Cannabis Bioscience International Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following table presents selected financial data for the Company on a consolidated basis for the fiscal years ended May 31, 2010 and 2009, respectively. We derived the selected financial data set forth below from the Company's consolidated audited statements of operations for the fiscal years ended May 31, 2010 and 2009 and the consolidated audited balance sheets as at May 31, 2010 and 2009, each of which is included in this report. You should read the following summary financial data in conjunction with the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this report. Our historical results are not necessarily indicative of the results to be expected in any future period. 43 For Year Ended May 31, 2010 2009 Gross revenues $ 73,998,463 $ 66,778,296 Net operating income (loss) (13,285,355 ) 11,070,029 Net income (loss) (13,434,410 ) 10,461,209 Total assets 71,714,081 34,840,724 Total liabilities $ 21,585,039 $ 12,745,803 The Company's consolidated audited financial statements for the fiscal years ended May 31, 2010 and 2009, together with the report of the independent certified public accounting firm thereon and the notes thereto, are presented beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We changed our independent registered public accounting firm effective October 10, 2008 from Ronald R. Chadwick, P.C. (“Chadwick”) to Child, Van Wagoner & Bradshaw, PLLC. Information regarding the change in the independent registered public accounting firm was disclosed in our Current Report on Form 8-K filed with the SEC on October 10, 2008. There were no disagreements with Chadwick or any reportable events requiring disclosure under Item 304(b) of Regulation S-K. ITEM 9A(T). CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to principal executive and principal financial officers to allow timely decisions regarding disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report. 44 Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of May 31, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on our assessment, we determined that, as of May 31, 2010, our internal control over financial reporting was ineffective based on those criteria. During our assessment of the effectiveness of internal control over financial reporting as of May 31, 2010, management identified the following significant deficiencies: - Accounting and Finance Personnel’s Lack of US GAAP expertise. Our current accounting staff is relatively new and inexperienced, and needs substantial training to meet the higher demands of being a US public company. The accounting skills and understanding necessary to fulfill the requirements of US GAAP based reporting, including the skills of subsidiary financial statements consolidations, are inadequate and were inadequately supervised. - Lack of Internal Audit Function – We lack qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the internal audit function are yet to be developed. The Company’s management determined that the number and nature of these significant deficiencies, when aggregated, amounted to a material weakness. 45 Remediation Initiative During the fiscal year ended May 31, 2010, the Company took the following actions to remediate the material weakness: (i) hired English speaking U.S. GAAP knowledgeable Chief Financial Officer, (ii) established an audit committee, (iii) continued to implement its written control and accountability policies for administrative personnel, and (iv) hired additional English speaking personnel in the administrative division. Additionally, during the fiscal year ended May 31, 2010, the Company’s staff in the accounting department gained more expertise in internal audit functions. We plan to continue to take measures to remediate the material weakness as soon as practicable including providing U.S. GAAP training to our staff in the accounting department. A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting. Auditor Attestation This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report. Changes in Internal Controls over Financial Reporting As described above, during the fiscal year ended May 31, 2010, we implemented certain remediation measures that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The following are the officers and directors of the Company as of the date of this report. Some of our officers and directors are residents of the PRC. As a result, it may be difficult for investors to effect service of process within the United States upon them or to enforce judgments obtained in the United States courts against them in the PRC. 46 Name Age Position Rong Yang 49 Chairman of Board of Directors, President and CEO Yiru Shi 37 Chief Financial Officer Shuqian Wang 43 Director Francis Nyon Seng Leong 66 Director Zhenhai Niu 48 Director Pat Lee Spector 66 Director Rong Yang (CEO, President and Chairman) Mr. Yang, age 49, has been our Chairman and Chief Executive since October 2008. He has been the Chairman and Chief Executive of Beijing Concrete since its inception in 2002. He is also the founder of Beijing Concrete. Mr. Yang has over 20 years experience in the concrete industry. In the mid 1980’s, he started his career by joining China Railway Construction (“CRC”), one of the largest construction groups in China and Asia. Before Mr. Yang founded Beijing Concrete, he was the project manager for one of CRC’s subsidiary companies. Mr. Yang graduated from Guizhou College of Finance and Economics with a Bachelor degree in administrative management. We believe that Mr. Yang’s knowledge of all aspects of the Company’s business and his in-depth understanding of its operations, combined with his years of experience in the concrete industry position him well as our Chairman and Chief Executive Officer. Yiru Shi (CFO) Ms. Yiru Shi, age 37, has been our Chief Financial Officer since December 2009. Prior to that, Ms. Shi served as the Chief Financial Officer of Shengtai Pharmaceutical, Inc., a U.S. public company from 2008. From 2005 to 2008, Ms. Shi was the audit manager for Kabani & Co., Inc., a PCAOB registered auditor headquartered in California. From 2002 to 2004, Ms. Shi was a controller at Aroa Marketing. Prior to that, Ms. Shi worked as Channel Program Manager at Sun Microsystems and as a financial analyst at Hewlett Packard China. Ms. Shi is a Certified Public Accountant since 2007. She graduated with an MBA degree from the University of California, Irvine in 2003. She received her Bachelor degrees in Computer Science and International Trade and Business from the Beijing Polytechnic University in 1997. Shuqian Wang (Director) Ms. Wang, age 43, has been our Director since September 2009. She is a partner at East Associates, a law firm in China, since October 2002. Prior to that, she was with another PRC law firm, C&T Partners, from September 1989 to 1996 as an associate, and from 1996 to 2002 as a partner. Ms. Wang graduated from University of Kent at Canterbury with an LL.M. degree in International Trade Law in 1997, and she received her Bachelor degree in law from the School of Law of Nanjing University in 1988. We believe that Ms. Wang’s qualifications and her over 20 year experience in advising Chinese companies on complicated legal issues arising in connection with capital formation and M&A provide a unique perspective for our Board. 47 Francis Nyon Seng Leong (Director) Mr. Leong, age 66, has been our Director since February 2010. He has been the principal of Sungai River Inc., an international financial consulting company since October 2003. From March to June of 2004, he was Chief Financial Officer and Secretary of Blue Diamond Mining Corporation, an NEX board listed company in the oil and gas industry. Prior to that, Mr. Leong was the Treasurer for the City of Calgary, Canada from October 1999 through August 2003. Currently, Mr. Leong is serving on the boards and the committees of the following public companies: Boyuan Construction Group, a construction company listed on Toronto Stock Exchange. , Andatee China Marine Fuel Services Corporation, a NASDAQ traded company in the marine fuel industry and China Industrial Waste Management, Inc., an industrial waste management company listed on the OTC Bulletin Board. Mr. Leong received his Master’s degree in Public Administration from the Marriott School of Management of Brigham Young University in 1975. In 1968, he graduated from National Chengchi University in Taiwan with a Bachelor degree in commerce. We believe that Mr. Leong’s qualifications to serve as our director include his extensive experience in corporate finance and corporate governance acquired by him while serving on the boards and committees of several public companies. Zhenhai Niu (Director) Mr. Niu, age 48, has been our Director since February 2010. He is currently the general manager of Beijing Ritan Hotel from February 2008. Prior to that, he was the manager of China Hainan Huandao Taide Hotel from 1995 to 2008. Mr. Niu received his Bachelor’s degree in Management from Beijing University and Capital University of Economics and Business in 1987 and 1985, respectively. We believe that Mr. Niu’s qualifications to serve as our director include his extensive management experience as well as his executive leadership. Pat Lee Spector (Director) Mr. Spector, age 66, has been our Director since February 2010. He has been an Executive Advisor of AECOM Technology, Inc., a technical and management service provider that is currently listed on New York Stock Exchange (“NYSE”) since September 2007. From January 1999 through May 2007, he served as a Vice President of Jacobs Engineering Group Inc., a NYSE listed company that is engaged in the business of technical services and support. Mr. Spector received his Master degree in Architecture in 1970 and his Bachelor degree in Physics in 1966 from Washington University. Audit Committee The Board of Directors created the audit committee in March 2010. The Audit Committee is to oversee the Company's accounting and financial reporting processes, as well as its financial statement audits. The committee recommends to the Board of Directors the selection of the Company’s outside auditors and reviews their procedures for ensuring their independence with respect to the services performed for the Company. 48 The Audit Committee is comprised of three directors: Mr. Francis Leong, Ms. Shuqian Wang and Mr. Pat Spector. Mr. Leong is the Chairman of the Audit Committee. In the opinion of the Board of Directors, Ms. Wang, Messrs. Leong and Spector are independent of management and free of any relationship that would interfere with their exercise of independent judgment as members of this committee and they are independent as defined by the rules of the NASDAQ Stock Market. The Board of Directors has adopted a written charter for the Audit Committee. Audit Committee Financial Expert The Board of Directors has determined that we have an Audit Committee financial expert, as defined under Item 407(d)(5)(i) of Regulation S-K, serving on our Audit Committee. Mr. Leong is our Audit Committee financial expert, and he is independent as defined by the rules of the NASDAQ Stock Market. Compensation Committee In March 2010, the Board of Directors established a Compensation Committee, which is responsible for the design, review, recommendation and approval of compensation arrangements for our directors, executive officers and key employees, and for the administration of our equity incentive plans, including the approval of grants under such plans to our employees, consultants and directors. The Compensation Committee also reviews and determines compensation of our executive officers, including our Chief Executive Officer. The board of directors has adopted a written charter for the Compensation Committee. Mr. Francis Leong, Mr. Zhenhai Niu and Mr. Pat Spector, each of whom is an independent director, currently serve on the Compensation Committee. Mr. Spector is the Chairman of the Compensation Committee. Nominating Committee In March 2010, the Board of Directors established a Nominating Committee, which assists in the selection of director nominees, approves director nominations to be presented for stockholder approval at our annual general meeting and fills any vacancies on our board of directors, considers any nominations of director candidates validly made by stockholders, and reviews and considers developments in corporate governance practices. The board of directors has adopted a written charter for the Nominating Committee. Ms. Shuqian Wang, Mr. Zhenhai Niu and Mr. Pat Spector, each of whom is an independent director, currently serve on the Nominating Committee. Ms. Wang is the Chairman of the Nominating Committee. Section 16(a) Beneficial Reporting Compliance Not applicable. 49 Code of Ethics We have adopted a Code of Conduct that applies to all of our employees and officers, and the members of our Board of Directors. A copy of the Code of Ethics was included as Exhibit 14.1 to our current report on Form 8-K filed on March 12, 2010. A printed copy of the Code of Conduct may also be obtained free of charge by writing to us at our headquarters located at Shidai Caifu Tiandi Building Suite 1906-09 1 Hangfeng Road Fengtai District, Beijing, China 100070; attention: Company Secretary. ITEM 11. EXECUTIVE COMPENSATION The following table reflects the compensation paid to our principal executive officer and executive officers who have earned more than $100,000 in any of the previous two fiscal years. Summary Compensation Table Name and Principal Position Year Salary ($) Option Awards ($) (1) Total ($) Rong Yang, 2010 128,992 559,457 688,449 Chairman, President and 2009 122,900 — 122,900 Chief Executive Officer (2) Yiru Shi, 2010 50,000 419,593 459,593 Chief Financial Officer (3) 2009 — — — (1) The amounts in these columns represent the compensation cost of stock options granted in 2010, except that these amounts do not include any estimate of forfeitures. The aggregate grant date fair value of option awards granted were determined in accordance with Financial Accounting Standard Board Accounting Standards Codification Topic 718 (formerly SFAS123(R) and are recognized as compensation cost over the requisite service period. The amount recognized for these awards was calculated using the Black Scholes option-pricing model, and our 2010 Stock Incentive Plan is described in this report. (2) Rong Yang was also the Chief Financial Officer of the Company until December 17, 2009 when he resigned from this position and Yiru Shi was appointed as the Chief Financial Officer of the Company. (3) Yiru Shi was appointed as the Chief Financial Officer of the Company on December 17, 2009. 50 Narrative Disclosure to Summary Compensation Table Employment Agreements Rong Yang On February 12, 2010, the Company and Mr. Rong Yang entered into an amended and restated employment agreement (the “CEO Employment Agreement”) for his service as the Company’s Chief Executive Officer for a term of five years. The CEO Employment Agreement is automatically renewable for an additional year unless either party notifies the other at least 30 days prior to the end of the term of an intention to terminate. Under the CEO Employment Agreement, Mr. Yang will be compensated with an annual salary of RMB 1,500,000, payable monthly in equal installments in arrears. He will also receive options to purchase 400,000 shares of the Common Stock, exercisable at $3.90 per share. In the event that Mr. Yang’s service as the Company’s CEO is terminated, whether involuntarily or voluntarily, under certain circumstances, or following the occurrence of a Change of Control, as defined under the Employment Agreement (the “Separation from Service”), Mr. Yang shall receive: (i) a lump sum payment of fifteen times of Mr. Yang’s annual salary; (ii) Common Stock equal to 3% of then outstanding Common Stock; and (iii) continuing health insurance benefits for two years after the occurrence of Change of Control. Additionally, all unvested options, restricted stock, performance shares and stock appreciation rights previously granted to Mr. Yang under the Company’s incentive plan will immediately be fully vested upon his Separation from Service. In the event that the above payments and benefits to Mr. Yang upon his Separation from Service following a Change of Control (the “Separation Parachute Payments”) would (i) constitute a parachute payment within the meaning of Section 280G of the Internal Revenue Code of 1986 (the “Code”) or any similar or successor provision to 280G; and (ii) be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision to Section 4999 (the “Excise Tax”), then such Severance Parachute Payments shall be reduced to the largest amount which would result in no portion of the Severance Parachute Payments being subject to the Excise Tax, at the discretion of Mr. Yang. Yiru Shi On December 17, 2009, the Company entered into an employment agreement with Ms. Yiru Shi as its Chief Financial Officer (the “CFO Employment Agreement”). Such 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. 