Cannabis Bioscience International Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD-LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS "PLANS", "INTENDS", "WILL", "HOPES", "SEEKS", "ANTICIPATES", "EXPECTS"AND THE LIKE OFTEN IDENTIFY SUCH FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD-LOOKING STATEMENT. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS. 2 The "Company", "we," "us," and "our," refer to (i) China Infrastructure Construction Corporation (formerly Fidelity Aviation Corporation); (ii) Beijing Chengzhi Qianmao Concrete Corporation Ltd. (“Beijing Concrete”), (iii) Beijing Fortune Capital Management, Ltd. (“BFCM”), and (iv) Northern Construction Holdings, Ltd. (“NCH”) Overview China Infrastructure Construction Corporation (the “Company”, “China Infrastructure”, “CHNC”, “We”, “Our”) was organized in Colorado on February 28, 2003. The Company through its subsidiaries in Hong Kong and thePeople’s Republic of China (“PRC” or “China”), engages in production of ready-mixed concrete and other special high-performance concrete for developers and the construction industry in the PRC. The Company primarily operates through its indirect majority-owned subsidiary, Beijing Chengzhi Qianmao Concrete Co., Ltd. (“Beijing Concrete”), a company organized under the laws of the PRC. It has two prime production facilities. One facility is located in the Nanhaizi area, on the west side of the Yizhuang economic development zone in Beijing. The other is located at the Tangshan harbor, about two hundred kilometers from Beijing. Recent Developments 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. 3 Results of Operations Three Months Ended November 30, 2009 Compared to Three Months Ended November 30, 2008 Net Revenue Net revenue for the three months ended November 30, 2009 was $19,155,132 as compared to $15,565,149 for the same period last year, an increase of $3,589,983, or approximately 23.06%. The increase in net revenue is attributable to the increased demand for concrete due to the government’s stimulus plan in the infrastructure and real estate industries, and is mainly due to the increase of the sales volume of concrete products. The sales volume of concrete products increased approximately 23% for the three months ended November 30, 2009 as compared to the same period last year. Net revenue from pumping services accounted for approximately 5% of the total net revenue for the three months ended November 30, 2009 and 2008. Cost of Goods Sold Cost of goods sold for the three months ended November 30, 2009 was $14,923,975 as compared to $12,870,609 for the same period last year, an increase of $2,053,366, or approximately 15.95%. The increase in cost of goods sold is in line with the increase of the net revenue. Gross Profit Gross profit for the three months ended November 30, 2009 was $4,231,157, an increase of $1,536,617 or approximately 57.03%, as compared to $2,694,540 for the same period last year. The increase in gross profit is attributable to the increase of the net revenue. Gross Profit Margin Gross profit margin for the three months ended November 30, 2009 was 22.09%, compared to 17.31% for the same period last year. The increase of the gross profit margin is mainly due to the decrease of the sales commission expenses that are included in the overhead costs, which are then transferred to the cost of goods sold. The sales commission expenses decreased approximately $340,729 for the three months ended November 30, 2009 compared to the same period of 2008. The sales commission expenses decreased mainly because the Company paid a lower percentage commission for the three months ended November 30, 2009, compared to the same period last year. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended November 30, 2009 were $28,525,492, as compared to $499,476 for the same period last year, an increase of $28,026,016, or approximately 5,611.08%. The increase of the selling, general and administrative expenses was primarily due to a one time non cash compensation expenses of $27,422,242. 4 Operating Income (Loss) Our operating loss for the three months ended November 30, 2009 was $24,294,335, a decrease of $26,489,399 or approximately 1,206.77% as compared to operating income of $2,195,064 for the three months ended November 30, 2008. The decrease was mainly due to the $27,422,242 one time non cash compensation expense included in the selling, general, and administrative expenses. Income Taxes During the three months ended November 30, 2009, our business operations were solely conducted by our subsidiaries incorporated in the PRC and we are governed by the PRC Enterprise Income Tax Laws. PRC enterprise income tax is calculated based on taxable income determined under PRC GAAP. In accordance with the Income Tax Laws, a PRC domestic company is subject to enterprise income tax at the rate of 25%. However, our PRC subsidiary is considered by the respective tax authorities a resource multipurpose utilization enterprise, which qualifies it for an exemption from income tax until December 31, 2010. Net Income (Loss) Attributable To China Infrastructure Construction Corporation Net loss was $24,465,988 for the three months ended November 30, 2009, compared to net income of $2,075,020 for the three months ended November 30, 2008, a decrease of $26,541,008 or approximately 1,279.07%. The decrease was primarily due to the $27,422,242 one time non cash compensation expenses included in the selling, general, and administrative expenses. Six Months ended November 30, 2009 Compared to Six Months Ended November 30, 2008 Net Revenue Net revenue for the six months ended November 30, 2009 was $31,410,860 as compared to $27,020,125 for the same period last year, an increase of $4,390,735, or approximately 16.25%. The increase in net revenue is attributable to the increased demand for concrete due to the government’s stimulus plan in infrastructure and real estate industries, and is mainly due to the increase of the sales volume of concrete products. The sales volume of concrete products increased approximately 14% for the six months ended November 30, 2009 as compared to the same period last year. Net revenue from pumping services accounted for approximately 5% and 4% of the total net revenue for the six months ended November 30, 2009 and 2008, respectively. Cost of Goods Sold Cost of goods sold for the six months ended November 30, 2009 was $24,504,167 as compared to $22,251,323 for the same period last year, an increase of $2,252,844, or approximately 10.12%. The increase in cost of goods sold is in line with the increase of the net revenue. 