2009.

 

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Net Cash Provided by/used in Financing Activities. Net cash used in financing activities totaled $2,726,172 for the six months ended December 31, 2009, as compared to net cash provided by financing activities of $275,412 for the six months ended December 31, 2008. The decrease in cash used by financing activities was due to a short-term loan payoff of $4,502,287 (RMB 30 million) to Beijing International Trust & Investment Co., offset by proceeds of our July 2009 common stock offering and warrant exercised of $1,883,342, compared to proceeds of short term loans of $7,354,278 and payments of short term loans of $6,749,544 in the same quarter last year. The net proceeds from the common stock offering will be used for purchasing plant equipment, concrete mixers and pump trucks, working capital and general corporate purposes.

Cash.   As of December 31, 2009, we had cash of $1,696,339 as compared to $3,225,178 as of December 31, 2008. This decrease is due primarily to a decrease in accounts receivable and a short-term loan payoff of $4,502,287 (RMB 30 million) to Beijing International Trust & Investment Co., which was partially offset by cash received from common stock offering and warrant exercised.

We believe that we can meet our liquidity and capital requirements for our ongoing operations from a variety of sources. However, we will need to raise additional capital in order to undertake out current plans for expansion.

Loan Facilities

We had a total of $146,259 and $4,512,200 outstanding on loans and credit facilities as of December 31, 2009 and June 30, 2009, respectively. During the six months ended December 31, 2009, we paid $4,502,287 towards our June 30, 2009 outstanding loans.

Interest expense on short-term loans for the three months ended December 31, 2009 and 2008 amounted to $0 and $217,570, respectively. Interest expense on short-term loans for the six months ended December 31, 2009 and 2008 amounted to $23,753 and $446,344, respectively.

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 consolidated financial statements include the financial statements of China ACM and its wholly owned subsidiaries, BVI-ACM, China-ACMH and its variable interest entity Xin Ao. All significant inter-company transactions and balances have been eliminated in consolidation. China ACM, its subsidiaries and Xin Ao, together are referred to as the Company. In accordance with an accounting standard regarding the consolidation of 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. In connection with the adoption of this accounting standard the Company concludes that Xin Ao is a VIE and China ACM is the primary beneficiary. Under the transition rules, the financial statements of Xin Ao are then consolidated into the Company’s consolidated 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 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

The Company recognizes revenue in accordance with accounting standards issued by the FASB, which specifies that revenue is realized or realizable and earned when four criteria are met:

 

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Persuasive evidence of an arrangement exists (the Company considers its sales contracts and technical service agreements to be pervasive evidence of an arrangement);

Ÿ

Delivery has occurred or services have been rendered;

Ÿ

The seller’s price to the buyer is fixed or determinable; and

Ÿ

Collectability of payment is reasonably assured.

 

The Company sells its concrete products and provides concrete manufacturing services mainly to major 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 breaches the contract terms specified in the agreement. The Company does not sell products to customers on a consignment basis. There is no right of return after the product has been injected into the location specified by the contract and accepted by the customer. The Company recognizes revenue when the goods are accepted by the customer and title has passed.

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

Due to the fact that the Company uses recycled raw materials to manufacture its products, the State Administration of Taxation has granted the Company VAT tax exemption from August 2005 through to August 2011. The VAT tax collected from the Company’s customers is kept by the Company and recorded as Other Subsidy Income.

The Company also provides technical consulting services to and enters strategic cooperation including market sharing and equipment rental with other independently owned concrete companies. The Company signs a Technical Service Agreement or Strategic Cooperation Agreement with each client, which specifies all terms and conditions including prices to be charged. Once concrete products are produced by clients and supplied to builders referred by the Company or cost savings are realized by use of technical solutions provided by the Company, the agreements consider the Company has rendered its service. The Company recognizes revenue and invoices client monthly for technical service and marketing cooperation on a per-cubic-meter basis and for equipment rental on a per-mixer truck basis.

Financial instruments

The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

The three levels are defined as follows:

Ÿ

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

Ÿ

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

Ÿ

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Marketable securities, warrant liabilities, receivables and current liabilities qualify as financial instruments. Marketable securities were determined using Level 1, which are carried on the consolidated balance sheets at fair value, with fair values determined by the financial institution who sold the securities. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities are reasonable estimates of fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

As required by a FASB accounting standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The fair value of the warrants was determined using the CRR Binomial Model, as level 2 inputs, and recorded the change in earnings. As a result, the derivative liability is carried on the balance sheet at its fair value.

The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2009 (unaudited).

 

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		Carrying Value at December 31, 2009				Fair Value Measurement at December 31, 2009
		(Unaudited)				Level 1				Level 2				Level 3
Marketable securities		$	-			$	-			$	-			$	-
Derivative liability - warrants		$	5,546,523			$	-			$	5,546,523			$	-

Other than the marketable securities and derivative liability - warrants carried at fair value, the Company did not identify any other assets and liabilities that are required to be presented on the consolidated balance sheet at fair value in accordance with the FASB accounting standard.

Accounts receivable

During the normal course of business, the Company extends unsecured credit to its customers. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. The Company’s reserves are consistent with its historical experience and considered adequate by management.

The ultimate collection of the Company’s accounts receivable may take more than one year, and any portion of accounts receivable expected to be collected in more than one year is reflected as non-current, net of allowance for doubtful accounts relating to that portion of receivables. The bifurcation between current and non-current portions of accounts receivable is based on management’s estimate and predicated on historical collection experience.

Chinese Income Taxes

The Company and its subsidiaries are governed by the income tax laws of the PRC concerning Foreign Investment Enterprises, or FIEs, and Foreign Enterprises and various local income tax laws, or the Income Tax Laws.