51 Compensation Discussion and Analysis Overview We intend to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations. It is not uncommon for PRC private companies in northeastern China to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities. In March 2010, our board of directors established a compensation committee comprised of independent directors. The compensation committee will perform periodically a strategic review of the compensation program for our executive officers to determine whether it provides adequate incentives and motivation to our executive officers and whether it adequately compensates our executive officers relative to comparable officers in other companies with which we compete for executives. Those companies may or may not be public companies or companies located in the PRC or even, in all cases, companies in a similar business. 2010 Stock Incentive Plan In February 2010, we adopted the 2010 Stock Incentive Plan (the “2010 Plan”). All officers and key employees, directors of, and consultants to the Company and its subsidiaries and affiliates, who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its subsidiaries and affiliates are eligible for participation in the 2010 Plan. One Million One Hundred Fifty Thousand (1,150,000) shares of the Company’s common stock have been authorized and reserved for the 2010 Plan, subject to an increase of up to 10% of the Company’s issued and outstanding Common Stock, and any shares that may become available for issuance under awards under the 2010 Plan as a result of expiration or forfeiture. The Company may issue stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based awards under the 2010 Plan. The 2010 plan is administered by our Compensation Committee. Outstanding Equity Awards The following table reflects the unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of the end of the fiscal year ended May 31, 2010: 52 Option Awards Name Number of Securities Underlying Unexercised Options (#) Number of Securities Underlying Unexercised Unearned Options (#) Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date Rong Yang 400,000 (1) — 400,000 (1) $ 3.90 (1) Yiru Shi 300,000 (2) 300,000 (2) — $ 3.90 (2) (1) These options vest in two equal installments on February 13, 2011 and February 13, 2012, respectively. Each installment expires 5 years after its date of vesting. (2) These options vest in two equal installments on December 17, 2010 and December 17, 2011, respectively. Each installment expires 3 years after its date of vesting. Additional Narrative Disclosure We have no plans that provide for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including, but not limited to, tax qualified defined benefit plans, supplemental executive retirement plans, tax qualified defined contribution plans and non-qualified defined contribution plans. Director Compensation The following table reflects the compensation of the current directors (other than the named executive officers) for the Company’s fiscal year ended May 31, 2010: Name of Director Fees Earned or Paid in Cash ($) Option Awards ($) (1) Total ($) Francis Leong (2) 5,637 21,339 26,976 Zhenhai Niu (2) 4,827 21,339 26,166 Pat Spector (2) 6,175 21,339 27,514 Shuqian Wang (2) 5,637 11,589 17,226 53 (1) The amounts in these columns represent the compensation cost of stock options granted in 2010, except that these amounts do not include any estimate of forfeitures. The grant date fair value of option awards granted were determined in accordance with Financial Accounting Standard Board Accounting Standards Codification Topic 718 (formerly SFAS123(R) and are recognized as compensation cost over the requisite service period. The amount recognized for these awards was calculated using the Black Scholes option-pricing model. (2) As of May 31, 2010, Messrs. Leong, Niu, Spector and Ms. Wang each held options to purchase 10,000 shares of our common stock at an exercise price of $3.90 per share. On February 12, 2010, Messrs. Francis Nyon Seng Leong, Zhenhai Niu, and Pat Lee Spector were appointed as directors of the Company. Each of Messrs Leong, Niu and Spector entered into an Independent Director Agreement with the Company. On March 22, 2010, Ms. Shuqian Wang entered into an Independent Director Agreement with the Company. A summary of the compensation for the directorship of each of Messrs. Leong, Niu and Spector and Ms. Wang is set forth as follows: 1. An annual salary of $15,000, or $1,250 payable at the end of each month; 2. For the service as a chairman of a committee, such director shall receive an additional fee of $5,000 per annum, payable in equal installments at the end of each month. For the service as a member of a committee, such director shall receive an additional fee of $2,000 per annum, payable in equal installments at the end of each month. 3. Options to purchase 10,000 shares of the Common Stock subject to the 2010 Plan, exercisable at $3.90 per share, to vest one year after the grant date. Such options will expire 36 months from the date of the grant. If the directorship is terminated, the vested option will expire 365 calendar days after the termination. 4. Reimbursement of traveling expenses for such director’s attendance of meetings of the Board or any committee of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table provides information concerning beneficial ownership of our capital stock as of August 27, 2010 by: · each stockholder, or group of affiliated stockholders, who owns more than 5% of our outstanding capital stock; · each of our named executive officers; · each of our directors; and 54 · all of our directors and executive officers as a group. The following table lists the number of shares and percentage of shares beneficially owned based on 12,930,620 shares of Common Stock outstanding as of August 27, 2010. Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to the securities held. Shares of Common Stock subject to options and warrants currently exercisable or exercisable within 60 days of August 27, 2010 or issuable upon conversion of convertible securities which are currently convertible or convertible within 60 days of August 27, 2010 are deemed outstanding and beneficially owned by the person holding those options, warrants or convertible securities for purposes of computing the number of shares and percentage of shares beneficially owned by that person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, and subject to applicable community property laws, the persons or entities named have sole voting and investment power with respect to all shares of our Common Stock shown as beneficially owned by them. Name & Address of Beneficial Owner Office Title of Class Amount and Nature of Beneficial Ownership (1) Percent of Class (2) Officers and Directors Rong Yang Shidai Caifu Tiandi Building Suite 1906-09 1 Hangfeng Road Fengtai District Beijing, China 100070 (3) (7) Chairman, CEO and President Common Stock 6,753,991 50.7% Shuqian Wang 19 th Floor, Landmark Tower 2 8 North Dongsanhuan Road Beijing, China 100004 (8) Director Common Stock 10,000 Less than 1/10 of 1% Francis Nyon Seng Leong 262 Millview Bay SW Calgary, Alberta T2Y 3X9 (6) Director Common Stock 10,100 Less than 1/10 of 1% 55 Pat Lee Spector 145 McSkimming Road Aspen, Colorado 81611 (6) Director Common Stock 10,000 Less than 1/10 of 1% Zhenhai Niu Tuanjiehu Road Building 28, Room 1-201, Chaoyang District, Beijing 100026 (6) Director Common Stock 10,000 Less than 1/10 of 1% Yiru Shu Shidai Caifu Tiandi Building Suite 1906-09 1 Hangfeng Road Fengtai District Beijing, China 100070 (4) Chief Financial Officer Common Stock 300,000 2.3% All officers and directors as a group (6 persons named above) Common Stock 7,094,091 51.9% 5% Securities Holders Rui Shen 3814 Ballentree Way Duluth, GA 30097 (3) Common Stock 5,673,362 43.9% Whitebox Combined Partners 3033 Excelsior Blvd., Suite 300 Minneapolis, MN 55416 (10) Common Stock 751,282 5.8% 56 Bingchuan Xiao Room 8, Unit 4, Building 46, No.22 Fuxing Road, Haidian District, Beijing 100842 (5) Common Stock 756,071 (5) 5.8% Guiping Liao Shidai Caifu Tiandi Building Suite 1906-09 1 Hangfeng Road Fengtai District Beijing, China 100070 (9) Common Stock 6,753,991 50.7% (1) Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. (2) As of the date of this report, we had 12,930,620 shares of our common stock outstanding. (3) Under those certain call option agreements between Mr. Yang and Mr. Shen, Mr. Yang has an option to purchase 5,113,384 shares of common stock from Mr. Shen over the course of approximately two years in installments upon achievement of certain performance milestones by the Company. Under