5 Gross Profit Gross profit for the six months ended November 30, 2009 was $6,906,693, an increase of $2,137,891 or approximately 44.83%, as compared to $4,768,802 for the same period last year. The increase in gross profit is attributable to the increase of net revenue. Gross Profit Margin Gross profit margin for the six months ended November 30, 2009 was 21.99%, compared to 17.65% for the same period last year. The increase of the gross profit margin is mainly due to the decrease of the sales commission expenses that are included in the overhead costs, which then are transferred to the cost of goods sold. The sales commission expenses decreased approximately $570,000 for the six months ended November 30, 2009 compared to the same period of 2008. The sales commission expenses decreased mainly because the Company paid a lower percentage commission for the six months ended November 30, 2009, compared to the same period last year. Selling, General and Administrative Expenses Selling, general and administrative expenses for the six months ended November 30, 2009 were $29,183,485, as compared to $764,588 for the same period last year, an increase of $28,418,897, or approximately 3,716.89%. The increase of the selling, general and administrative expenses was primarily due to a one time non cash compensation expenses of $27,422,242. Operating Income (Loss) Our operating loss for the six months ended November 30, 2009 was $22,276,792, a decrease of $26,281,006 or approximately 656.33% as compared to operating income of $4,004,214 for the six months ended November 30, 2008. The decrease was mainly due to the $27,422,242 one time non cash compensation expenses included in the selling, general, and administrative expenses. Income Taxes During the six months ended November 30, 2009, our business operations were solely conducted by our subsidiaries incorporated in the PRC and we are governed by the PRC Enterprise Income Tax Laws. PRC enterprise income tax is calculated based on taxable income determined under PRC GAAP. In accordance with the Income Tax Laws, a PRC domestic company is subject to enterprise income tax at the rate of 25%. However, our PRC subsidiary is considered by the respective tax authorities a resource multipurpose utilization enterprise, which qualifies it for an exemption from income tax until December 31, 2010. 6 Net Income (Loss) Attributable To China Infrastructure Construction Corporation Net loss was $22,559,585 for the six months ended November 30, 2009, compared to net income of $3,773,887 for the six months ended November 30, 2008, a decrease of $26,333,472 or approximately 697.78%. The decrease was primarily due to the $27,422,242 one time non cash compensation expenses included in the selling, general, and administrative expenses. Liquidity and Capital Resources As of November 30, 2009, we had cash and cash equivalents of $6,503,129. We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital from shareholders. Our working capital requirements are influenced by the level of our operations, the numerical and dollar volume of our project contracts, the progress of our contract execution, and the timing of accounts receivable collections. The following table sets forth a summary of our cash flows for the periods indicated: Six Months Ended November 30, 2009 2008 Net cash used in operating activities $ (3,661,951 ) $ (191,753 ) Net cash used in investing activities (918,285 ) (47,580 ) Net cash provided by (used in) financing activities 10,151,014 (136,586 ) Effect of exchange rate change on cash and cash equivalents 10,510 10,056 Net increase (decrease) in cash and cash equivalents 5,581,288 (365,863 ) Cash and cash equivalents, beginning balance 921,841 865,601 Cash and cash equivalents, ending balance $ 6,503,129 $ 499,738 Operating Activities Net cash used in operating activities was $3,661,951 for the six months ended November 30, 2009, an increase of $3,470,198, or 1,809.72%, as compared to $191,753 for the six months ended November 30, 2008. The increase of net cash used in operating activities was due to the increase of trade accounts receivable. The trade accounts receivable increased because of the growing sales. We typically had long-term annual and multi-year contracts with our major customers. We entered into varying payment terms with our customers ranging from payment before delivery, payment on delivery or up to 1 year after the project completion. As of November 30, 2009, trade accounts receivable with aging over twelve months old amounted to $554,357, only 1.47% of total trade accounts receivable. Investing Activities Net cash used in investing activities was $918,285 for the six months ended November 30, 2009, an increase of $870,705, or 1,829.98%, compared to $47,580 for the six months ended November 30, 2008. Acquisitions of plant, properties and equipment were the main contributor to the increase of net cash used in investing activities. 7 Financing Activities Net cash provided by financing activities was $10,151,014 for the six months ended November 30, 2009, an increase of $10,287,600, or 7,531.96%, compared to $136,586 net cash used in financing activities for the six months ended November 30, 2008. The increase was primarily due to the sale of stock by the Company to investors resulting in net proceeds of $8,605,625 and receipt of a bank loan of $1,466,200. Critical Accounting Policies and Estimates Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See note 3 to our consolidated financial statements, "Summary of Significant Accounting Policies." Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations. Revenue recognition . The Company receives revenue from sales of concrete products and from provision of 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. 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. 8 Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates. Inventories Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements.