CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1 – Organization and description of business
China
Advanced Construction Materials Group, Inc. (“China ACM” or the “Company”) was
incorporated in the State of Delaware on February 15, 2007. The Company through
its 100% owned subsidiaries and its variable interest entities (“VIEs”), 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”).
Current
developments
In March
and April 2010, Beijing Xin Ao Concrete Co., Ltd. (“Xin Ao”) established five
100% owned subsidiaries in China for consulting, concrete mixing and equipment
rental services. They are Beijing Heng Yuan Zheng Ke Technical Consulting Co.,
Ltd (“Heng Yuan Zheng Ke”), Beijing Hong Sheng An Construction Materials Co.,
Ltd (“Hong Sheng An”), Beijing Heng Tai Hong Sheng Construction Materials Co.,
Ltd (“Heng Tai”) and Da Tong Ao Hang Wei Ye Machinery, Equipment Rental Co., Ltd
(“Da Tong”) and Luan Xian Heng Xin Technology Co., Ltd (Heng Xin). Total
registered capital for these five subsidiaries is approximately $2.1 million
(RMB 14 million) and the purpose of these new subsidiaries is to support the
Company’s future growth.
On
September 20, 2010, the Company established a 100% owned subsidiary, Advance
Investment Holdings Co., Inc. (“AIH”) in the State of Nevada. AIH has no
operations up to date.
Note
2 – Summary of significant accounting policies
Basis of
presentation
The
Company’s accounting policies used in the preparation of the accompanying
consolidated financial statements conform to accounting principles generally
accepted in the United States of America ("US GAAP") and have been consistently
applied.
Principles of
consolidation
The
consolidated financial statements reflect the activities of the following
subsidiaries and variable interest entities (“VIEs). All material intercompany
transactions have been eliminated.
Subsidairies and VIEs
|
|
Place of incorporated
|
|
Ownership
percentage
|
|
AIH
|
|
Nevada,
USA
|
|
|
100
|
%
|
Xin
Ao Construction Materials, Inc. ("BVI-ACM")
|
|
British
Virgin Island
|
|
|
100
|
%
|
Beijing
Ao Hang Construction Material Technology Co., Ltd.
("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
|
|
In
accordance with the interpretation of US GAAP, 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.
ASC 810,
addresses whether certain types of entities referred to as VIEs, should be
consolidated in a company’s consolidated financial
statements.
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 financial statements of Xin Ao and its
subsidiaries are consolidated into the financial statements of the
Company.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
carrying amount of the VIEs’ assets and liabilities are as follows:
|
|
September
30,
2010
(Unaudited)
|
|
|
June
30,
2010
|
|
Current
assets
|
|
$
|
69,565,802
|
|
|
$
|
44,161,471
|
|
Property,
plant and equipment
|
|
|
27,640,275
|
|
|
|
25,891,066
|
|
Other
noncurrent assets
|
|
|
7,201,286
|
|
|
|
9,029,763
|
|
Total
assets
|
|
|
104,407,363
|
|
|
|
79,082,300
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
(41,274,498
|
)
|
|
|
(20,486,646
|
)
|
Intercompany
payables*
|
|
|
(9,621,507
|
)
|
|
|
(39,124,318
|
)
|
Total
liabilities
|
|
|
(50,896,005
|
)
|
|
|
(59,610,964
|
)
|
Net
assets
|
|
$
|
53,511,358
|
|
|
$
|
19,471,336
|
|
*
Payables to China-ACMH and BVI-ACMH are eliminated upon
consolidation.
The
interim unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
or GAAP, for interim financial information and with the instructions to
Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC
Regulation S-X and consistent with the accounting policies stated in the
Company’s 2010 Annual Report on Form 10-K. Certain information and note
disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and regulations.
Therefore, these financial statements should be read in conjunction with our
audited consolidated financial statements and notes thereto for the year ended
June 30, 2010, included in our Annual Report on Form 10-K filed with the
SEC.
The
interim consolidated financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments that, in the
opinion of management, are necessary to present fairly our consolidated
financial position as of September 30, 2010, and our consolidated results of
operations and cash flows for the three months ended September 30, 2010 and
2009. The results of operations for the three months ended September 30, 2010
are not necessarily indicative of the results to be expected for future quarters
or the full year.
Use of
estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
assessment of the fair value of share-based payments and the collectability of
accounts receivable. Actual results could be materially different from those
estimates, upon which the carrying values were based.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of
China ACM, AHI 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 FASB’s guidance on foreign currency translation, the
Company’s results of operations and cash flows are translated at the average
exchange rates during the period, assets and liabilities are translated at the
exchange rates at the balance sheet dates, and equity is translated at
historical exchange rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
Accumulated
other comprehensive income in the consolidated statements of shareholders’
equity amounted to $4,090,165 and $3,019,983 as of September 30, 2010 and June
30, 2010, respectively. Asset and liability accounts at September 30, 2010 and
June 30, 2010 were translated at RMB 6.70 and RMB 6.81 to $1.00, respectively.
The average translation rates applied to the consolidated statements of income
and cash flows for three months ended September 30, 2010 and 2009 were RMB 6.78
and RMB 6.84 to $1.00, respectively.
Translation
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operations. There were no material
transaction gains or losses for the three months ended September 30, 2010 and
2009.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue
recognition
The
Company recognizes revenue in accordance with FASB issued accounting standards
regarding revenue recognition which specifies that revenue is realized or
realizable and earned when four criteria are met:
|
Ÿ
|
Persuasive
evidence of an arrangement exists (the Company considers its sales
contracts and technical service agreements to be pervasive evidence of an
arrangement);
|
|
Ÿ
|
Delivery
has occurred or services have been
rendered;
|
|
Ÿ
|
The
seller’s price to the buyer is fixed or determinable;
and
|
|
Ÿ
|
Collectability
of payment is reasonably assured.
|
The
Company sells its concrete products and provides concrete technical services
primarily to major local construction companies. Sales agreements are signed
with each customer. The agreements list all terms and conditions with the
exception of delivery date and quantity, which are evidenced separately in
purchase orders. The purchase price of products is fixed in the agreement and
customers are not permitted to renegotiate after the contracts have been signed.
The agreements include a cancellation clause if the Company or customers breach
the contract terms specified in the agreement.
The
Company does not sell products to customers on a consignment basis. There is no
right of return after the product has been injected into the location specified
by the contract and accepted by the customer. The Company recognizes revenue
when the goods and services are provided by the Company and are accepted by the
customer.
Sales
revenue represents the invoiced value of goods, net of a value added tax
(“VAT”). All of the Company’s concrete products that are sold in the PRC are
subject to a Chinese VAT at the rate of 6% of the gross sales
price.
Due to
the fact that the Company uses recycled raw materials to manufacture its
products, the State Administration of Taxation has granted the Company VAT tax
exemption from August 2005 to August 2009 and a two year extension on the VAT
tax exemption from June 2009 to June 2011. The VAT tax collected during the
aforementioned period from the Company’s customers is retained by the Company
and recorded as other subsidy income.
The
Company also provides manufacturing services, technical consulting services and
strategic cooperation including market sharing and equipment rental with other
independently owned concrete companies. The Company signs a Technical Service
Agreement or Strategic Cooperation Agreement with each concrete company, which
specifies all terms and conditions including prices to be charged. Once concrete
products are produced by the concrete company and supplied to builders referred
by the Company or cost savings are realized by the use of technical solutions
provided by the Company, the Company has in effect rendered its service pursuant
to the agreements. The Company recognizes revenue and invoices the concrete
companies monthly for technical service and marketing cooperation on a
per-cubic-meter basis and for equipment rental on a per-mixer truck
basis.