the Call Option Agreement, Mr. Yang can assign the right to purchase the shares to third parties. (4) Includes 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. (5) Under that certain call option agreement between Mr. Xiao and Mr. Shen, Mr. Xiao has an option to purchase 559,978 held by Mr. Shen over the course of approximately two years in installments upon achievement of certain performance milestones by the Company. Under the Call Option Agreement, Mr. Xiao can assign the right to purchase the shares to third parties. (6) Includes options to purchase 10,000 shares of the Common Stock of the Company, exercisable at $3.90 per share, to vest on February 12, 2011. (7) Includes options to purchase 400,000 shares of the Common Stock of the Company, exercisable at $3.90 per share, to vest on February 12, 2011. Includes 1,240,607 shares of the Common Stock of the Company held by Guiping Liao, the spouse of Mr. Yang. (8) Includes options to purchase 10,000 shares of the Common Stock of the Company, exercisable at $3.90 per share, to vest on March 22, 2011. (9) Includes options held by Mr. Yang, the spouse of Ms. Liao, to purchase 400,000 shares of the Common Stock of the Company, exercisable at $3.90 per share, to vest on February 12, 2011. Includes options held by Mr. Yang to purchase 5,113,384 shares of common stock from Mr. Shen. 57 (10) Includes 64,103 shares issuable upon exercise of warrants. Securities Authorized for Issuance under Equity Compensation Plan The following table summarizes the equity compensation plans under which our securities may be issued as of the date of this report. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted- average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans approved by security holders — — — Equity compensation plan not approved by security holders 440,000 $ 3.90 710,000 Total 440,000 710,000 Our Board of directors adopted the China Infrastructure Construction Corporation 2010 Stock Incentive Plan (the “2010 Plan”) on February 12, 2010. All our officers and key employees, and directors of, and consultants including those of our subsidiaries and affiliates, who are responsible for or contribute to the management, growth and/or profitability of our business, are eligible for participation in the 2010 Plan. One Million One Hundred Fifty Thousand (1,150,000) shares of our common stock have been authorized and reserved for the 2010 Plan, subject to an increase of up to 10% of our issued and outstanding common stock, and any shares that may become available for issuance under awards under the 2010 Plan as a result of expiration or forfeiture. We may issue stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based awards under the 2010 Plan. 58 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Transactions with related persons The following includes a summary of transactions for the last fiscal years ended May 31, 2010 and 2009, in which we were a participant, and in which any related person had a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm's-length transactions. The total outstanding amount of related party payables was $47,125 and $564,419 as of May 31, 2010 and 2009, respectively. These payables are loans from related parties for business purposes. They bear no interest, are unsecured and have no fixed payment terms. Currently, the related party payable consists of the following: May 31, 2010 May 31, 2009 Rong Yang (Chairman) $ 47,125 $ 372,489 Shunjun Liao(Chairman’s brother-in-law) - 98,723 RongHua Chang Shen Transportation (20% owned by a common shareholder) - 93,207 Total $ 47,125 $ 564,419 Total outstanding amount of related party receivables was $1,286,945 and $674,289 as of May 31, 2010 and 2009, respectively. These receivables require no interest and have no fixed re-payment terms. Currently, the receivables from related parties consist of the following: May 31, 2010 May 31, 2009 Lao Zhan (common shareholder) $ - $ 465,332 Yang Ming (Chairman Yang Rong’s brother) 147,817 187,490 Guiping Liao (CEO’s wife) 1,127,291 (1) - XiYang (CEO’s son) 12,467 - Heng Jian (20% owned by a common shareholder ) - 20,736 Beijing Yihua Daxin Investment (holding company) - 731 $ 1,286,945 $ 674,289 (1) The purpose of this loan was compliance with the PRC currency regulations. The loan was extended by our Hong Kong subsidiary. Except as set forth in our discussion above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC. 59 Policies and Procedures for Review, Approval or Ratification of Transactions with Related Persons As we increase the size of our board of directors and gain independent directors, we expect to prepare and adopt a written related-person transactions policy that sets forth our policies and procedures regarding the identification, review, consideration and approval or ratification of “related-persons transactions.” For purposes of our policy only, a “related-person transaction” will be a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any “related person” are participants involving an amount that exceeds $120,000. Transactions involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person will not be covered by this policy. A related person will be any executive officer, director or a holder of more than five percent of our common stock, including any of their immediate family members and any entity owned or controlled by such persons. We anticipate that, where a transaction has been identified as a related-person transaction, the policy will require management to present information regarding the proposed related-person transaction to our audit committee (or, where approval by our audit committee would be inappropriate, to another independent body of our board of directors) for consideration and approval or ratification. Management’s presentation will be expected to include a description of, among other things, the material facts, the direct and indirect interests of the related persons, the benefits of the transaction to us and whether any alternative transactions are available. To identify related-person transactions in advance, we are expected to rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related-person transactions, our board of directors will take into account the relevant available facts and circumstances including, but not limited to: · the risks, costs and benefits to us; · the impact on a director's independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated; · the terms of the transaction; · the availability of other sources for comparable services or products; and · the terms available to or from, as the case may be, unrelated third parties or to or from our employees generally. We also expect that the policy will require any interested director to excuse himself or herself from deliberations and approval of the transaction in which the interested director is involved. 60 Director Independence Mr. Francis Leong, Ms. Shuqian Wang, Mr. Zhenhai Niu and Mr. Pat Spector are independent directors pursuant to the definition of “independent director” under the Rules of NASDAQ, Marketplace Rule 5605(a)(2). ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following lists fees billed by Child, Van Wagoner & Bradshaw, PLLC, current auditors for the Company, for the years ended May 31, 2010 and 2009: 2010 2009 Audit Fees $ 102,612 $ 80,000 Audit Related Fees 18,500 12,000 Tax Fees 9,500 - All Other Fees 1,836 - In the event that we should require substantial non-audit services, the audit committee would pre-approve such services and fees. PART IV ITEM 15. EXHIBITS Number Description 2.1 Share Exchange Agreement by and between the Company and Northern Construction Holdings, Ltd. (1) 3.1 Articles of Incorporation of the Company (2) 3.2 Articles of Amendment (4) 3.3 By-laws of the Company (2) 4.1 Specimen of Common Stock Certificate (4) 10.1 Form of Call Option Agreement dated as of October 8, 2008 by and between Rui Shen and Rong Yang (3) 10.2 Form of Employment Agreement dated as of December 19, 2008 by and between Rong Yang and Beijing Concrete (4) 61 10.3 Form of Subscription Agreement dated October 16, 2009, among the Company and the Investors named therein (5) 10.4 Form of Investor Relations Escrow Agreement dated October 16, 2009, among the Company, Anslow& Jaclin, LLP and Trillion Growth China General Partner (5) 10.5 Form of Lockup Agreement dated October 16, 2009, by and between the Company and certain directors and officers (5) 10.6 Form of Lockup Agreement dated October 16, 2009, by and between the Company and certain non-affiliates shareholders (5) 10.7 Form of Call Option