Xin Ao’s use of recycled raw materials in its production since its inception entitled the Company to an income tax exemption from January 1, 2003, through to December 31, 2007 and an income tax reduction from 25% to 15% from January 1, 2009 to December 31, 2012  as granted by the State Administration of Taxation of the PRC. The income tax exemption granted to the Company was eliminated after December 31, 2007.  Beginning January 1, 2008, the new Chinese Enterprise Income Tax, or EIT, law replaced the existing laws for Domestic Enterprises, or DES, and FIEs. Effective January 1, 2009, the new reduced EIT rate of 15% replaced the existing rates of 25% currently applicable to both DES and FIEs.

PRC laws require that before a FIE can legally distribute profits to its shareholders, it must satisfy all tax liabilities, provide for losses in previous years, and make allocations in proportions made at the discretion of the board of directors, after the statutory reserve. The statutory reserve includes the surplus reserve fund, the common welfare fund, and represents restricted retained earnings.

The Company adopted accounting policies in accordance to U.S. GAAP with regard to provisions, reserves, inventory valuation method, and depreciation that are consistent with requirements under Chinese income tax laws. Therefore, there were no significant deferred tax assets or liabilities during the six months ended December 31, 2009 and 2008.

The Company classifies interest and penalties assessed due to underpayment of income taxes as interest expense and other expenses, respectively. The Company incurred no such expenses for the six months ended December 31, 2009 and 2008.

Value added tax

Enterprises or individuals, who sell commodities, engage in repair and maintenance, or import and export goods in the PRC are subject to a value added tax. The standard VAT rate is 6% of gross sales for the Company’s industry. A credit is available whereby VAT paid on the purchases of raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of finished products. Due to the fact that the Company uses recycled raw materials to manufacture its products, the State Administration of Taxation has granted the Company VAT exemption from August 2005 through to August 2009 and a two year tax (VAT) credit extension from August 2009 through August 2011.

Recently Issued Accounting Pronouncements

In January 2009, the FASB issued an accounting standard which amended the impairment model by removing its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of this accounting standard did not have a material impact on the Company’s consolidated financial statements because all of the investments in debt securities are classified as trading securities.

 

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In April 2009, the FASB issued authoritative guidance related to the determination of fair value when the volume and level of activity for an asset or liability has significantly decreased, the identification of transactions that are not orderly, the recognition and presentation of other-than-temporary impairments, and the disclosure of the fair value of financial instruments on an interim basis. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an accounting standard to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This standard will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. This standard provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this standard does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. This standard became effective for interim and annual periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an accounting standard that requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this accounting standard, fair values for these assets and liabilities were only disclosed annually. This standard applies to all financial instruments within its scope and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This standard does not require disclosures for earlier periods presented for comparative purposes at initial adoption, but in periods after the initial adoption, this standard requires comparative disclosures only for periods ending after initial adoption. The adoption of this standard did not have a material impact on the disclosures related to its consolidated financial statements.

In May 2009, the FASB an accounting standard which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The standard is effective for interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this Standard during the second quarter of 2009. The standard requires that public entities evaluate subsequent events through the date that the financial statements are issued.

In June 2009, the FASB issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity, or QSPE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company has not completed the assessment of the impact this new standard will have on the Company’s financial condition, results of operations or cash flows.

In June 2009, the FASB also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities, or VIEs. The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the company’s financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009.  The Company has not completed their assessment of the impact that this pronouncement will have on the Company’s financial condition, results of operations or cash flows.

In June 2009, the FASB issued an accounting standard which establishes the FASB Accounting Standards Codification™, or Codification, as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective for the Company in the third quarter of 2009, and accordingly, the Company’s Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all current and subsequent public filings will reference the Codification as the sole source of authoritative literature.

 

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In August 2009, the FASB issued an Accounting Standards Update, or ASU, regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing.  This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation.  This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In October 2009, the FASB issued new standards that revised the guidance for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. The guidance is effective for revenue arrangements entered into for fiscal years beginning on or after June 15, 2010.  The Company does not expect the adoption will have a material impact on its consolidated financial statements.

Decreases in Ownership of a Subsidiary – a Scope Clarification

In January 2010, the FASB issued an accounting standard update to address the accounting and reporting for Decreases in ownership of a subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations, or cash flows of the Company.

Distributions to Shareholders with Components of Stock and Cash

In January 2010, the FASB issued an accounting standard update to address the accounting for distributions to shareholders with components of stock and cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260 for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations, or cash flows of the Company.

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.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4(T).   CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934   , as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer (our president) and our principal accounting and financial officer (our chief financial officer) to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

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Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but no absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

 

As of December 31, 2009, the quarterly period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal accounting and financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president and our chief financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2009 or during the entire period covered by this report.

 

Changes in Internal Control over Financial Reporting.

 

During the fiscal quarter ended December 31, 2009, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

ITEM 1A.     RISK FACTORS

 In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES OR USE OF PROCEEDS

There were no unregistered sales of equity securities during the fiscal quarter ended December 31, 2009.  

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the fiscal quarter ended December 31, 2009.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fiscal quarter ended December 31, 2009.

ITEM 5.     OTHER INFORMATION

Not applicable.

ITEM 6.     EXHIBITS

The following exhibits are filed with this report, except those indicated as having previously been filed with the SEC and are incorporated by reference to another report, registration statement or form. As to any shareholder of record requesting a copy of this report, we will furnish any exhibit indicated in the list below as filed with this report upon payment to us of our expenses in furnishing the information.

Exhibit No.		Description
14.1		Code of Ethics (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 9, 2009)
31.1		Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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SIGNATURES

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

Date: February 9, 2010	CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
	By:	/s/ Xianfu Han
		Xianfu Han, Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Chin Hsiao
		Chin Hsiao, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

 

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