The
Company also earns income from the renting of certain of its vehicles to other
non-related concrete companies. The rental amounts are based on
pre-determined rental rates on a per cubic meter basis.
Shipping and
handling
Shipping
and handling costs related to costs of the raw materials purchased is included
in cost of revenues. Further, transportation costs incurred in the
delivery of the Company’s concrete products are also included in cost of
revenues.
Contingencies
From time
to time, the Company may be subject to proceedings, lawsuits and other claims.
The Company assesses the likelihood of any adverse judgments or outcomes of
these matters as well as potential ranges of probable losses. The Company
records a loss contingency when an unfavorable outcome and the amount of the
loss can be reasonably estimated. Legal expenses incurred related to loss
contingencies are classified as general and administrative expenses in the
period incurred. No significant legal expenses related to any potential
loss contingencies have been incurred during the three months ended September
30, 2010 and 2009.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial
instruments
The
accounting standards regarding fair value of financial instruments and related
fair value measurements define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement, and enhance disclosure
requirements for fair value measures.
The three
levels are defined as follows:
|
Ÿ
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
Ÿ
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
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 the 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 September 30, 2010.
|
|
Carrying
Value
at
September
30,
2010
(Unaudited)
|
|
|
Fair Value Measurement at
September 30, 2010
(Unaudited)
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative
liability – warrants
|
|
$
|
2,766,262
|
|
|
$
|
-
|
|
|
$
|
2,766,262
|
|
|
$
|
-
|
|
Other
than the 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
accounting standard.
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to accounting standard
regarding stock compensation which requires companies to measure compensation
cost for stock-based employee compensation plans at fair value at the grant date
and recognize the expense over the employee’s requisite service period. Under
ASC Topic 718, the Company’s expected volatility assumption is based on the
historical volatility of Company’s stock or the expected volatility of similar
entities. The expected life assumption is primarily based on historical exercise
patterns and employee post-vesting termination behavior. The risk-free interest
rate for the expected term of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.
Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. This accounting standard requires forfeitures to be estimated at the
time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
The
Company estimates the fair value of the awards using the CRR binomial model.
Option pricing models, such as the CRR binomial model, require the input of
highly complex and subjective variables including the expected life of options
granted and the Company’s expected stock price volatility over a period equal to
or greater than the expected life of the options. Because changes in the
subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the CRR
binomial model may not provide an accurate measure of the fair value of the
Company’s employee stock options. Although the fair value of employee stock
options is determined in accordance with the accounting standard aforementioned
using an option-pricing model, which value may not be indicative of the fair
value observed in a willing buyer/willing seller market
transaction.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Concentration of
risk
Cash –
Cash includes cash on hand and demand deposits in accounts maintained with state
owned banks within the PRC and US bank accounts. The Company considers all
highly liquid instruments purchased with original maturities of three months or
less, and money market accounts, to be cash equivalents. As of September 30,
2010 and June 30, 2010, the Company had deposits in excess of federally insured
limits totaling $11,814,376 and $2,340,854, respectively. Also, as of
September 30, 2010 and June 30, 2010, the Company held $0 and $57,580 in
restricted cash in a corporate legal counsel’s trust account respectively, in
accordance with an agreement with investors for the restricted use of preferred
stock dividend and investor relation related expenses. Nonperformance by these
institutions could expose the Company to losses not covered by insurance.
Management reviews the financial condition of these institutions on a periodic
basis. The Company has not incurred any losses on these accounts from
nonperformance by the aforementioned institutions.
Major
customers – For the three months ended September 30, 2010, one customer
accounted for 13% of the company’s total sales. For the three months ended
September 30, 2009, no customer accounted for more than 10% of the company’s
total sales. As of September 30, 2010, one customer accounted for 10% of the
company’s account receivable balance amounted to $5,140,625.
Major
suppliers – For the three months ended September 30, 2010, one supplier
accounted for 15% of the company’s total purchases. For the three months ended
September 30, 2009, no supplier accounted for more than 10% of the company’s
total purchases. As of September 30 and June 30, 2010, no supplier accounted for
more than 10% of the Company’s accounts payable balance
Political
and economic risks – The Company’s operations are carried out in the PRC.
Accordingly, the Company’s business, financial condition, and results of
operations may be influenced by the political, economic, and legal environments
in the PRC, and by the general state of the PRC’s economy. The Company’s
operations in the PRC are subject to specific considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic, and legal environments, and foreign currency exchange. The Company’s
results may be adversely affected by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among
others.
Restricted
cash
Restricted
cash represents a portion of the proceeds received from the June 11, 2009,
Private Placement that was deposited in a trust account held by the Company’s
legal counsel for payment of dividends, investor relations fees, and other
professional fees.
Accounts
receivable
During
the normal course of business, the Company extends unsecured credit to its
customers. Management reviews its accounts receivable each reporting period to
determine if the allowance for doubtful accounts is adequate. An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
probable. Known bad debts are written off against allowance for doubtful
accounts when identified. The Company’s reserves are consistent with its
historical experience and considered adequate by management.
The
ultimate collection of the Company’s accounts receivable may take more than one
year, and any portion of accounts receivable expected to be collected in more
than one year is reflected as noncurrent, net of allowance for doubtful accounts
relating to that portion of the receivables. The bifurcation between current and
noncurrent portions of accounts receivable is based on management’s estimate and
predicated on historical collection experience.
Inventories
Inventories
consist of raw materials and are stated at the lower of cost or market, as
determined using the weighted average cost method. Management compares 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. On an ongoing basis,
inventories are reviewed for potential write-down for estimated obsolescence or
unmarketable inventories equal to the difference between the costs of
inventories and the estimated net realizable value based upon forecasts for
future demand and market conditions. When inventories are written-down to
the lower of cost or market, it is not marked up subsequently based on changes
in underlying facts and circumstances. As of September 30, 2010 and June
30, 2010, the Company determined no reserves for obsolescence were
necessary.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prepayments and
advances
The
Company advances monies to certain suppliers for raw materials, plant and
equipment, and factory rent. These advances are interest free and
unsecured.
Plant and
equipment
Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred while additions, renewals and betterments are
capitalized. Depreciation is provided over the estimated useful life of each
class of depreciable assets and is computed using the straight-line method with
5% residual value.
The
estimated useful lives of assets are as follows:
|
Useful
Life
|
Transportation
equipment
|
10
years
|
Plant
and machinery
|
10
years
|
Office
equipment
|
5
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the
consolidated statements of income. Construction-in-progress represents
labor costs, materials, and capitalized interest incurred in connection with the
construction of a new mixer station inside the current plant facility in and
outside of Beijing. Interest incurred during construction is capitalized into
construction in progress. All other interest is expensed as incurred. No
depreciation is provided for construction in progress until it is completed and
placed into service. Maintenance, repairs and minor renewals are charged to
expense as incurred. Major additions and betterments to property and equipment
are capitalized. Interest incurred during construction is capitalized into
construction in progress. All other interest is expensed as incurred. For the
three months ended September 30, 2010 and 2009, no material interest was
capitalized into construction in progress.
The
Company recognizes an impairment loss when estimated cash flows estimated by
those assets are less than the carrying amounts of the asset. Based on
management review, the Company believes that there were no impairments as of
September 30, 2010 and June 30, 2010.
