Cannabis Bioscience International Holdings, Inc. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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. 38 Unless the context otherwise requires, The "Company", "we," "us," and "our," refer to (i) China Infrastructure Construction Corporation; (ii) Beijing Chengzhi Qianmao Concrete Co., Ltd. (“Beijing Concrete”), (iii) Beijing Fortune Capital Management, Ltd. (“BFCM”), (iv) Shaanxi Hongruida Concrete Ltd. (“Hongruida”) and (v) 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 the People’s Republic of China (“PRC” or “China”), engages in production of ready-mixed 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. Beijing Concrete currently has four production facilities. One facility is located in the Nanhaizi area, on the west side of the Yizhuang economic development zone in Beijing, one is in Shidu, a suburban area of Beijing, one is in Xi’an West New High-tech Zone, and another one is located at the Tangshan harbor, about two hundred kilometers from Beijing. The plant located in Xi’an was put into operation at the end of March 2010. Results of Operations Fiscal Year Ended May 31, 2010 Compared to Fiscal Year Ended May 31, 2009 Net Revenue Net revenue for the fiscal year ended May 31, 2010 was $73,998,463 as compared to $66,778,296 for the same period last year, an increase of 10.81%. The increase in net revenue is mainly attributable to our geographic expansion. We had set up new factories in Xi’an and Shidu. The sales volume of concrete products increased approximately 28.61% for the fiscal year ended May 31, 2010 as compared to the same period last year. The increase in net revenue is also attributable to technical services we provided to a Tianjin concrete producer from late March 2010. These services generated approximately $1.26 million in net revenue. Since March 2010, we have also leased stone and sand equipment from a supplier. Starting from April 2010, all sand and stone produced by this equipment were exclusively supplied to us. This contributed approximately $0.90 million to our net revenue. We also have less sales commission accrued to offset sales revenue for the year ended May 31, 2010 than 2009. Cost of Goods Sold Cost of goods sold for the fiscal year ended May 31, 2010 was $55,960,792 as compared to $53,776,934 for the same period last year, an increase of 4.06%. The increase in cost of goods is attributable to the increase of sales due to the geographic development of our business. 39 Gross Profit Gross profit for the fiscal year ended May 31, 2010 was $18,037,671, an increase of approximately 38.74%, as compared to $13,001,362 for the fiscal year ended May 31, 2009. The increase in gross profit is attributable to the increase of sales due to geographic development of our business, our business expansion into technical service, and vertical integration with one sand and stone vendor. Gross Profit Margin Gross profit margin for the fiscal year ended May 31, 2010 was 24.38%, compared to 19.47% for the same period last year. The increase of the gross profit margin is mainly because technical service provided a higher margin, the integration with one sand and stone company lowered the cost of goods sold, and less sales commission were accrued as an offset to sales revenue. Selling, General and Administrative Expenses Selling, general and administrative expenses for the fiscal year ended May 31, 2010 were $31,323,026 as compared to $1,931,333 for the same period last year, an increase of $29,391,693, or approximately 1,521.83%. The increase of the selling, general and administrative expenses was primarily due to increased professional expenses as a public company. A one-time non-cash compensation expense of $27,422,242 and a non-cash stock option expense of $199,003 were included in the selling, general, and administrative expenses for the year ended May 31, 2010. Operating Income (Loss) Our operating loss for the fiscal year ended May 31, 2010 was $13,285,355, a decrease of $24,355,384, or approximately 220.01%, as compared to $11,070,029 in operating income for the fiscal year ended May 31, 2009. The decrease was mainly due to the $27,422,242 one-time non-cash compensation expense and $199,003 non-cash stock option expense included in the selling, general, and administrative expenses for the year ended May 31, 2010. Income Taxes During the fiscal year ended May 31, 2010, 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, Beijing Concrete, 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. 40 Net Income (loss) Attributable To China Infrastructure Construction Corporation Net loss was $13,434,410 for the fiscal year ended May 31, 2010, compared to net income of $10,461,209 in the last fiscal year, a decrease of $23,895,619, or approximately 228.42%. The decrease was primarily due to the $27,422,242 one-time non-cash compensation expense and a $199,003 non-cash stock option expense included in the selling, general, and administrative expenses for the year ended May 31, 2010. Liquidity and Capital Resources As of May 31, 2010, we had cash and cash equivalents of $1,102,879. 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: Fiscal Year Ended May 31 2010 2009 Net cash provided by (used in) operating activities $ (10,208,535 ) $ 2,277,902 Net cash used in investing activities (4,015,685 ) (2,375,085 ) Net cash provided by financing activities 14,408,077 123,861 Effect of exchange rate change on cash and cash equivalents (2,819 ) 58,185 Net increase in cash and cash equivalents 181,038 84,863 Cash and cash equivalents, beginning balance 921,841 836,978 Cash and cash equivalents, ending balance $ 1,102,879 $ 921,841 Operating Activities Net cash used in operating activities was $10,208,535 for the fiscal year ended May 31, 2010, a decrease of $12,486,437, or 548.16%, as compared to net cash of $2,277,902 provided by operating activities for the fiscal year ended May 31, 2009. The decrease 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 May 31, 2010, trade accounts receivable with aging over twelve months old amounted to $339,034, or only 0.63% of total trade accounts receivable. We collected approximately $5,200,000 accounts receivable from June 1, 2010 to Aug. 30, 2010. 41 Investing Activities Net cash used in investing activities was $4,015,685 for the fiscal year ended May 31, 2010, an increase of $1,640,600, or 69.08%, compared to $2,375,085 for the fiscal year ended May 31, 2009. Acquisitions of plant, properties and equipment were the main contributors to the increase of net cash used in investing activities. Financing Activities Net cash provided by financing activities was $14,408,077 for the fiscal year ended May 31, 2010, an increase of $14,284,216, or 11,532.46%, compared to $123,861 for the fiscal year ended May 31, 2009. The increase was primarily due to the sale of stock by the Company to investors resulting in net proceeds of $13,234,406 and receipt of a bank loan of $1,319,760. 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. 42 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. 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.