Cannabis Bioscience International Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) Page Index to Consolidated Financial Statements Consolidated Balance Sheets (Unaudited) F-1 Consolidated Statements of Operations and Comprehensive Income (loss) (Unaudited) F-2 Consolidated Statements of Cash Flows (Unaudited) F-3 Notes to Consolidated Financial Statements (Unaudited) F-4 1 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION CONSOLIDATED BALANCE SHEETS AS OF NOVEMBER 30, 2009 AND MAY 31, 2009 November 30, 2009 May 31, 2009 (UNAUDITED) Assets Current assets Cash and cash equivalents $ 6,503,129 $ 921,841 Restricted cash 158,089 - Trade accounts receivable, net 37,640,167 26,438,106 Inventories 1,167,568 885,834 Total current assets 45,468,953 28,245,781 Property, plant and equipment, net 7,932,999 5,649,835 Other receivables 1,413,083 270,819 Related party receivables 163,458 674,289 Total other assets 1,576,541 945,108 Total assets $ 54,978,493 $ 34,840,724 Liabilities and equity Current liabilities Trade accounts payable $ 12,535,381 $ 10,173,765 Related party payable 344,030 564,419 Other payables 2,547,072 1,730,290 Current portion of capital lease obligations 568,178 - Accrued expenses 359,351 277,329 Bank loan payable 1,465,000 - Total current liabilities 17,819,012 12,745,803 Long-term liabilities Long-term portion of capital lease obligations 981,737 - Other payables - long-term 521,676 - Total long-term liabilities 1,503,413 - Total liabilities 19,322,425 12,745,803 Stockholders' equity Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding - - Common stock: no par value; 100,000,000 shares authorized; 11,528,429 and 1,529,550shares issued and outstanding as of November 30, 2009 and May 31, 2009 37,424,511 1,396,644 Retained earnings (deficit) (4,803,953) 17,755,631 Accumulated other comprehensive income 1,550,245 1,731,951 Total China Infrastructure Construction Corporation stockholders' equity 34,170,803 20,884,226 Noncontrolling interests 1,485,265 1,210,695 Total liabilities and equity $ 54,978,493 $ 34,840,724 The accompanying notes are an integral part of this statement. F-1 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2009 AND 2008 (UNAUDITED) THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30, 2009 2008 2009 2008 Net Revenue $ 19,155,132 $ 15,565,149 $ 31,410,860 $ 27,020,125 Cost of goods sold 14,923,975 12,870,609 24,504,167 22,251,323 Gross profit 4,231,157 2,694,540 6,906,693 4,768,802 Operating expenses: Selling, general and administrative expenses 28,525,492 499,476 29,183,485 764,588 Net operating income (loss) (24,294,335 ) 2,195,064 (22,276,792 ) 4,004,214 Other income (expense): Interest income (expense) (3,183 ) 258 (3,655 ) 943 Other income (expense) 5,196 288 4,996 (12,266 ) Total other income (expense) 2,013 546 1,341 (11,323 ) Net income (loss) before income taxes (24,292,322 ) 2,195,610 (22,275,451 ) 3,992,891 Income taxes - - - - Net income (loss) (24,292,322 ) 2,195,610 (22,275,451 ) 3,992,891 Less: Net income attributable to noncontrolling interests 173,666 120,590 284,134 219,004 Net income (loss) attributable to China Infrastructure Construction Corporation $ (24,465,988 ) $ 2,075,020 $ (22,559,585 ) $ 3,773,887 Earnings (loss) per share - basic and diluted $ (3.72 ) $ 1.49 $ (5.60 ) $ 2.91 Basic and diluted weighted average shares outstanding 6,578,625 1,390,400 4,026,345 1,295,200 Comprehensive income Net income (loss) (24,292,322 ) 2,195,610 (22,275,451 ) 3,992,891 Foreign currency translation adjustment (195,131 ) 17,087 (191,269 ) 151,863 Comprehensive income (loss) $ (24,487,453 ) $ 2,212,697 $ (22,466,720 ) $ 4,144,754 Comprehensive income attributable to non-controlling interests $ 163,893 $ 121,444 $ 274,571 $ 226,597 Comprehensive income (loss) attributable to China Infrastructure Construction Corporation $ (24,651,346 ) $ 2,091,253 $ (22,741,291 ) $ 3,918,157 The accompanying notes are an integral part of this statement. F-2 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2009 AND 2008 (UNAUDITED) November 30, 2009 2008 Cash flows from operating activities: Net income (loss) $ (22,275,451 ) $ 3,992,891 Adjustments to reconcile net income (loss) to net cash used in operations: Depreciation 548,431 428,309 Shares issued for compensation 27,422,242 - Changes in operating liabilities and assets: Trade accounts receivable (11,186,190 ) (7,810,510 ) Prepayments 149,847 Inventories (281,126 ) 464,598 Other receivables (1,064,571 ) (1,470,035 ) Trade accounts payable 2,353,912 2,498,816 Other payables 738,976 1,584,832 Accrued expenses 81,826 (30,501 ) Net cash used in operating activities (3,661,951 ) (191,753 ) Cash flows from investing activities: Fixed assets additions (754,827 ) (47,580 ) Deposits - construction in progress - - Payments to related party receivable (163,458 ) - Net cash used in investing activities (918,285 ) (47,580 ) Cash flows from financing activities: Shares issued for cash 8,605,625 - Restricted cash (158,089 ) - Bank loan payable 1,466,200 - Proceeds from related party payable 237,278 - Payment to related party payable - (136,586 ) Net cash provided by (used in) financing activities 10,151,014 (136,586 ) Effect of rate changes on cash 10,510 10,056 Increase (decrease) in cash and cash equivalents 5,581,288 (365,863 ) Cash and cash equivalents, beginning of period 921,841 865,601 Cash and cash equivalents, end of period $ 6,503,129 $ 499,738 Supplemental disclosures of cash flow information: Interest paid in cash $ - $ - Income taxes paid in cash $ - $ - Non-cash investing activities Acquisition of plant and equipment through other payable $ 2,073,287 $ - Related party receivable offset by payable to related party payable $ 674,289 $ - See accompanying notes to unaudited consolidated financial statements F-3 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) 1. Nature of Operations China Infrastructure Construction Corporation (the “Company”, “China Infrastructure”, “CHNC”, “We”, “Our”) was organized on February 28, 2003 as Fidelity Aircraft Partners LLC, a Colorado limited liability company (“Fidelity LLC”). On December 16, 2004, Fidelity LLC converted itself into Fidelity Aviation Corporation by filing a Statement of Conversion and Articles of Incorporation with the Colorado Secretary of State. Effective August 24, 2009, the Company changed its name from Fidelity Aviation Corporation to China Infrastructure Construction Corporation. On October 8, 2008, China Infrastructure entered into and consummated the transactions contemplated under a Share Exchange Agreement with Northern Construction Holdings, Ltd., a Hong Kong limited company (“NCH”) and its shareholder pursuant to which China Infrastructure issued 12,000,000 pre-split shares or 1,200,000 post split shares of China Infrastructure common stock (the “Share Exchange”) in exchange for all issued and outstanding common stock of NCH. The Share Exchange resulted in (i) a change in control of China Infrastructure with the shareholder of NCH owning approximately 78% of issued and outstanding shares of common stock of China Infrastructure, (ii) NCH becoming a wholly-owned subsidiary of China Infrastructure, and (iii) appointment of certain nominees of the shareholder of NCH as directors and officers of China Infrastructure and resignation of John Schoenauer as director, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer of China Infrastructure. As a result of the Share Exchange Agreement, Beijing Fortune Capital Management Co., Ltd. (“BFCM”), a 95% owned subsidiary of NCH, became our indirect majority-owned subsidiary. Also as a result of the Share Exchange Agreement, Beijing Chengzhi Qianmao Concrete Co., Ltd., (“Beijing Concrete”), the operating company, and a 99.5% owned subsidiary of BFCM, also became our majority-owned subsidiary. For accounting purposes, the share exchange transaction was treated as a capital transaction where the acquiring corporation issued stock for the net monetary assets of the shell corporation, accompanied by a recapitalization. The accounting is similar in form to a reverse acquisition, except that goodwill or other intangibles are not recorded. All references to NCH common stock have been restated to reflect the equivalent numbers of China Infrastructure common shares. When we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of NCH on a consolidated basis unless the context suggests otherwise. F-4 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the six month period ended November 30, 2009, are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2010. For further information refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report for the year ended May 31, 2009. 3. Summary of Significant Accounting Policies Economic and Political Risks The Company faces a number of risks and challenges as a result of having primary operations and marketing in the PRC. Changing political climates in the PRC could have a significant effect on the Company’s business. Control by Principal Stockholders The directors, executive officers and their affiliates or related parties own, beneficially and in the aggregate, the majority of the voting power of the registered capital of the Company. Accordingly, the directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company’s assets. Principles of Consolidation The consolidated financial statements include the financial statements of China Infrastructure, and its wholly-owned and majority-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Non-controlling interests consist of other stockholders’ ownership interests in majority-owned subsidiaries of the Company. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. F-5 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) Cash and Cash Equivalents For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. Deposits held in financial institutions in the PRC are not insured by any government entity or agency. Restricted Cash In accordance with the Escrow Agreement and the Subscription Agreement (note 11) signed by China Infrastructure Construction Corporation, Trillion Growth China General Partner and Anslow & Jaclin, LLP (the “Escrow Agent”) in October 2009, the Company was required to keep with the Escrow Agent $120,000 immediately on the Closing Date of the Subscription Agreement. This fund can only be disbursed when certain criteria are met. The escrow account also keeps $38,089 attorney fees as a covenant for future services. As of November 30, 2009 and May 31, 2009, the amount not disbursed was $158,089 and $0, respectively, and these are included in restricted cash in the consolidated balance sheets. Deposits held in the escrow account are not insured by any government entity or agency. Trade Accounts Receivable The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. Trade accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An allowance for doubtful accounts is established and determined based on management’s regular assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment. These factors continuously change, and can have an impact on collections and the Company’s estimation process. These impacts may be material. Management reviews and maintains an allowance for doubtful accounts that reflects the management’s best estimate of potentially uncollectible trade receivables. Certain accounts receivable amounts are charged off against allowances after a designated period of collection efforts. Subsequent cash recoveries are recognized as income in the period when they occur. Allowance for doubtful debts amounted to $774,143 and $311,928 as of November 30, 2009 and May 31, 2009, respectively. Inventories Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Inventories consist of the following: November 30, 2009 May 31, 2009 Raw materials $ 1,167,568 $ 885,834 F-6 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) Property, plant and Equipment Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the useful lives of the assets. Major renewals are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to manufacturing is reported in cost of revenues. Depreciation not related to manufacturing is reported in selling, general and administrative expenses. Property, plant and equipment are depreciated over their estimated useful lives as follows: Office trailers 10 years Machinery and equipment 3-8 years Furniture and office equipment 5-8 years Motor vehicles 3-5 years Impairment of Long-Lived and Intangible Assets Long-lived assets of the Company are reviewed annually to assess whether the carrying value has become impaired according to the guidelines established in FASB Codification (ASC) 360 . The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of November 30, 2009, the Company expects these assets to be fully recoverable. No impairment of assets was recorded in the periods reported. Accumulated Other Comprehensive Income Accumulated other comprehensive income represents foreign currency translation adjustments. Revenue Recognition The Company receives revenue from sales of concrete products and from provision of concrete pumping service and consulting service. The Company's revenue recognition policies are in compliance with ASC 605 (previously Staff Accounting Bulletin 104). Sales revenue is recognized at the date of shipment to customers or services have been rendered when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Our sales are non-returnable. Therefore, we do not estimate deductions or allowance for sales returns. Sales are presented net of any discounts, reward, or incentive given to customers. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. F-7 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) Our products delivered to customers would be checked on site by customers and, once the products are accepted by customers, they will sign the acceptance notice. There is no warranty issue after the delivery. Reward or incentive given to our customers is an adjustment of the selling prices of our products therefore the consideration is characterized as a reduction of revenue when recognized in our income statement. The Company recognizes its revenues net of value-added taxes (“VAT”). The Company is subject to VAT which is levied at the rate of 6% on the invoiced value of sales. However, the Company enjoys a free VAT policy according to the national policy, which encourages the development of the cement industry if the manufacturer satisfies the environmental protection requirements. The Company has enjoyed the free VAT policy from January 1, 2006 and has been reviewed every year by the local tax bureau. Cost of Goods Sold Cost of goods sold consists primarily of the costs of the raw materials, freight charges, direct labor, depreciation of plant and machinery, warehousing cost and overhead associated with the manufacturing process and commission expenses. Selling, General and Administration Expenses Selling, general and administrative expenses include costs incurred in connection with performing selling, general and administrative activities such as executives and administrative and sale employee salaries, related employee benefits, office supplies, and professional services (legal and audit). Shipping and Handling Costs ASC 605-45-20 “ Shipping and Handling costs ” establishes standards for the classification of shipping and handling costs. All amounts billed to a customer related to shipping and handling are classified as revenue. Advertising Costs The Company expenses advertising costs as incurred. Advertising expenses charged to operations were $0 for the three and six months ended November 30, 2009 and 2008, respectively. Advertising costs, if any, are included in selling, general and administrative expense on the income statement. Foreign Currency and Comprehensive Income The accompanying financial statements are presented in US dollars. The functional currency is the Renminbi (“RMB”) of the PRC. The financial statements are translated into US dollars from RMB at period-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. F-8 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/USD exchange rate into a flexible rate under the control of the PRC’s government. We use the Closing Rate Method in currency translation of the financial statements of the Company. RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation. Income Taxes The Company accounts for income taxes in accordance with ASC 740 (Formerly SFAS 109, “Accounting for Income