Accounting for long-lived
assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. We assess
the recoverability of the assets based on the undiscounted future cash flow the
assets are expected to generate and recognize an impairment loss when estimated
undiscounted future cash flow expected to result from the use of the asset plus
net proceeds expected from disposition of the asset, if any, are less than the
carrying value of the asset. When we identify an impairment, we reduce the
carrying amount of the asset to its estimated fair value based on a discounted
cash flow approach or, when available and appropriate, to comparable market
values. As of September 30, 2010 and June 30, 2010, management believes
there was no impairment.
Redeemable convertible
preferred stock
On June
11, 2008, the Company completed the sale to certain accredited investors of
875,000 investment units for gross proceeds of $7,000,000, each unit consisting
of one share of the Company’s Series A Convertible Preferred Stock and one
warrant to purchase two shares of the Company’s common stock. The preferred
stock pays annual dividends of 9% regardless of the Company’s profitability.
Each preferred share is convertible into four shares of common stock. The
Company received net proceeds of approximately $5.3 million after offering
expenses and net of $930,000 restricted cash which was required to be placed in
escrow. Upon the two year anniversary of the closing date, the Company is
required to redeem for cash the outstanding preferred stock, if not previously
converted by the holders, for $8.00 per share plus accrued but unpaid
dividends. Because the Company was required to redeem the preferred
stock on June 11, 2010, if it has not been previously converted by the holders,
in accordance with the accounting standard, the preferred stock is classified
outside of shareholders’ equity. As of June 30, 2010, all redeemable convertible
preferred stock has been converted or redeemed. See Note 11 for
detail.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
accordance with an accounting standard regarding debt with conversion and other
options, the Company allocated the proceeds received between the preferred stock
and the warrants. The resulting discount from the face amount of the
preferred stock is being amortized using the effective interest method over the
period to the required redemption date. After allocating a portion of the
proceeds to the warrants, the effective conversion price of the preferred stock
was higher than the market price at the date of issuance, and therefore, no
beneficial conversion feature was recorded. The dividends on the preferred
stock, together with the periodic accretion of the preferred stock to its
redemption value, are charged to retained earnings.
Income
taxes
The
Company accounts for income taxes in accordance with the accounting standards,
which requires the Company to use the assets and liability method of accounting
for income taxes. Under the assets and liability method, deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Under this accounting standard, the effect on deferred income taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized if it is more likely than
not that some portion, or all of, a deferred tax asset will not be
realized.
The
accounting standard 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. The Company had no material deferred tax amounts as
of September 30, 2010 and June 30, 2010 from its US operation, respectively.
Penalties and interest incurred related to underpayment of income tax are
classified as income tax expense in the period incurred. No significant
penalties or interest relating to income taxes have been incurred for the three
months ended September 30, 2010 and 2009. GAAP also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.
The
Company’ VIE entities have cumulative undistributed earnings of approximately
$33.4 million and $29.5 million as of September 30, 2010 and June 30, 2010,
respectively, included in consolidated retained earnings and will continue to be
indefinitely reinvested in international operations. Accordingly, no
provision has been made for U.S. deferred taxes related to future repatriation
of these earnings.
China ACM
was organized in the United States and has incurred net operating losses of
$253,166 for income tax purposes for the three months ended September 30, 2010,
which excludes $178,302 stock based compensation expenses and gain in fair value
of warrant liabilities of $154,258. The cumulative net operating loss carry
forwards for United States income taxes amounted to $1,239,633. The net
operating loss carry forwards may be available to reduce future years’ taxable
income. These carry forwards will expire, if not utilized, starting from 2027.
Management believes that the realization of the benefits from these losses
appears uncertain due to the Company’s limited operating history and continues
losses for United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. The net change in the valuation allowance for the three
months ended September 30, 2010 was an increase of approximately $86,076.
Management reviews this valuation allowance periodically and makes adjustments
accordingly.
Chinese income
taxes
China-ACMH
and VIEs are governed by the income tax laws of the PRC concerning FIEs, Foreign
Enterprises and various local income tax laws (the “Income Tax
Laws”).
Xin Ao
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 March 31,
2007 and an income tax reduction from 25% to 15% from January 1, 2009 to
December 31, 2011 as granted by the State Administration of Taxation
of the PRC. Beginning January 1, 2009, the new Chinese Enterprise Income Tax
(“EIT”) law replaced the existing laws for Domestic Enterprises (“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.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, see
note 12 for further discussion.
The
Company adopted accounting policies in accordance with U.S. GAAP with regard to
provisions, reserves, inventory valuation method, and depreciation that are
consistent with requirements under Chinese income tax laws. The Company had
deferred tax assets of $0 and $127,741 as of September 30, 2010 and June 30,
2010 from its Chinese operations, respectively. The deferred tax asset
balance was acquired by the VIE entity’s (XinAo) operating station through the
four-year operating lease agreement (see Note 15) during the fiscal year ended
June 30, 2010. The lease agreement stated the leasor, as part of the lease
agreement, would transfer its own operating loss carry forward to VIE entity to
offset the net income from the station. The net operating loss carry forward
resulted in $668k of deferred tax assets on the VIE entity’s book and the
effective rental payment was therefore reduced by the same amount. For the three
months ended September 30, 2010, the deferred tax assets of $127,741 had been
used to offset the tax liability.
The
deferred tax assets and allowance are as followed:
China
ACM
|
|
|
|
Deferred
tax assets, July 1, 2009
|
|
$
|
-
|
|
NOL
|
|
|
742,000
|
|
Income
tax rate
|
|
|
34
|
%
|
Deferred
tax assets
|
|
|
252,280
|
|
Allowance
|
|
|
(252,280
|
)
|
Deferred
tax assets, June 30, 2010
|
|
|
-
|
|
NOL
|
|
|
253,166
|
|
Income
tax rate
|
|
|
34
|
%
|
Deferred
tax assets
|
|
|
86,076
|
|
Allowance
|
|
|
(86,076
|
)
|
Deferred
tax assets, September 30, 2010 (Unaudited)
|
|
$
|
-
|
|
|
|
|
|
|
Xin
Ao
|
|
|
|
|
Deferred
tax assets, July 1, 2009
|
|
$
|
-
|
|
NOL
acquired from Xin Ao’s station through rental agreement
|
|
|
2,671,644
|
|
Current
year’s net income from the station
|
|
|
(2,160,680
|
)
|
NOL
as of June 30, 2010
|
|
|
510,964
|
|
Tax
rate for such station
|
|
|
25
|
%
|
Deferred
tax assets, June 30, 2010
|
|
|
127,741
|
|
Current
year’s net income from the station
|
|
|
(705,477
|
)
|
NOL
as of September 30, 2010
|
|
|
-
|
|
Tax
rate for such station
|
|
|
25
|
%
|
Deferred
tax assets, September 30, 2010 (Unaudited)
|
|
|
-
|
|
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 three months ended September 30, 2010 and 2009,
respectively.
Value Added
Tax
Enterprises
or individuals, who sell commodities, engage in repair and maintenance, or
import and export goods in the PRC are subject to a value added tax. The
standard VAT rate is 6% of gross sales for the Company’s industry. A credit is
available whereby VAT paid on the purchases of raw materials used in the
production of the Company’s finished products can be used to offset the VAT due
on sales of finished products. Due to the fact that the Company uses recycled
raw materials to manufacture its products, the State Administration of Taxation
has granted the Company VAT exemption from August 2005 through to August 2009
and another two-year extension from June 2009 through June 2011.
Research and development
costs
Research
and development costs are expensed as incurred. The cost of materials and
equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and
development, marketing, or sales, are classified as property and equipment, and
depreciated over their estimated useful lives. Research and development expenses
for the three months ended September 30, 2010 and 2009 were $147,900 and
$37,562, respectively.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Earnings per
share
The
Company reports earnings per share in accordance with the accounting standards,
which requires presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing such
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts, such as warrants, options and convertible preferred stock, to
issue common stock were exercised and converted into common stock. Dilutive
securities having an anti-dilutive effect on diluted earnings per share are
excluded from the calculation.
Comprehensive
income
The
accounting standard for reporting and display of comprehensive income and its
components in its financial statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
providence as other financial statements. The accompanying consolidated
financial statements include the provision of this accounting standard, and
therefore, comprehensive income consists of net income, unrealized gains and
losses from marketable securities, and foreign currency translation
adjustments.
Recently issued accounting
pronouncements
In June
2009, the FASB issued authoritative guidance to eliminate the exception to
consolidate a qualifying special-purpose entity, change the approach to
determining the primary beneficiary of a variable interest entity and require
companies to more frequently re-assess whether they must consolidate variable
interest entities. Under the new guidance, the primary beneficiary of a variable
interest entity is identified qualitatively as the enterprise that has both (a)
the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance, and (b) the obligation
to absorb losses of the entity that could potentially be significant to the
variable interest entity or the right to receive benefits from the entity that
could potentially be significant to the variable interest entity. This guidance
becomes effective for the Company at its fiscal 2011 year-end and interim
reporting periods thereafter. The Company does not expect this guidance to have
a material impact on its consolidated financial statements.
In July 2010, the FASB
issued Accounting Standards Update 2010-20 which amends “
Receivables”
(Topic 310)
.
ASU 2010-20 is
intended to provide additional information to assist financial statement users
in assessing an entity’s risk exposures and evaluating the adequacy of its
allowance for credit losses. The disclosures as of the end of a reporting period
are effective for interim and annual reporting periods ending on or after
December 15, 2010. The disclosures about activity that occurs during a reporting
period are effective for interim and annual reporting periods beginning on or
after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not
require, comparative disclosures for earlier reporting periods that ended before
initial adoption. However, an entity should provide comparative disclosures for
those reporting periods ending after initial adoption. The Company does not
expect this ASU to have a material impact on its consolidated financial
statements.
In
September 2010, FASB issued Accounting Standard Update 2010-25, “Plan
Accounting—Defined Contribution Pension Plans (Topic 962): Reporting Loans to
Participants by Defined Contribution Pension Plans” or ASU 2010-25. The ASU
clarifies how loans to participants should be classified and measured by defined
contribution plans and how IFRS compare to these provisions. The amendments in
this update are effective for fiscal years ending after December 15, 2010. The
Company does not expect the adoption of this ASU to have a material impact on
the Company’s consolidated financial statements.
Note
3 – Supplemental disclosure of cash flow information
For the
three months ended September 30, 2010 and 2009, the Company paid interest in the
amount of $898 and $118,720, respectively.
Cash
payments for income taxes for the three months ended September 30, 2010 and 2009
were $51,282 and $1,682,537, respectively.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Non-cash transactions in the
years ended September 30, 2010 and 2009
For the
three months ended September 30, 2010 and 2009, the accretion of the
discount on redeemable preferred stock amounted to approximately $0 and
$191,738, respectively, and has been included in the consolidated
statements of shareholders’ equity.
For the
three months ended September 30, 2010, no warrant was converted. For the
three months ended September 30, 2009, 57,500 shares of common stock underlying
warrants were converted into 51,052 shares of common stock by the exercise of
such warrants on a cashless basis.
For the
three months ended September 30, 2009, 63,125 shares of redeemable convertible
preferred stock were converted into 252,500 shares of common stock on a cashless
basis
Note
4 – Accounts receivable
Accounts
receivable are generated from concrete products sold, vehicle rental services
provided to other unrelated concrete companies, and technological consulting
services provided to the Company’s customers and other concrete companies with
which the Company conducts business. The payment terms are defined in the
respective contracts. Over 73% of the Company’s receivables are due within a
year by contract and are classified as current assets on the consolidated
balance sheets. For certain large construction projects that can take several
years to complete, the Company provides extended payment terms to the general
contractors. These contractors are usually large state-owned builders with good
credit ratings. At the end of each period, the Company evaluates the structure
and collectability of accounts receivable and for these receivables that are
past due or not being paid according to payment terms, the Company takes
appropriate actions including seeking legal resolution in a court of law, for
its collection efforts.
As of
September 30, 2010 and June 30, 2010, accounts receivable and allowance for
doubtful accounts consisted of the following:
|
|
September 30,
2010
(Unaudited)
|
|
|
June 30, 2010
|
|
Accounts
receivable, current
|
|
$
|
51,720,170
|
|
|
$
|
36,528,776
|
|
Less: allowance
for doubtful accounts, current
|
|
|
(618,170
|
)
|
|
|
(456,085
|
)
|
Net
accounts receivable, current
|
|
|
51,102,000
|
|
|
|
36,072,691
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, non-current
|
|
|
1,599,593
|
|
|
|
368,978
|
|
Less: allowance
for doubtful accounts, non-current
|
|
|
(19,119
|
)
|
|
|
(4,607
|
)
|
Net
accounts receivable, non-current
|
|
|
1,580,474
|
|
|
|
364,371
|
|
Total
accounts receivable, net
|
|
$
|
52,682,474
|
|
|
$
|
36,437,062
|
|
The
following table consists of allowance for bad debts:
Allowance
for bad debts, current as July1, 2009
|
|
$
|
120,986
|
|
Bad
debt expense
|
|
|
27,506
|
|
Effect
of foreign currency translation
|
|
|
(286
|
)
|
Allowance
for bad debts, current as September 30, 2009 (Unaudited)
|
|
|
148,206
|
|
Reclassified
from non-current
|
|
|
398,137
|
|
Bad
debt recovery
|
|
|
(92,638
|
)
|
Effect
of foreign currency translation
|
|
|
2,380
|
|
Allowance
for bad debt, current as June 30, 2010
|
|
|
456,085
|
|
Bad
debt expense
|
|
|
152,795
|
|
Effect
of foreign currency translation
|
|
|
9,290
|
|
Allowance
for bad debt, current as September 30, 2010 (Unaudited)
|
|
$
|
618,170
|
|
Allowance
for bad debts, non-current as July 1, 2009
|
|
$
|
328,563
|
|
Bad
debt expense
|
|
|
72,915
|
|
Effect
of foreign currency translation
|
|
|
(728
|
)
|
Allowance
for bad debts, non-current at September 30, 2009
(Unaudited)
|
|
|
400,750
|
|
Reclassified
to current
|
|
|
(398,137
|
)
|
Bad
debt expense
|
|
|
865
|
|
Effect
of foreign currency translation
|
|
|
1,129
|
|
Allowance
for bad debt, non-current as June 30, 2010
|
|
|
4,607
|
|
Bad
debt expense
|
|
|
14,263
|
|
Effect
of foreign currency translation
|
|
|
249
|
|
Allowance
for bad debt, non-current as September 30, 2010
(Unaudited)
|
|
$
|
19,119
|
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
5 – Plant and equipment
Plant and
equipment consist of the following as of September 30, 2010 and June 30,
2010:
|
|
September 30,
2010
(Unaudited)
|
|
|
June 30, 2010
|
|
Transportation
equipment
|
|
$
|
22,771,405
|
|
|
$
|
20,502,987
|
|
Plant
and machinery
|
|
|
14,966,797
|
|
|
|
13,615,455
|
|
Buildings
|
|
|
135,961
|
|
|
|
123,702
|
|
Office
equipment
|
|
|
134,516
|
|
|
|
125,550
|
|
Construction-in-progress
|
|
|
2,148,721
|
|
|
|
3,089,785
|
|
Total
|
|
|
40,157,400
|
|
|
|
37,457,479
|
|
Less:
accumulated depreciation
|
|
|
(11,959,031
|
)
|
|
|
(10,969,125
|
)
|
Plant
and equipment, net
|
|
$
|
28,198,369
|
|
|
$
|
26,488,354
|
|
Construction-in-progress
represents labor costs, materials, and capitalized interest incurred in
connection with the construction of a new mixer station inside and outside of
the current plant facility in Beijing. No depreciation is provided for
construction-in-progress until it is completed and placed into service. Most
construction-in-progress is related to assembling of portable machinery the
Company purchased with cash and in general the assembling process can be done in
less than three weeks. Therefore, no interest expense was capitalized as the
capitalized interest was not significant.
Depreciation
expense for the three months ended September 30, 2010 and 2009 amounted to
$862,140 and $668,020 respectively.
Note
6 – Prepayments (short-term and long-term)
Short-term
prepayments are primarily comprised of short-term portion of the factory rental
prepayments the Company made (see Note 15 for more information on the factory
rental) and advances on inventory purchases. Short-term prepayments as of
September 30 and June 30, 2010 and 2009 consisted of the following:
|
|
September 30,
2010
(Unaudited)
|
|
|
June 30, 2010
|
|
Advances
on inventory purchases
|
|
$
|
1,589,480
|
|
|
$
|
691,364
|
|
Current
portion of rent prepayments
|
|
|
2,114,926
|
|
|
|
2,112,823
|
|
Others
|
|
|
17,500
|
|
|
|
17,500
|
|
Total
short-term prepayments
|
|
$
|
3,721,906
|
|
|
$
|
2,821,687
|
|
Long-term
prepayments represent the long-term factory rental prepayments the Company has
made. As of September 30, 2010 and June 30, 2010, the Company prepaid $4,052,422
and $4,414,391 long-term prepayment, respectively.
Note
7 – Short term loans
Short
term loans represent amounts due to banks and the Company’s employees that are
due within one year or on demand. As of September 30 and June 30, 2010, the
outstanding balances on these loans were $10,508,940 and $0, respectively, and
these loans consisted of the following:
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
September 30,
2010
(Unaudited)
|
|
|
June 30, 2010
|
|
Loan
from Huaxia Bank. interest rate of 5.841% per annum, due August 18, 2011,
guaranteed loan.
|
|
$
|
1,497,000
|
|
|
$
|
-
|
|
Loan
from Shanghai Pufa Bank. interest rate of 5.841% per
annum, due September 29, 2011, guaranteed
loan
|
|
|
8,982,000
|
|
|
|
-
|
|
Loan
from an employee, effective interest rate of 0% per annum, due upon
demand, unsecured.
|
|
|
29,940
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
short term loans
|
|
$
|
10,508,940
|
|
|
$
|
-
|
|
Interest
expense on short-term loans for the three months ended September 30, 2010 and
2009 amounted to $11,446 and $23,753, respectively.
Note
8 – Derivative liability
Effective
July 1, 2009, the Company adopted a FASB accounting standard, which defines
determining whether an instrument (or embedded feature) is indexed to an
entity’s own stock. This accounting standard specifies that a contract
that would otherwise meet the definition of a derivative but is both (a) indexed
to the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. This accounting standard provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer’s own stock and thus able to qualify for the scope
exception.
As a
result of adopting this accounting standard, warrants previously treated as
equity pursuant to the derivative treatment exemption are no longer afforded
equity treatment because the warrants have downward ratchet provision on the
exercise price. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.
As such,
effective July 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in June 2009. On July 1, 2009,
the Company reclassified from paid-in capital, as a cumulative effect
adjustment, $1,965,945 to beginning retained earnings and $3,337,225 to warrant
liabilities to recognize the fair value of such warrants. The fair value of the
warrants was $2,766,262 and $2,920,520 on September 30 and June 30, 2010.
The Company recognized a $154,258 gain and $7,273,441 loss from the change
in fair value for the three months ended September 30, 2010 and 2009,
respectively.
These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the CRR Binomial
Model using the following assumptions:
|
|
September 30, 2010
(Unaudited)
|
|
|
June 30, 2010
|
|
Annual
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected
life (years)
|
|
|
2.75
|
|
|
|
3.00
|
|
Risk-free
interest rate
|
|
|
0.57
|
%
|
|
|
0.98
|
%
|
Expected
volatility
|
|
|
80
|
%
|
|
|
80
|
%
|
Expected
volatility is based on historical volatility of a similar U.S. public company
due to limited trading history of the Company’s common stock. The Company
has no reason to believe future volatility over the expected remaining life of
these warrants is likely to differ materially from historical volatility. The
expected life is based on the remaining term of the warrants. The risk-free
interest rate is based on U.S. Treasury securities according to the remaining
term of the warrants. The expected dividend yield was based on the Company’s
current and expected dividend policy.
The
conversion option does not need to be separated from the redeemable convertible
preferred stock and accounted for as derivative liability because it has the
risks and rewards of an equity instrument and clearly and closely related to the
risks and rewards of the redeemable convertible preferred stock, which has been
accounted for as an equity instrument.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
redeemable convertible preferred stock contains residual equity interest, which
on dissolution and liquidation of the Company, entitle the preferred
stockholders to liquidation value and accumulated dividends, and rank equal with
the common shareholders on an as if converted basis. A host contract is
considered an equity instrument if it encompasses a residual interest in an
entity.
Note
9 – Related party transactions
Other payables –
shareholders
Beginning
in July 2007, Mr. He Weili, a 20.10% shareholder, leased office space to the
Company at approximately the current fair market value from July 2009 to June
2010 with annual payments of $172k. For the three months ended September
30, 2010 and 2009, the Company recorded rent expense from the shareholder in the
amount of approximately $43,725 and $43,215, respectively. As of September 30
and June 30, 2010, approximately $66k and $4k, respectively, remained unpaid,
and is included in other payables - shareholders.
The
Company’s 30.1% and 20.1% shareholders, Mr. Han Xianfu and Mr. He Weili,
respectively, together loaned $750,900 to BVI-ACM on March 12, 2008, for the
entity’s cash flow purposes. The loan is non-interest bearing, unsecured, and is
payable in cash on demand.
Total
other payables - shareholders as of September 30, 2010 and June 30, 2010 as
follows:
|
|
September 30,
2010
(Unaudited)
|
|
|
June 30, 2010
|
|
Han
Xianfu, shareholder
|
|
$
|
450,540
|
|
|
$
|
450,540
|
|
He
Weili, shareholder
|
|
|
366,716
|
|
|
|
322,104
|
|
Total
other payable – shareholders
|
|
$
|
817,256
|
|
|
$
|
772,644
|
|
Note
10 – Income taxes
Corporate income taxes for
China
Companies,
established before March 16, 2007, will continue to enjoy tax holiday treatment
approved by the local Chinese government for a grace period of either for the
next five years or until the tax holiday term is completed, whichever is sooner.