Agreement dated October 14, 2009, by and between Rui Shen and Rong Yang (5) 10.8 Form of Call Option Agreement dated October 14, 2009, by and between Rui Shen and Bingchuan Xiao (5) 10.9 Form of Voting Trust Agreement dated October 14, 2009, by and between Rui Shen and Rong Yang (5) 10.10 Form of Voting Trust Agreement dated October 14, 2009, by and between Rui Shen and Bingchuan Xiao (5) 10.11 Form of Employment Agreement dated December 17, 2009, by and between the Company and Ms. Yiru Shi (6) 10.12 Form of Option Agreement dated December 17, 2009, by and between the Company and Ms. Yiru Shi (6) 10.13 The China Infrastructure Construction Corporation 2010 Stock Incentive Plan, dated February 12, 2010 (7) 10.14 Form of Independent Director Agreement (7) 10.15 Amended and Restated Employment Agreement with Rong Yang, dated February 12, 2010 (7) 10.16 Non-Qualified Stock Option Agreement with Rong yang, dated February 12, 2010 (7) 10.17 Form of Subscription Agreement dated March 5, 2010, by and among the Company and the parties named therein (8) 10.18 Form of Amendment dated March 5, 2010 to Subscription Agreement dated October 16, 2009 by and among the Company and the parties named therein (8) 62 10.19 Form of Warrant issued to the Company’s placement agent and certain finder (8) 10.20 Form of Warrant issued to the 2009 Investors (8) 16.1 Letter of Ronald R. Chadwick, P.C. to the SEC dated October 9, 2008 (1); 21.1 List of Subsidiaries 31.1 Certifications of Rong Yang pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certifications of Yiru Shi pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002; Footnotes: (1) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 10, 2008. (2) Incorporated by reference to our Registration Statement on Form SB-2 (Reg. No. 333-146758) filed with the SEC on October 17, 2007. (3) Incorporated by reference to our Current Report on Form 8-K/A filed with the SEC on April 29, 2009. (4) Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on September 15, 2009. (5) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 20, 2009. (6) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 22, 2009. (7) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 19, 2009. (8) Incorporated by reference to our Current Report on Form 8-K filed with the SEC on March 12, 2009. 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION Date: August 30, 2010 By: /s/ Rong Yang Rong Yang Chief Executive Officer, Director (principal executive officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name and Title Date /s/ Rong Yang August 30, 2010 Rong Yang Chief Executive Officer and Director (Principal Executive officer) /s/ Yiru Shi August 30, 2010 Yiru Shi Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Shuqian Wang August 30, 2010 Shuqian Wang, Director /s/ Francis Nyon Seng Leong August 30, 2010 Francis Nyon Seng Leong, Director /s/ Pat Lee Spector August 30, 2010 Pat Lee Spector, Director /s/ Zhenhai Niu August 30, 2010 Zhenhai Niu, Director 64 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders of China Infrastructure Construction Corporation Beijing, China We have audited the accompanying consolidated balance sheets of China Infrastructure Construction Corporation (the Company) as of May 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income, cash flows, and changes in stockholders’ equity for the years ended May 31, 2010 and 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Infrastructure Construction Corporation as of May 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended May 31, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America. Child, Van Wagoner & Bradshaw, PLLC Salt Lake City, Utah August 30, 2010 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION CONSOLIDATED FINANCIAL STATEMENTS May 31, 2010 and 2009 Index to Consolidated Financial Statements Page Consolidated Balance Sheets F-1 Consolidated Statements of Operations and Comprehensive Income F-2 Consolidated Statements of Cash Flows F-3 Consolidated Statement of Changes in Stockholders’ Equity F-4 Notes to Consolidated Financial Statements F-5 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2010 AND 2009 May 31, 2010 2009 Assets Current assets Cash and cash equivalents $ 1,102,879 $ 921,841 Restricted cash 146,089 - Trade accounts receivable, net 53,411,689 26,438,106 Other receivables 950,671 - Inventories 575,452 885,834 Total current assets 56,186,780 28,245,781 Property, plant and equipment, net 7,995,701 5,649,835 Prepayments 1,289,007 - Other receivables - long term 4,955,648 270,819 Related party receivables 1,286,945 674,289 Total other assets 7,531,600 945,108 Total assets $ 71,714,081 $ 34,840,724 Liabilities and equity Current liabilities Trade accounts payable $ 13,376,119 $ 10,173,765 Related party payable 47,125 564,419 Other payables 2,217,307 1,730,290 Current portion of capital lease obligations 1,949,183 - Accrued expenses 491,885 277,329 Bank loan payable 1,317,600 - Total current liabilities 19,399,219 12,745,803 Long-term liabilities Long-term portion of capital lease obligations 2,185,820 - Total long-term liabilities 2,185,820 - Total liabilities 21,585,039 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; 12,815,620 and 1,529,550 shares issued and outstanding as of May 31, 2010 and May 31, 2009 42,252,295 1,396,644 Retained earnings 4,321,221 17,755,631 Accumulated other comprehensive income 1,509,314 1,731,951 Total China Infrastructure Construction Corporation stockholders' equity 48,082,830 20,884,226 Noncontrolling interests 2,046,212 1,210,695 Total liabilities and equity $ 71,714,081 $ 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 FISCAL YEARS ENDED MAY 31, 2010 AND 2009 YEARS ENDED MAY 31, 2010 2009 Sales Revenue, Net $ 73,998,463 $ 66,778,296 Cost of goods sold 55,960,792 53,776,934 Gross profit 18,037,671 13,001,362 General and administrative expenses 31,323,026 1,931,333 Net operating income (loss) (13,285,355 ) 11,070,029 Other income (expense): Interest income 4,424 - Interest expense (163,646 ) (2,097 ) Other income 857,170 - Total other income (expense) 697,948 (2,097 ) Net income (loss) before income taxes (12,587,407 ) 11,067,932 Income taxes - - Net income (loss) (12,587,407 ) 11,067,932 Less: Net income attributable to noncontrolling interests 847,003 606,723 Net income (loss) attributable to China Infrastructure Construction Corporation $ (13,434,410 ) $ 10,461,209 Earnings (loss) per share - basic and dilutive $ (1.66 ) $ 7.40 Basic and dilutive weighted average shares outstanding 8,106,833 1,413,047 Comprehensive income Net income (loss) (12,587,407 ) 11,067,932 Foreign currency translation adjustment (234,123 ) 448,057 Comprehensive income (loss) $ (12,821,530 ) $ 11,515,989 Comprehensive income attributable to non-controlling interests $ 835,517 $ 629,126 Comprehensive income (loss) attributable to China Infrastructure Construction Corporation $ (13,657,047 ) $ 10,886,863 The accompanying notes are an integral part of this statement. F-2 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED MAY 31, 2010 AND 2009 May 31, 2010 2009 Cash flows from operating activities: Net income (loss) $ (12,587,407 ) $ 11,067,932 Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: Gain from property, plant and equipment disposal (496,816 ) - Bad debt expenses 85,170 18,900 Depreciation 1,174,021 695,464 Shares issued for compensation 27,422,242 - Stock option expenses 199,003 - Changes in operating liabilities and assets: Trade accounts receivable (27,095,999 ) (16,117,557 ) Prepayments (1,291,119 ) 247,541 Inventories 311,124 448,959 Other receivables (1,835,744 ) 219,695 Trade accounts payable 3,204,875 4,539,958 Other payables 511,779 1,152,541 Accrued expenses 190,336 4,469 Net cash provided by (used in) operating activities (10,208,535 ) 2,277,902 Cash flows from investing activities: Property, plant, and equipment additions (2,692,568 ) (46,544 ) Deposits - construction in progress - (1,826,851 ) Payments to related party receivable (1,898,489 ) (501,690 ) Proceeds from related party receivable 575,372 - Net cash used in investing activities (4,015,685 ) (2,375,085 ) Cash flows from financing activities: Shares issued for cash 13,234,406 - Restricted cash (146,089 ) - Bank loan payable 1,319,760 - Proceeds from related party payable - 123,861 Cash acquired in recapitalization - - Net cash provided by financing activities 14,408,077 123,861 Effect of rate changes on cash (2,819 ) 58,185 Increase (decrease) in cash and cash equivalents 181,038 84,863 Cash and cash equivalents, beginning of period 921,841 836,978 