Taxes.”) Under the asset and liability method as required by ASC 740 (Formerly SFAS 109), deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under ASC 740, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized. As of November 30, 2009 and May 31, 2009, the Company did not have any deferred tax assets or liabilities, and as such, no valuation allowances were recorded at November 30, 2009 and May 31, 2009. ASC 740 (Formerly FIN 48) clarifies the accounting and disclosure for uncertain tax positions and prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under ASC 740, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company’s operations are subject to income and transaction taxes in the United States, HongKong, and the PRC jurisdictions. Significant estimates and judgments are required in determining the Company’s worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, and as a result the ultimate amount of tax liability may be uncertain. However, the Company does not anticipate any events that would lead to changes to these uncertainties. F-9 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) Restrictions on Transfer of Assets Out of the PRC Dividend payments by the Company are limited by certain statutory regulations in the PRC. No dividends may be paid by the Company without first receiving prior approval from the Foreign Currency Exchange Management Bureau. However, no such restrictions exist with respect to loans and advances. Financial Instruments ASC 825 (Formerly SFAS 107, “Disclosures about Fair Value of Financial Instruments”) defines financial instruments and requires disclosure of the fair value of those instruments. ASC 820 (Formerly SFAS 157, “Fair Value Measurements”), adopted July 1, 2008, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables and payables, including short-term loans, qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available. The three levels are defined as follows: · Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. · Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. · Level 3: inputs to the valuation methodology are unobservable and significant to the fair value. The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with ASC 820 (Formerly SFAS 157). Stock-Based Compensation The Company records stock-based compensation expense pursuant to ASC 718 ( Formerly SFAS 123R, “Share Based Payment.”) The Company uses the Black-Scholes option pricing model which requires the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. F-10 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) Stock-based compensation expense is recognized based on awards expected to vest, and there were no estimated forfeitures as the Company has a short history of issuing options. ASC 718 ( Formerly SFAS 123R) requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates. Basic and Diluted Earnings Per Share The Company reports earnings per share in accordance with the provisions of ASC 260 ( Formerly SFAS No. 128, "Earnings Per Share.") ASC 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. The following is a reconciliation of the basic and diluted earnings per share: THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30, 2009 2008 2009 2008 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net income (loss) for earnings per share $ (24,465,988 ) $ 2,075,020 $ (22,559,585 ) $ 3,773,887 Weighted average shares used in basic computation 6,578,625 1,390,400 4,026,345 1,295,200 Diluted effect of warrants - - - - Weighted average shares used in diluted computation 6,578,625 1,390,400 4,026,345 1,295,200 Earnings (loss) per share, basic and diluted $ (3.72 ) $ 1.49 $ (5.60 ) $ 2.91 F-11 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) Statement of Cash Flows In accordance with FASB ASC 230 cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet. Segment Reporting Statement of Financial Accounting Standards No. 131 (SFAS 131), (ASC 250) “Disclosure about Segments of an Enterprise and Related Information” requires use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. Since management does not disaggregate Company data, the Company has determined that only one segment exists. Recent Accounting Pronouncements In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, “Accounting for Transfers of Financial Assets”), which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe this pronouncement will impact its financial statements. In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. We are currently evaluating the impact that adoption will have on our consolidated financial statements. In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value , which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. We do not expect it to have a significant impact on our consolidated financial statements. F-12 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) In October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force.” This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The management is in the process of evaluating the impact of adopting this ASC update on the Company’s financial statements. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. 