These companies will pay the standard tax rate when the grace period expires.
Xin Ao had received its tax holiday treatment until December 2007. During
the fourth quarter of the last year, Xin Ao has 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 a result of this certification, Xin Ao's
effective income tax rate for China has been reduced to 15% from 25%. The new
tax rate will be retroactive to January 1, 2009 and will be effective for three
years, through December 31, 2011.
Xin Ao
was granted income tax exemption from January 1, 2003 to March 31, 2007.
Beginning on January 1, 2009, Xin Ao and its subsidiaries were subject to an EIT
rate of 25%. Xin Ao was granted a 10% tax deduction on 90% of the total
sales revenue by the local authority due to Xin Ao’s utilization of recycled raw
materials. Beginning on January 1, 2009, Xin Ao and its subsidiaries were
subject to an EIT rate of 15%. For the three months ended September 30,
2010 and 2009, the provision for income taxes amounted to $726,226 and $536,814,
respectively.
The
estimated tax savings for the three months ended September 30, 2010 and 2009
amounted to $366,572 and $357,178, respectively. The net effect on earnings per
share attributable to controlling interest had the income tax been applied would
decrease earnings (losses) per share from $0.19 to $0.17 for the three months
ended September 30, 2010, and ($0.44) to ($0.47) for the three months ended
September 30, 2009.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended September 30, 2010 and 2009:
|
|
September 30,
2010
(Unaudited)
|
|
|
September 30,
2009
(Unaudited)
|
|
U.S.
statutory rates
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign
income not recognized in the U.S.
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
China
income taxes
|
|
|
25
|
%
|
|
|
25
|
%
|
China
income tax exemption
|
|
|
(10
|
)%
|
|
|
(10
|
)%
|
Other
(a)
|
|
|
3
|
%
|
|
|
(29
|
)%
|
Effective
income tax rates
|
|
|
18
|
%
|
|
|
(14
|
)%
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a)The 3%
and (29%) represents certain expenses in the amount of $339,462 and $7,413,651
incurred in the U.S. entity that are not deductible for PRC income tax for the
three months ended September 30, 2010 and 2009, respectively.
Taxes payable consisted of the following:
|
|
|
|
|
|
|
|
|
September, 30,
2010
(Unaudited)
|
|
|
June, 30, 2010
|
|
Income
taxes payable
|
|
$
|
2,115,607
|
|
|
$
|
1,536,610
|
|
Other
taxes payables
|
|
|
105,257
|
|
|
|
33,304
|
|
Total
taxes payable
|
|
$
|
2,220,864
|
|
|
$
|
1,569,914
|
|
Note
11 – Shareholders’ equity
On June
11, 2008, the Company completed an offering (the “Offering”) on the sale of
875,000 of investment units for a total of $7,000,000, each unit consisting of
one share of the Company’s Series A Convertible Preferred Stock, $0.001 par
value per share, and one (1) five year warrant to purchase two shares of Common
Stock (the “Warrants”). Each preferred share is convertible into four shares of
common stock at $8 per share. Additionally, each holder is entitled to
cumulative dividends equal to 9% annually, payable in cash, irrespective of the
profitability of the Company.
The
Company received net proceeds of approximately $5,223,291 with $930,000 in an
escrow and after payment of certain fees and expenses. $497,500 was paid
to Maxim Group LLC (“Maxim”) who served as the placement agent for the
transaction, $9,500 was paid to American Stock Transfer & Trust Company as a
transfer agent fee, $60,000 was paid to the attorney, and $45,000 was paid for a
finance fee for the purchasers in connection with the transaction. These
offering costs approximating $602,500 were charged to paid-in capital. The
allocation of the proceeds from the investment to a relative fair value basis
resulted in the allocation of $5,798,000 to the Series A Preferred and
$1,202,000 to the warrants.
The
Company also issued to the placement agent a warrant to purchase an aggregate of
245,000 shares of common stock with an exercise price of $2.40 per share with a
term of five years. The warrants are exercisable on a cashless basis, in whole
or in part, at an exercise price equal to $2.40 per share. The Company may call
the warrants for redemption at any time after the warrants become exercisable
(i) at a price of $0.01 per warrant; (ii) upon not less than 30 days’ prior
written notice of redemption to each warrant holder; and (iii) if, and only if,
the last sale price of the common stock equals or exceeds $5.00 per share, for
any twenty (20) trading days within a thirty (30) consecutive trading day period
ending on the third business day prior to the notice of redemption to warrant
holders.
The value
of the warrants issued to the placement agent was $169,345 calculated by using
the Cox-Ross-Rubinstein (“CRR”) Binomial Model. The fair value of these warrants
of $169,345 was recognized as offering expense and charged to additional paid-in
capital. The value of the warrants was determined using the CRR Binomial Model
using the following assumptions: volatility 75%; risk-free interest rate of
3.49% of the Investor Warrants, the Placement and Advisory Warrants; dividend
yield of 0%, and expected term of 5 years of the Investor Warrants and the
Placement and Advisory Warrants. The volatility of the Company’s common stock
was estimated by management based on the historical volatility of a similar U.S.
public company due to limited trading history of the Company’s common stock. The
risk-free interest rate was based on the Treasury Constant Maturity Rates
published by the U.S. Federal Reserve for periods applicable to the expected
life of the warrants. The expected dividend yield was based on the Company’s
current and expected dividend policy and the expected term is equal to the
contractual life of the warrants.
Following
is a summary of the status of warrants outstanding:
Outstanding Warrants
|
Exercise Price
|
|
Number
|
|
Average Remaining
Contractual Life
|
US
$2.40
|
|
|
678,875
|
|
2.69 years
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Following
is a summary of the activities of Common Stocks underlying Warrant:
|
|
Number of Common
stock underlying
Warrants
|
|
Outstanding
as of June 30, 2009
|
|
|
1,995,000
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
(637,250
|
)
|
Outstanding
as of June 30, 2010
|
|
|
1,357,750
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of September 30, 2010 (unaudited)
|
|
|
1,357,750
|
|
In
connection with the private placement, the Company agreed to file a registration
statement to register the warrants and common stock issuable upon conversion of
the preferred stock and exercise of the warrants, as defined. The registration
statement was declared effective in January 2009; the Company incurred $140,000
in penalties for late registration and was paid based on the contract in
connection with the private placement.
On July
16, 2009, the Company issued 650,988 shares of its common stock, at a price of
$2.30 per share, to its employees. The Company received net proceeds of
approximately $1.5 million.
On March
1, 2010, the Company closed an offering of 2,000,000 shares of its common stock,
at a price of $4.6 per share, less than 1% underwriting commission. The
Company received net proceeds of approximately $8.4 million after deducting a
total of $0.82 million underwriting commission, legal counsel, and other
expenses directly related to the offering. Also, the Company issued an
additional 300,000 shares of common stock to cover over-allotments on March 22,
2010 and received net proceeds of $1.2 million less $0.14 million underwriter
commission and other direct expenses.
Employee Stock
Options
On
October 3, 2008, the Company entered into a one-year agreement with one of the
Company’s board of directors. In connection with his services, the Company
issued an aggregate of 50,000 options of the Company’s common stock at an
exercise price of $2.90 per share. The options vest in equal quarterly
installments over the first year of the agreement. As of September 30, 2010, all
of the 50,000 options have been fully vested.
On
December 1, 2008, the Company entered into a three-year agreement with
the Company’s previous Chief Financial Officer. In connection with his
services, the Company issued a total of 200,000 options of the Company’s
common stock from the option bonus pool. The option bonus pool consists of four
equal tranches of 50,000 options, with the first tranche of 50,000 options
carrying an exercise price of $3.00, the second tranche of 50,000 options
carrying an exercise price of $3.50, the third tranche of 50,000 options
carrying an exercise price of $4.00, and the fourth tranche of 50,000 options
carrying an exercise price of $4.50. A quarter (25%) of each tranche of options
will vest at the end of each twelve-month period of the agreement. Upon
termination of his service in the third quarter, in addition to the 50,000
vested options per the vesting schedule described above, the Company agreed to
vest additional 50,000 shares of options (12,500 shares from each tranche)
immediately.
In
January, 2010, the Company appointed a new CFO who is also the President of the
Company. In connection with his services, the Company granted 12,500 option
vesting on February 23, 2010 with an exercise price of $4.64, 35,000 share
options vesting on March 5, 2010 with an exercise price $5.38, 15,000 option
vesting on June 30, 2010 contingent upon a performance condition and exercise
price at $5.38, and 50,000 options vesting on July 15, 2010 contingent upon a
performance condition and exercise price at $5.38. As of September 30, 2010, the
15,000 and 50,000 contingent options were forfeited due to failure to meet
performance condition.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company valued the stock options by the CRR binomial model with the following
assumptions:
|
|
Expected
|
|
|
Expected
|
|
|
Dividend
|
|
|
Risk Free
|
|
|
Grant Date
|
|
|
|
Term
|
|
|
Volatility
|
|
|
Yield
|
|
|
Interest Rate
|
|
|
Fair Value
|
|
Director
|
|
|
5.31
|
|
|
|
75
|
%
|
|
|
0
|
%
|
|
|
1.41
|
%
|
|
$
|
2.90
|
|
CFO
and president
|
|
|
5.50
|
|
|
|
44
|
%
|
|
|
0
|
%
|
|
|
1.70
|
%
|
|
$
|
5.95
|
|
The
following is a summary of the option activity:
|
|
Number of options
|
|
|
Intrinsic Value
|
|
Outstanding
as of June 30, 2009
|
|
|
250,000
|
|
|
|
|
|
Granted
|
|
|
112,500
|
|
|
|
|
|
Forfeited
|
|
|
(165,000
|
)
|
|
|
|
|
Exercised
|
|
|
(100,000
|
)
|
|
|
|
|
Outstanding
as of June 30, 2010
|
|
|
97,500
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
Outstanding
as of September 30, 2010 (Unaudited)
|
|
|
97,500
|
|
|
$
|
-
|
|
Following
is a summary of the status of options outstanding at September 30,
2010:
Outstanding options
|
|
|
Exercisable options
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
remaining
|
|
|
Average
|
|
|
|
|
|
average
|
|
Average
|
|
|
|
|
|
contractual life
|
|
|
Exercise
|
|
|
|
|
|
exercise
|
|
Exercise price
|
|
|
Number
|
|
|
(years)
|
|
|
price
|
|
|
Number
|
|
|
price
|
|
$
|
2.90
|
|
|
|
50,000
|
|
|
|
8.02
|
|
|
$
|
2.90
|
|
|
|
50,000
|
|
|
$
|
2.90
|
|
$
|
4.64
|
|
|
|
12,500
|
|
|
|
9.51
|
|
|
|
4.64
|
|
|
|
12,500
|
|
|
|
4.64
|
|
$
|
5.38
|
|
|
|
35,000
|
|
|
|
9.51
|
|
|
|
5.38
|
|
|
|
35,000
|
|
|
|
5.38
|
|
For the
three months ended September 30, 2010 and 2009, the Company recognized
approximately $0 and $41,355, respectively, as compensation expenses for its
stock option plan.
Restricted Stock
Awards
Restricted
stocks awarded are measured based on the market price on the grant date. The
Company has awarded restricted shares of common stocks to the board of
directors, senior management, and consultants. For the three months ended
September 30, 2009, the Company granted 10,000 shares of restricted stock and
recognized $18,800 of related compensation expense.
On August
30, 2010, the Company engaged a consulting firm for investor relation for six
months, and granted 120,000 shares of restricted stock, total fair value
amounted to $411,600 on the grant date, and amortize through the period of
services. For the three months ended September 30, 2010, the Company recognized
$178,302 of related compensation expenses. As of September 30 and June 30,
2010, the Company had unrecognized share-based compensation cost of $427,828 and
$194,530 associated with these awards, respectively. Following is a
summary of the restricted stock awards for the three months ended
September 30, 2010.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nonvested
as of June 30, 2009
|
|
|
-
|
|
Granted
|
|
|
100,000
|
|
Vested
|
|
|
37,500
|
|
Nonvested
as of June 30, 2010
|
|
|
62,500
|
|
Granted
|
|
|
120,000
|
|
Vested
|
|
|
85,000
|
|
Nonvested
as of September 30, 2010 (Unaudited)
|
|
|
97,500
|
|
Note
12 – 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 $12 million as of September 30, 2010 and June 30,
2010.
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
13 – Earnings per share
The
following is a reconciliation of the basic and diluted earnings per share
computation for the three months ended September 30, 2010 and 2009:
|
|
September
30, 2010
(Unaudited)
|
|
|
September
30, 2009
(Unaudited)
|
|
Basic earnings
(loss) per share
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$
|
3,308,321
|
|
|
$
|
(4,863,801
|
)
|
Weighted
average shares outstanding-Basic
|
|
|
17,518,544
|
|
|
|
10,985,405
|
|
Earnings
(loss) per share-Basic
|
|
$
|
0.19
|
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$
|
3,308,321
|
|
|
$
|
(4,863,801
|
)
|
Add:
Dividends on preferred stock
|
|
|
-
|
|
|
|
149,126
|
|
Add:
Accretion on preferred stock
|
|
|
-
|
|
|
|
191,738
|
|
Net
income (loss) for diluted EPS
|
|
$
|
3,308,321
|
|
|
$
|
(4,522,937
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-Basic
|
|
|
17,518,544
|
|
|
|
10,985,405
|
|
Restricted
stock
|
|
|
65,000
|
|
|
|
-
|
|
Warrants
and options
|
|
|
439,271
|
|
|
|
-
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted
shares outstanding-Diluted
|
|
|
18,022,815
|
|
|
|
10,985,405
|
|
Earnings
(loss) per share-Diluted
|
|
$
|
0.18
|
|
|
$
|
(0.44
|
)
|
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June
11, 2008, the Company issued 875,000 shares of preferred stock, each of which
can be converted into four shares of common stock. The convertible preferred
stock is mandatorily redeemable for cash at the end of two years if not yet
converted. As of June 30, 2010, 865,625 shares preferred stock had been
converted into 3,462,500 of common stock and 9,375 shares of preferred stock had
been redeemed for $75,000. Dividends on the preferred stock and accretion
of the initial discount from the redemption value of the preferred stock, both
of which are charged to retained earnings, are subtracted from net income to
determine net income available to common shareholders for the purposes of
computing basic earnings per share. In calculating diluted earnings per share,
the convertible preferred stock is treated as common stock equivalents on an
as-converted basis. The dividends and accretion on the preferred stock are added
back to the net income available to common shareholders for calculating diluted
earnings per share, as if the preferred stock were converted at the beginning of
the period. For the period ended September 30, 2010, 678,875 warrants at
an exercise price of $2.40 per share were included in the diluted EPS
calculation, which under treasury stock method resulted in an additional 430,530
of common stocks, 50,000 shares of option and 65,000 of restricted stock vested
but not issued were included in the diluted EPS calculation.
Note
14 – Employee pension
The
Company offers a discretionary pension fund, a defined contribution plan, to
qualified employees. The pension includes two parts: the first to be paid by the
Company is 20% of the employee’s actual salary in the prior year. The other
part, paid by the employee, is 8% of the actual salary. The Company’s
contributions of employment benefits, including pension were approximately
$71,253 and $17,681 for the three months ended September 30, 2010 and 2009,
respectively.
Note
15 – Operating leases
The
Company entered into a lease agreement for a manufacturing plant with an
unrelated party from October 1, 2008 to September 30, 2013 with annual payments
of $197k. Further, the Company agreed to lease office space from the
Company’s shareholder, Mr. He Weili, from July 2010 to June 2011 with annual
payment of $172k. The rent is valued at fair value from the main property
management.
The
Company entered into three five-year and one four-year operating lease
agreements during the fourth quarter of 2009. The lease payments are for
four manufacturing plants with various unrelated parties for a total monthly
payment of $213k. Certain lease payments have been pre-paid by transferring the
Company’s long-term accounts receivable to the lessors as the Company believes
that a lump-sum pre-payment from aging receivable in exchange for agreeing to no
increase in the future lease will benefit its future operation.
Total
operating lease expense for the three months ended September 30, 2010 and 2009
was $707,070 and $595,027, respectively, and is included in cost of revenue,
selling, general, and administrative expenses. Future annual lease payments, net
of rent prepayment made as of September 30, 2010, under non-cancelable operating
leases with a term of one year or more consist of the following:
Years ending September
30,
|
|
Amount
|
|
2011
|
|
$
|
738,890
|
|
2012
|
|
|
938,780
|
|
2013
|
|
|
938,780
|
|
2014
|
|
|
627,355
|
|
2015
|
|
|
-
|
|
Thereafter,
|
|
|
-
|
|
Note
16 - Business Segments
The
Company’s operations are classified into four principal reportable segments that
provide different products or services. The Company is engaged in the
business of selling concrete, manufacturing concrete, providing technical
support services and others, which include mixer rental, sales of materials and
marketing cooperation. Separate segment is required because each business unit
is subject to different production and technology strategies.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the
three months ended September 30, 2010:
|
|
Sales of
concrete
|
|
|
Manufacturing
services
|
|
|
Technical
services
|
|
|
Mixer
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net
sales
|
|
$
|
25,320,947
|
|
|
$
|
4,471,777
|
|
|
$
|
1,159,060
|
|
|
$
|
5,298
|
|
|
$
|
-
|
|
|
$
|
30,957,082
|
|
Depreciation
|
|
|
(301,447
|
)
|
|
|
(526,421
|
)
|
|
|
(32
|
)
|
|
|
-
|
|
|
|
(34,240
|
)
|
|
|
(862,140
|
)
|
Segment
profit
|
|
|
1,632,899
|
|
|
|
1,228,893
|
|
|
|
1,113,444
|
|
|
|
5,268
|
|
|
|
(2,049,028
|
)
|
|
|
1,931,476
|
|
Other
income (expenses)
|
|
|
1,519,257
|
|
|
|
268,307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
315,507
|
|
|
|
2,103,071
|
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,929
|
|
|
|
4,929
|
|
Interest
expenses
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,906
|
)
|
|
|
(12,906
|
)
|
Capital
expenditure
|
|
|
(59,554
|
)
|
|
|
(10,517
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(70,083
|
)
|
Total
assets as of September 30, 2010 (Unaudited)
|
|
$
|
94,031,439
|
|
|
$
|
16,606,313
|
|
|
$
|
-
|
|
|
$
|
19,675
|
|
|
$
|
-
|
|
|
$
|
110,657,427
|
|
For the
three months ended September 30, 2009:
|
|
Sales of
concrete
|
|
|
Manufacturing
services
|
|
|
Technical
services
|
|
|
Mixer
rental
|
|
|
Corporate
|
|
|
Total
|
|
Net
sales
|
|
$
|
14,886,757
|
|
|
$
|
2,805,614
|
|
|
$
|
1,244,895
|
|
|
$
|
543,870
|
|
|
$
|
-
|
|
|
$
|
19,481,136
|
|
Depreciation
|
|
|
(290,725
|
)
|
|
|
(324,148
|
)
|
|
|
(1,274
|
)
|
|
|
(45,808
|
)
|
|
|
(6,065
|
)
|
|
|
(668,020
|
)
|
Segment
profit
|
|
|
428,516
|
|
|
|
1,025,544
|
|
|
|
1,180,250
|
|
|
|
493,696
|
|
|
|
(736,001
|
)
|
|
|
2,392,005
|
|
Other
income (expenses)
|
|
|
798,435
|
|
|
|
168,337
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,322,644
|
)
|
|
|
(6,355,872
|
)
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,497
|
|
|
|
1,497
|
|
Interest
expenses
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,753
|
)
|
|
|
(23,753
|
)
|
Capital
expenditure
|
|
|
(82,733
|
)
|
|
|
(15,592
|
)
|
|
|
-
|
|
|
|
(3,023
|
)
|
|
|
-
|
|
|
|
(101,348
|
)
|
Total
assets as of June 30, 2010
|
|
$
|
69,101,360
|
|
|
$
|
15,326,776
|
|
|
$
|
-
|
|
|
$
|
1,183,304
|
|
|
$
|
-
|
|
|
$
|
85,611,440
|
|
Note
17 – Commitments and contingencies
Litigation
From time
to time, the Company is a party to various legal actions arising in the ordinary
course of business. The Company’s management does not expect the legal
matters involving the Company would have a material impact on the Company’s
consolidated financial position or results of operations.
Following
is the summary of the current litigation:
Beijing
Xin Ao Concrete Co., Ltd vs. Beijing Boda Guosheng Investment Co., Ltd. (Beijing
District Court, PRC)
In August
2006, Xin Ao filed a lawsuit against Beijing Boda Guosheng Investment Co., Ltd
(“Boda”) seeking specific performance of Boda’s obligations under the sales
contract to pay approximately $294,600 (RMB 2,000,000) for the cement supplied
by Xin Ao between March 2005 and June 2005 and compensatory damages of
approximately $23,500 (RMB 171,000) to cover the interest incurred on the unpaid
balance. The Court ruled against Boda and ordered Boda to pay the amounts
requested by Xin Ao; however, Boda appealed the court’s rulings. In November
2007, the Appeals Court upheld the original verdict and again ordered Boda to
pay all the damages. Management does not believe that the ultimate outcome of
this case will have a material adverse effect on the Company’s consolidated
financial position or results of operations. As of September 30, 2010, the
Company has factored this amount to an unrelated third party trust company and
the trust company has received the payment from Boda.
CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
18 – Subsequent Events
On
October 10, 2010, the Company, through its variable interest entity, Xin Ao,
entered into a financing agreement with Citibank (China) Co., Ltd. Beijing
Branch to borrow up to RMB 15,000,000 (US$2.2 million) and Xin Ao subsequently
received RMB 7,500,000 (US$1.1 million) on October 10, 2010.
The
Company has performed an evaluation of subsequent events through the date these
consolidated financial statements were issued to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions in the consolidated financial statements as of September 30,
2010. During this period, the Company did not have any material
recognizable subsequent events.