4. Property, Plant and Equipmen t Plant and equipment consist of the following: November 30, 2009 May 31, 2009 Office trailers $ 903,173 $ 902,319 Machinery and equipment 5,749,311 2,922,504 Motor vehicles 468,314 466,117 Furniture and office equipment 463,944 462,300 Construction in progress 3,308,945 3,305,813 Total property, plant and equipment 10,893,687 8,059,053 Accumulated depreciation (2,960,688 ) (2,409,218 ) Net property, plant and equipment $ 7,932,999 $ 5,649,835 Depreciation expense included in selling, general and administrative expenses for the three months ended November 30, 2009 and 2008 was $52,799 and $60,670, respectively. Depreciation expense included in selling, general and administrative expenses for the six months ended November 30, 2009 and 2008 was $106,353 and $105,401, respectively. Depreciation expense included in cost of goods sold for the three months ended November 30, 2009 and 2008 was $241,481 and $193,994, respectively. Depreciation expense included in cost of goods sold for the six months ended November 30, 2009 and 2008 was $442,078 and $322,908, respectively. F-13 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) Construction in progress represents direct costs of construction and design fees incurred for the Company’s new project in Tangshan. All construction costs associated with this project are accumulated and capitalized as construction in progress. The construction in progress is closed out to the appropriate asset classification when the project is substantially complete, occupied, or placed into service. No depreciation is provided until it is completed and ready for its intended use. At November 30, 2009, the costs involved with construction in progress were $3,308,945. Interest costs totaling $0 were capitalized into construction in progress for the three and six months ended November 30, 2009 and 2008, respectively. 5. Other Receivables As of November 30, 2009, other receivables amounted to $1,413,083, which mainly consists of $876,289 in receivables from an unrelated party, unsecured, interest free, and with no fixed repayment date. As of January 14, 2010, all of this $876,289 has been collected. It also includes insurance claims and travel advances to the staff. All the other receivables are from unrelated parties, interest free, unsecured, and with no fixed repayment date. As of May 31, 2009, other receivables amounted to $270,819, which mainly consists of insurance claims and the temporary lending to the staff with no fixed repayment date, unsecured, and with no interest bearing on it. The allowances on the other accounts receivable are recorded when circumstances indicate collection is doubtful for particular accounts receivable. The Company provides for allowances on a specific account basis. There is no provision made for the other receivables at November 30, 2009 and May 31, 2009. 6. Other Payables Other payables in current liabilities consist of the following as of November 30, 2009 and May 31, 2009: November 30, 2009 May 31, 2009 Commission payable $ 1,932,453 $ 1,541,579 Staff and other companies deposit 614,619 188,711 Total other payables - current $ 2,547,072 $ 1,730,290 Other Payables – Long-Term Long-term other payables amounted to $521,676 and $0 as of November 30, 2009 and May 31, 2009. The long-term other payables are payments due to unrelated vendors for machinery and equipment purchases. 7. Accrued Expenses Accrued expenses amounted to $359,351 and $277,329 as of November 30, 2009 and May 31, 2009. The accrued expenses mainly include accrued land lease expenses, accrued electricity and utility expenses, and accrued interest. F-14 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) 8. Related Party Transactions Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence. Total outstanding amount of related party payable was $344,030 and $564,419 as of November 30, 2009 and May 31, 2009, respectively. These payables bear no interest, are unsecured, and have no fixed payment terms. Currently, the related party payable consists of the following: November 30, 2009 May 31, 2009 Rong Yang (Chairman) $ 344,030 $ 372,489 Liao Shunjun (Chairman’s brother-in-law) - 98,723 RongHua Chang Shen Transportation (20% owned by a common shareholder) - 93,207 $ 344,030 $ 564,419 Total outstanding amount of related party receivables was $163,458 and $674,289 as of November 30, 2009 and May 31, 2009, respectively. These receivables require no interest, are unsecured, and have no fixed re-payment terms. All the related party receivables are loans to related parties for business developments. As a public company, the Company has set up stricter rules to forbid loans to related parties. Currently, the receivables from related party consist of the following: November 30, 2009 May 31, 2009 Lao Zhan (common shareholder) $ - $ 465,332 Yang Ming (Chairman Yang Rong’s brother) 69,605 187,490 Heng Jian (20% owned by a common shareholder ) - 20,736 Liao Shunjun (Chairman’s brother-in-law) 22,372 - Liao Guiping (Chairman’s wife) 71,481 731 $ 163,458 $ 674,289 In the six months ended November 30, 2009, the May 31, 2009 related party receivable of $674,289 was offset against payable to a related party, CEO and chairman of the Company, according to an agreement in which the CEO agreed such obligation. F-15 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) 9. Debt Bank Loan Payable On October 16, 2009, the Company borrowed $1,465,000 from Beijng Bank. The loan is unsecured, and with an annual interest rate of 5.31%. $1,318,500 of the total amount is guaranteed by an unrelated party. The due dates are as follows: $146,500 due on April 16, 2010, $146,500 due on July 16, 2010, $293,000 due on August 16, 2010, $439,500 due on September 16, 2010, and $439,500 due on October 16, 2010. Interest expenses are due on the 16th of every third month. As of November 30, 2009, the loan payable to bank amounted to $1,465,000. There is no interest expense capitalized into construction in progress for the three and six months ended November 30, 2009 and 2008. There was no bank loan payable as of May 31, 2009. Interest Total interest expense and financial charges for the three and six months ended November 30, 2009 on all debt, amounted to $3,183 and $3,655, respectively. Total interest expense and financial charges for the three and six months ended November 30, 2008 on all debt, amounted to $258 and $943, respectively. Capital Lease In July, 2009, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $1,775,580 with an annual interest rate of 6.76%. The lease has been accounted for as a capital lease with the same third party to lease the equipments for three years, with total payments of approximately $1,966,685. The title of the equipments will be transferred back to the Company upon the last payment. A one time processing fee of $22,120 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 31 months from December 2009 to June 2012 and are as follows: Total lease payment $ 1,693,536 Less imputed interest 143,621 Total capital lease obligation as of November 30, 2009 1,549,915 Less current maturity 568,178 Capital lease obligation – long-term portion as of November 30, 2009 $ 981,737 The future lease commitments for the next three year after November 30, 2009 are as follows: 1 year after $ 655,562 2 year after 655,562 3 year after 382,411 Total $ 1,693,534 10. Noncontrolling Interest Noncontrolling interest consist of other stockholders’ ownership interest in majority-owned subsidiaries of the Company, which is about 5.48% of the total ownership. As of November 30, 2009 and May 31, 2009, the balance of noncontrolling interest was $1,485,265 and $1,210,695 respectively. F-16 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) 11. Shareholder’s Equity Reverse Stock Split On September 28, 2009, the Company effectuated a 1-for-10 reverse stock split of the Company’s common stock, with no par value (the “Common Stock”) (the “Reverse Stock Split”). Upon the Reverse Stock Split, ten (10) shares of the outstanding Common Stock were automatically converted into one (1) share of Common Stock. The Reverse Stock Split, however, did not alter the number of shares the Company is authorized to issue, but only reduced the number of shares of its Common Stock issued and outstanding. Any fractional share issued as a result of the reverse split was rounded up. Immediately before the Reverse Split there were 15,295,500 shares of Common Stock issued and outstanding. Immediately after giving effect to the Reverse Split, there were 1,529,550 shares of Common Stock issued and outstanding. All statements are retroactively stated. Stock Issuance For Compensation On October 14, 2009, to provide incentives to the Company’s management and to adjust the Company’s capital structure, the Company issued to Rui Shen, as a trustee holding for the Company’s Chief Executive Officer and Chairman Mr.Yang. The Company has used the closest share issuance price as the fair market value to calculate the compensation expenses. Total $27,422,242 compensation expense was included in selling, general and administrative expenses. Stock Issuance For Cash On October 16, 2009, the Company entered into and consummated the sale of securities pursuant to a Subscription Agreement with a number of institutional investors (the “Investors”), providing for the sale to the Investors of an aggregate of approximately 2,564,108 shares of Common Stock for an aggregate purchase price of approximately $10,000,000 (or $3.90 per Share). Net proceeds of $8,605,626 had been received and recorded as share capital. In connection with the Private Placement, the Company issued to the placement agent warrants to purchase 153,846 shares of Common Stock exercisable for a period of five years at an exercise price of $3.90 per share and paid a transaction fee equal to 8% of the gross proceeds of the Private Placement. Additionally, the Company issued to an advisor in the PRC 289,012 shares of Common Stock and paid a transaction fee equal to 2.5% of the gross proceeds of the Private Placement for the service provided purely relating to the equity financing. The Company also issued to one investor 22,000 shares for services provided related to the fund raising. Thus, the Company paid $1,394,396 in total and issued 403,431 shares to various parties as fund raising costs. These costs were classified as equity and accounted for as common stock issuance cost. The Company also entered into several covenants in the Subscription Agreement, the breach of which can result in penalties, which are capped at 15% of the aggregate purchase price of the Private Placement. These covenants include: · Structuring the Company’s board of directors to be in compliance with the Nasdaq Corporate Governance standards; F-17 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) · Listing on a National Securities Exchange within 24 months of the Closing Date; · Hiring of a new full-time chief financial officer, subject to the approval of certain Investors; · Hiring of an internal control consultant for Sarbanes-Oxley 404 compliance; and · Delivery of additional shares of common stock to the Investors on a pro rata basis for no additional consideration in the event that the Company’s after tax net income for each of the fiscal years ending May 31, 2010 and 2011 is less than $14,000,000 and $18,000,000 respectively subject to certain adjustments, which number of shares should be equal to the percentage of variation between the actual net income and the target net income. In connection with the Subscription Agreement, the Company also entered into an Investor Relations Escrow Agreement with an escrow agent and an investor representative, wherein the Company agreed to deposit $120,000 of the proceeds of the Private Placement into an escrow account (the “IR Escrow Funds”) and to utilize such IR Escrow Funds for a three-year investor relations program (the “IR Escrow Agreement”). In accordance with the Subscription Agreement, the Company shall retain an investor relations firm within 30 days after the Closing Date, subject to the approval of the investor representative. The Company is obligated to replenish the IR Escrow Funds on the second and third anniversaries of the Closing Date to bring the balance of such funds to $120,000 as of then. Warrants On October 16, 2009, in connection with the Share Purchase Agreement, the Company issued 153,846 warrants to Hunter Wise Financial Group, LLC, the Placement Agent. The warrants carry an exercise price of $3.90 and a 5-year term. The Warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction. Placement Agent Warrants meet the conditions for equity classification pursuant to FASB ASC 815 “Derivatives and Hedging” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.” Therefore, these warrants were classified as equity and accounted for as common stock issuance cost. Warrants Outstanding Warrants Exercisable Weighted Average Exercise Price Average Remaining Contractual Life Outstanding, May 31, 2009 - - $ - - Granted 153,846 153,846 3.90 4.88 Forfeited - - - - Exercised - - - - Outstanding, November 30, 2009 (Unaudited) 153,846 153,846 $ 3.90 4.88 F-18 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) 12. Employee Welfare Plan The Company has established its own employee welfare plan in accordance with Chinese law and regulations. The Company makes contributions to an employee welfare plan. The total expense for the above plan was $43,488 and $108 for the three months ended November 30, 2009 and 2008, respectively. The total expense for the above plan was $48,161 and $955 for the six months ended November 30, 2009 and 2008, respectively. 13. Income Tax The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the six months ended November 30, 2009 and 2008: 2009 2008 U.S. Statutory rates 34.0 % 34.0 % Foreign income not recognized in USA (34.0 ) (34.0 ) China income taxes 0 0 China income tax exemption 0 0 Total provision for income taxes 0 % 0 % People ’ s Rep ublic of China (PRC) Under the Income Tax Laws of the PRC, the Company’s subsidiaries are generally subject to an Enterprise Income Tax (EIT) at a standard rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. Currently, the Company is charged at 0% income tax rate because of a special tax exemption approved by the PRC tax department. The income tax expenses for the three and six months ended November 30, 2009 and 2008 are $0. The exemption of income tax to the Company will last until December 31, 2010 and from year 2011, the Company will be subject to an income tax at a standard rate of 25%. There were no significant book and tax basis differences. The estimated tax savings due to the tax exemption for the three and six months ended November 30, 2008 amounted to approximately $520,000 and $940,000, respectively. The net effect on earnings per share if the income tax had been applied would decrease the basic and diluted earnings per share for the three and six months ended November 30, 2008 by $0.37 and $0.73, respectively. The estimated tax savings due to the tax exemption for the three and six months ended November 30, 2009 amounted to approximately $500,000 and $1,300,000, respectively. The net effect on earnings per share if the income tax had been applied would decrease the basic and diluted earnings per share for the three and six months ended November 30, 2009 by $0.08 and $0.32, respectively. F-19 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) 14. Other Income (Expenses) Other income was $5,196 and $4,996 for the three and six months ended November 30, 2009, respectively. It mainly consists of fines from employees. Other income was $288 for the three months ended November 30, 2008. It mainly consists of income from selling used newspaper. Other expenses were $12,266 for the six months ended November 30, 2008. It mainly consists of fines for the Company. 15. Concentration of Credit Risks and Uncertainties The Company’s practical operations are all 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 other things. Concentration of credit risk exists when changes in economic, industry or geographic factors similarly affect groups of counter parties whose aggregate credit exposure is material in relation to the Company’s total credit exposure. For the three months ended November 30, 2009, there are four major customers that each individually comprised more than 10% of the Company’s total sales. (Mingsheng Group 14%, China Construction 14%, Guangzhou Tianli Construction Projects Inc. 11%, and Beijing Sanyuan Construction Inc. 11%). For the six months ended November 30, 2009, there are three customers that each individually comprised more than 10% of the Company’s total sales. (Mingsheng Group 11%, China Construction 11% and Beijing Sanyuan Construction Inc., 11%). For the three months ended November 30, 2008, there are three major customers that each individually comprised more than 10% of the Company’s total sales. (Jiangsu Suzhong Construction Group 11%, Guangzhou Tianli Construction Projects Inc. 10%, and China Construction 10%) For the six months ended November 30, 2008, there are four customers that each individually comprised more than 10% of the Company’s total sales. (Guangzhou Tianli Construction Projects Inc. 12%, Jiangsu Suzhong Construction Group 11%, China Construction 11%,, and Beijing Sanyuan Construction Inc. 11%). Two customers, China Railway Construction Corp. and Beijing Sanyuan, comprised 25% and 11% of the Company’s accounts receivable balance at November 30, 2009. China Railway Construction Corp. comprised 33% of the Company’s accounts receivable balance at May 31, 2009. F-20 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2009 (UNAUDITED) The top five major vendors accounted for 34% of the Company’s total purchases for the three months ended November 30, 2009, with no one major vendor accounting for more than 10% of the total purchases. The top five major vendors accounted for 36% of the Company’s total purchases for the six months ended November 30, 2009, with one major vendor, Tianjin Zhenxing Cement Company, accounting for 10% of the total purchases. The top five major vendors accounted for 56% of the Company’s total purchases for the three months ended November 30, 2008, with one major vendor, Tianjin Zhenxing Cement Company, accounting for 23% of the total purchases. The top five major vendors accounted for 55% of the Company’s total purchases for the six months ended November 30, 2008, with one major vendor, Tianjin Zhenxing Cement Company, accounting for 23% of the total purchases. No vendor accounted for more than 10% of the Company’s accounts payable at November 30, 2009. Two major vendors, Wushan Cement Company and Tianjin Zhenxing Cement Company, accounted for 8% and 6% of the Company’s accounts payable at November 30, 2009. No vendor accounted for more than 10% of the Company’s accounts payable at May 31, 2009. One major vendor, Zhuozhou Shuishang Leyuan Shashiliao, accounted for 8% of the Company’s accounts payable at May 31, 2009. The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash equivalents and short-term investments, denominated in the U.S. dollar. Any significant revaluation of RMB may materially and adversely affect the cash flows, revenues, earnings and financial position of the Company. 16. Subsequent Events We have reviewed subsequent events up through January 14, 2010, which is the date that the financial statements are issued or are available to be issued. Change Of Principal Officers On December 17, 2009, Mr. Rong Yang resigned as the Chief Financial Officer of the Company. Mr. Yang’s resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices Effective December 17, 2009, Ms. Yiru Shi was appointed as acting Chief Financial Officer of the Company, and the Company entered into an employment agreement with Ms. Shi, dated December 17, 2009. The Employment Agreement provides that Ms. Shi will serve as acting CFO of the Company for a three-month probation period (the “Probation Period”), at the end of which the Board will review Ms. Shi’s performance and approve her appointment as the Company’s Chief Financial Officer. The term of the Employment Agreement is two years, including the Probation Period, with a renewal option upon a 15-day written notice in advance (the “Term”). Ms. Shi will be compensated as follows: 1 An annual salary of $150,000, or $12,500 monthly payable in U.S. dollars; and 2 Options to purchase 300,000 shares of the Common Stock of the Company, exercisable at $3.90 per share, to vest in two equal installments respectively on December 17, 2010 and December 17, 2011. If Ms. Shi’s employment is terminated prior to the vesting date, any unvested options will be terminated. If her employment is terminated after the vesting date, any vested but unexercised options shall terminate on the 91st day following the date of the termination of her employment. The details of such options are set forth on the Option Grant Agreement. Entered Into Strategic Alliance Agreement On December 8, 2009, the Company entered into a Strategic Alliance Agreement for a term of 10 years with Commercial Concrete Mixer Division of China Railway Construction Group Co., Ltd. (“CRCG”), a major customer of the Company (the “Agreement”). Under the Agreement, the Company will be obligated to build and set up concrete mixing stations in Xi’an, China and to provide the raw material purchase, internal accounting, technical and administrative staff of such stations. The Company and CRCG will jointly run and operate the concrete mixing stations. CRCG will provide the cement for manufacturing the concrete mix in such concrete mixing stations, and CRCG can purchase the concrete mix at a discounted price. Also, in accordance with the Agreement, each party will lease certain equipment to the concrete mixing stations. There are currently no definitive terms for such leases. In addition, the Company and CRCG will share 75% and 25% of the annual profits of such concrete mixing stations in Xi’an, respectively. The details of such profit sharing arrangement shall be further agreed upon. According to the Agreement, the management team from CRCG to work at the concrete mixing stations shall be compensated by CRCG. F-21