Cash and cash equivalents, end of period $ 1,102,879 $ 921,841 - Supplemental disclosures of cash flow information: Interest paid in cash $ 119,619 $ - Income taxes paid in cash $ - $ - Non-cash investing activities: Acquisition of property, plant and equipment through other payable $ 4,141,781 $ - Disposal of property, plant and equipment through other receivable $ 3,808,920 $ - 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 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED MAY 31, 2010 AND 2009 Accumulated Other Common Stock Retained Earnings Comprehensive Noncontrolling Total Shares Amount (Accumulated Deficit) Income Interests Equity Balance: May 31, 2008 1,200,000 $ 1,368,021 $ 7,294,422 $ 1,306,297 $ 581,569 $ 10,550,309 Shares effectively issued to former shareholder as part of the recapitalization on 10/8/2008 329,550 28,623 - - - 28,623 Foreign currency translation adjustment - - - 425,654 22,403 448,057 Net income (loss) - - 10,461,209 - 606,723 11,067,932 Balance: May 31, 2009 1,529,550 1,396,644 17,755,631 1,731,951 1,210,695 22,094,921 Adjustment for 1:10 reverse split (4 ) - - - - - Shares issued for cash in October 2009 2,564,108 10,000,021 - - - 10,000,021 Shares issued for fund raising service in October 2009 408,531 1,573,366 - - - 1,573,366 Warrants issued for fund raising service in October 2009 - 262,836 - - - 262,836 Cost of issuance - (3,230,597 ) - - - (3,230,597 ) Shares issued for cash in March 2010 1,282,091 5,000,153 - - - 5,000,153 Warrants issued to placement agent - 183,200 - - - 183,200 Warrants issued to investors - 1,776,503 - - - 1,776,503 Cost of issuance - (2,331,076 ) - - - (2,331,076 ) Shares issued for compensation 7,031,344 27,422,242 - - - 27,422,242 Stock option expenses - 199,003 - - - 199,003 Foreign currency translation adjustment - - - (222,637 ) (11,486 ) (234,123 ) Net income (loss) - - (13,434,410 ) - 847,003 (12,587,407 ) Balance: May 31, 2010 12,815,620 $ 42,252,295 $ 4,321,221 $ 1,509,314 $ 2,046,212 $ 50,129,042 The accompanying notes are an integral part of this statement. F-4 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of operations China Infrastructure Construction Corporation (“China Infrastructure”), formerly Fidelity Aviation Corporation, 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. Fidelity was formed to purchase large commercial (transport category) jet airframes, salvage the usable aircraft parts and components from them and sell the parts and components. The Board of Directors evaluated the future market for aircraft parts business and resolved not to pursue this line of business anymore. 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 1,200,000 (12,000,000 pre-reverse 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 indirect majority-owned subsidiary. F-5 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. On January 15, 2010, Beijing Concrete increased its registered capital from RMB 15 million (approximately $2.2 million) to RMB 30 million (approximately $4.4 million) and BFCM increased its investment in Beijing Concrete accordingly. Its share capital increased from RMB 10 million (approximately $1.47 million) to RMB 15 million (approximately $2.2 million). As a result, BFCM owns 99.67% of Beijing Concrete from January 15, 2010. On February 1, 2010, Beijing Concrete formed a subsidiary, Shaanxi Hongruida Concrete Ltd. (“Hongruida”) and contributed RMB 10 million (approximately $1.47 million) to its capital. Beijing Concrete is the sole shareholder of Hongruida. Hongruida was organized to implement the 10-year strategic cooperative agreement with one of the Company’s major clients, China Railway Construction Group Co., Ltd (“CRCG”). Under the Agreement, the Company and CRCG will jointly manage the concrete mixing stations to be operated by Hongruida. CRCG will provide the cement for manufacturing the concrete mix in such concrete mixing stations, and will be able to purchase the concrete mix at discounted prices. Also, in accordance with the Agreement, each party will lease certain equipment to the concrete mixing stations. The Company and CRCG will share 75% and 25% of the annual profits of such concrete mixing stations in Xi’an. Hongruida commenced its operations at the end of March 2010. 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. 2. Basis of Presentation The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP. F-6 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Company’s foreign subsidiaries have fiscal year ends of May 31 and the results are consolidated up to that date. 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-7 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 12) 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 of attorney fees as a covenant for future services. As of May 31, 2010 and 2009, the amount not disbursed was $146,089 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 $397,042 and $311,928 as of May 31, 2010 and 2009, respectively. F-8 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: May 31, 2010 May 31, 2009 Raw materials $ 575,452 $ 885,834 Property 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 property and equipment is reported in cost of revenues. 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 May 31, 2010, 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. F-9 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 are 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. F-10 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Shipping Income and Expense -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 years ended May 31, 2010 and 2009, 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 of the Company is U.S. Dollars and that of Beijing Concrete 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. 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 May 31, 2010 and 2009, the Company did not have any deferred tax assets or liabilities, and as such, no valuation allowances were recorded at May 31, 2010 and 2009. F-11 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, Hong Kong, 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. Under the Income Tax Laws of the PRC, the Company’s subsidiaries are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. Currently, the Company is charged at 0% income tax expense for the fiscal years ended May 31, 2010 and 2009. 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 an effective rate of 25%. The current income tax expense and deferred tax expense for the fiscal years ended May 31, 2010 and 2009 are as follows: F-12 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2010 May 31, 2009 Current tax expense $ - $ - Deferred tax expense $ - $ - 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: o Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. o 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. o Level 3: inputs to the valuation methodology are unobservable and significant to the fair value. F-13 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. F-14 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a reconciliation of the basic and diluted earnings per share: 2010 2009 Net income (loss) for earnings per share $ (13,434,410 ) $ 10,461,209 Weighted average shares used in basic computation 8,106,833 1,413,047 Diluted effect of warrants and options - - Weighted average shares used in diluted computation 8,106,833 1,413,047 Earnings (loss) per share, basic $ (1.66 ) $ 7.40 Earnings (loss) per share, diluted $ (1.66 ) $ 7.40 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 ASC 280 “Segment reporting” (formerly SFAS 131) 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. F-15 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162 ), which has become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. 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-16 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Management is in the process of evaluating the impact of adopting this ASC update on the Company’s financial statements. In February 2010, FASB issued ASU No. 2010-9 –"Subsequent events (Topic 855)" Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The amendments were effective upon issuance of the update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements. In April 2010, the FASB issued Accounting Standard Update 2010-17, “Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition” or ASU 2010-17. This Update provides guidance on the recognition of revenue under the milestone method, which allows a vendor to adopt an accounting policy to recognize all of the arrangement consideration that is contingent on the achievement of a substantive milestone (milestone consideration) in the period the milestone is achieved. The pronouncement is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010. The Company does not expect the adoption of ASU 2010-17 to have a significant impact on its consolidated financial statements. F-17 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED 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: May 31, 2010 May 31, 2009 Office trailers $ 902,556 $ 902,319 Machinery and equipment 8,292,669 2,922,504 Motor vehicles 1,452,308 466,117 Furniture and office equipment 509,611 462,300 Construction in progress 421,716 3,305,813 Total property, plant and equipment 11,578,860 8,059,053 Accumulated depreciation (3,583,159 ) (2,409,218 ) Net property, plant and equipment $ 7,995,701 $ 5,649,835 Depreciation expense included in general and administrative expenses for the fiscal year ended May 31, 2010 and 2009 was $163,573 and $208,509, respectively. Depreciation expense included in cost of sales for the fiscal year ended May 31, 2010 and 2009 was $1,010,448 and $486,955, respectively. 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. On February 28, 2010, we sold construction in progress in Tangshan to an unrelated third party at a price of approximately $3.8 million. The amount will be due in 4 annual equal installments starting September 1, 2010. As of May 31, 2010, the book value of the construction in progress sold was approximately $3.3 million. A gain from property, plant and equipment disposal of $496,816 was recorded in other income. F-18 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest costs totaling $0 were capitalized into construction in progress for the years ended May 31, 2010 and 2009. 5. Prepayments Prepayments consist of the prepaid expenses and the monies deposited with the suppliers for purchasing vehicles and raw material. The total outstanding amount were $1,289,007 and $0 as of May 31, 2010 and 2009, respectively. There is no provision made for the prepayment at May 31, 2010 and 2009. 6. Other Receivables Other receivable in current assets amounted to $950,671 and $0 as of May 31, 2010 and 2009, respectively. Other receivables in long term assets amounted to $4,955,648 and $270,819 as of May 31, 2010 and 2009, respectively. As of May 31, 2010 other receivable includes $3.8 million related to construction in progress disposal to an unrelated party. The receivable is unsecured, interest free, and with fixed repayment dates (note 4). It also includes insurance claims and deposits, that are from unrelated parties, interest free, unsecured, and with no fixed repayment date, and advances to employees for business purposes. As of May 31, 2009, other receivables in long term assets 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 May 31, 2010 and 2009. F-19 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Other Payables Other payables in current liabilities consist of the following as of May 31, 2010 and 2009: May 31, 2010 May 31, 2009 Commission payable $ 1,488,213 $ 1,541,579 Payable to CRCG (note 1) 265,838 - Staff and other companies deposit 463,256 188,711 Total other payables $ 2,217,307 $ 1,730,290 Commission expense has been included in cost of goods sold. 8. Accrued Expenses Accrued expenses amounted to $491,885 and $277,329 as of May 31, 2010 and 2009. The accrued expenses mainly include accrued land lease expenses, accrued electricity and utility expenses, and accrued interest. 9. 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 $47,125 and $564,419 as of May 31, 2010 and 2009, respectively. These payables bear no interest and have no fixed payment terms. Currently, the related party payable consists of the following: May 31, 2010 May 31, 2009 Rong Yang (Chairman) $ 47,125 $ 372,489 Shunjun Liao(Chairman’s brother-in-law) - 98,723 RongHua Chang Shen Transportation (20% owned by a common shareholder) - 93,207 Total $ 47,125 $ 564,419 F-20 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total outstanding amount of related party receivables was $1,286,945 and $674,289 as of May 31, 2010 and 2009, respectively. These receivables require no interest and have no fixed re-payment terms. Currently, the receivables from related party consist of the following: May 31, 2010 May 31, 2009 Lao Zhan (common shareholder) $ - $ 465,332 Yang Ming (Chairman Yang Rong’s brother) 147,817 187,490 Guiping Liao (CEO’s wife) 1,128,723 (1) - XiYang (CEO’s son) 12,467 - Heng Jian (20% owned by a common shareholder ) - 20,736 Beijing Yihua Daxin Investment (holding company) - 731 $ 1,289,007 $ 674,289 (1) The purpose of this loan was compliance with the PRC currency regulations. The loan was extended by our Hong Kong subsidiary. 10. Debt Bank Loan Payable On October 16, 2009, the Company borrowed $1,466,000 from Beijng Bank. The loan is unsecured, and with an annual interest rate of 5.31%. $1,317,600 of the total amount is guaranteed by an unrelated party. The due dates are as follows: $146,400 due on July 16, 2010, $292,800 due on August 16, 2010, $439,200 due on September 16, 2010, and $439,200 due on October 16, 2010. Interest expenses are due on the 16th of every third month. As of May 31, 2010, the loan payable to bank amounted to $1,317,600. There is no interest expense capitalized into construction in progress for the years ended May 31, 2010 and 2009. By August 30, 2010, total loan bank payable of $146,400 was paid back. There was no bank loan payable as of May 31, 2009. Interest Total interest expense and financial charges for the years ended May 31, 2010 and 2009 on all debt amounted to $163,646 and $2,097, respectively. Total interest income for the years ended May 31, 2010 and 2009 amounted to $4,424 and $0, respectively. F-21 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capital Leases In July 2009, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $1,774,368 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 equipment for three years, with total payments of approximately $1,965,343. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $22,106 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 25 months from June 2010 to June 2012 are as follows: Total lease payment $ 1,474,007 Less imputed interest 110,186 Total capital lease obligation as of May 31, 2010 1,363,821 Less current maturity 681,337 Capital lease obligation – long-term portion as of May 31, 2010 $ 682,484 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 764,300 2012 655,114 2013 54,593 Total $ 1,474,007 In November 2009, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $187,392 with an annual interest rate of 5.94%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for three years, with total payments of approximately $205,050. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $2,811 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 34 months from June 2010 to March 2013 are as follows: Total lease payment $ 193,659 Less imputed interest 15,827 Total capital lease obligation as of May 31, 2010 177,832 Less current maturity 59,836 Capital lease obligation – long-term portion as of May 31, 2010 $ 117,996 F-22 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 68,350 2012 68,350 2013 56,959 Total $ 193,659 In December 2009, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $545,779 with an annual interest rate of 5.94%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for three years, with total payments of approximately $597,200. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $6,822 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 35 months from June 2010 to April 2013 are as follows: Total lease payment $ 597,200 Less imputed interest 51,421 Total capital lease obligation as of May 31, 2010 545,779 Less current maturity 185,995 Capital lease obligation – long-term portion as of May 31, 2010 $ 359,784 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 215,655 2012 199,067 2013 182,478 Total $ 597,200 F-23 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In December 2009, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $249,466 with an annual interest rate of 5.94%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for three years, with total payments of approximately $272,920. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $3,118 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 34 months from June 2010 to March 2013 are as follows: Total lease payment $ 264,184 Less imputed interest 21,065 Total capital lease obligation as of May 31, 2010 243,119 Less current maturity 85,436 Capital lease obligation – long-term portion as of May 31, 2010 $ 157,683 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 97,369 2012 90,990 2013 75,825 Total $ 264,184 In January 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $56,979 with an annual interest rate of 6.70%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for one year, with total payments of approximately $59,067. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $814 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 8 months from June 2010 to January 2011 are as follows: Total lease payment $ 39,378 Less imputed interest 971 Total capital lease obligation as of May 31, 2010 38,407 Less current maturity 38,407 Capital lease obligation – long-term portion as of May 31, 2010 $ 0 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 39,378 2012 - 2013 - Total $ 39,378 F-24 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In February 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $14,640 with an annual interest rate of 9.98%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for three years, with total payments of approximately $17,034. The title of the equipment will be transferred back to the Company upon the last payment. The minimum payments for the remaining lease term of 33 months from June 2010 to February 2013 are as follows: Total lease payment $ 15,584 Less imputed interest 2,004 Total capital lease obligation as of May 31, 2010 13,580 Less current maturity 4,515 Capital lease obligation – long-term portion as of May 31, 2010 $ 9,065 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 5,667 2012 5,667 2013 4,250 Total $ 15,584 In March 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $203,789 with an annual interest rate of 5.94%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for three years, with total payments of approximately $222,991. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $2,547 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 34 months from June 2010 to March 2013 are as follows: Total lease payment $ 215,813 Less imputed interest 17,210 Total capital lease obligation as of May 31, 2010 198,603 Less current maturity 69,793 Capital lease obligation – long-term portion as of May 31, 2010 $ 128,810 F-25 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 79,541 2012 74,330 2013 61,942 Total $ 215,813 In March 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $28,489 with an annual interest rate of 6.70%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for one year, with total payments of approximately $29,534. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $407 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 11 months from June 2010 to April 2011 are as follows: Total lease payment $ 27,072 Less imputed interest 885 Total capital lease obligation as of May 31, 2010 26,187 Less current maturity 26,187 Capital lease obligation – long-term portion as of May 31, 2010 $ 0 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 27,072 2012 - 2013 - Total $ 27,072 In March 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $339,642 with an annual interest rate of 11.13%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for two years, with total payments of approximately $380,403. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $293 will be paid by the Company related to this lease. The minimum payments for the remaining lease term of 23 months from June 2010 to April 2012 are as follows: F-26 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total lease payment $ 380,403 Less imputed interest 40,761 Total capital lease obligation as of May 31, 2010 339,642 Less current maturity 174,615 Capital lease obligation – long-term portion as of May 31, 2010 $ 165,027 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 206,053 2012 174,350 2013 - Total $ 380,403 In March 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $1,161,830 with an annual interest rate of 11.13%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for two years, with total payments of approximately $1,301,262. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $2,928 will be paid by the Company related to this lease. The minimum payments for the remaining lease term of 23 months from June 2010 to April 2012 are as follows: Total lease payment $ 1,301,262 Less imputed interest 139,432 Total capital lease obligation as of May 31, 2010 1,161,830 Less current maturity 597,310 Capital lease obligation – long-term portion as of May 31, 2010 $ 564,520 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 704,850 2012 596,412 2013 - Total $ 1,301,262 F-27 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In May 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $28,505 with an annual interest rate of 6.70%. The lease has been accounted for as a capital lease with the same third party to lease the equipment for one year, with total payments of approximately $29,549. The title of the equipment will be transferred back to the Company upon the last payment. A one time processing fee of $407 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 11 months from June 2010 to May 2011 are as follows: Total lease payment $ 27,087 Less imputed interest 885 Total capital lease obligation as of May 31, 2010 26,202 Less current maturity 26,202 Capital lease obligation – long-term portion as of May 31, 2010 $ 0 The future lease commitments for the next three years after May 31, 2010 are as follows: 2011 $ 27,087 2012 - 2013 - Total $ 27,087 The summary of all lease commitments is as follows: Total lease payment $ 4,535,649 Less imputed interest 400,646 Total capital lease obligation as of 5-31-2010 4,135,003 Less current maturity 1,949,183 Capital lease obligation – long term portion as of 5-31-2010 $ 2,185,820 The summary of future lease commitments for the next three years after May 31, 2010 is as follows: 2011 $ 2,235,323 2012 1,864,277 2013 436,046 Total $ 4,535,649 F-28 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Non-controlling Interest Non-controlling interest consists of other stockholders’ ownership interest in majority-owned subsidiaries of the Company, which is about 5.48% of the total ownership before the change of the non-controlling interest and 5.32% of the total ownership after the change of the non-controlling interest (Note 1). As of May 31, 2010 and 2009, the balance of non-controlling interest was $2,046,212 and $1,210,695, respectively. 12. 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 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 to show the effects of the Reverse Split as if it had occurred at the beginning of the first period presented. 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 7,031,344 shares of its common stock to Rui Shen, as a trustee holding the shares 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 expense. A total of $27,422,242 in compensation expense was included in selling, general and administrative expenses. F-29 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Company issued to the placement agent 92,468 shares of Common Stock for the service provided purely relating to the equity financing. Additionally, the Company issued to an advisor in the PRC 288,963 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 issued to a middleman 27,100 shares of Common Stock for the service provided purely relating to the equity financing. Thus, the Company paid $1,394,396 in total and issued 408,531 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; ¨ 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. F-30 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. On March 11, 2010, the Company consummated a private placement pursuant to a Subscription Agreement dated March 5, 2010 with a number of investors, providing for the sale to the investors of an aggregate of approximately 1,282,091 shares of common stock for an aggregate purchase price of approximately $5,000,000 (or $3.90 per Share). In connection with the private placement, the Company issued to the placement agent a warrant to purchase 46,154 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 of $240,000. Additionally, the Company issued to a finder a warrant to purchase 23,077 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 of $120,000. The Company paid $371,373 fund raising costs in total to various parties. These costs were classified as equity and accounted for as common stock issuance cost. Options On December 17, 2009, we granted to our newly appointed CFO options to purchase 300,000 shares of common stock, with an exercise price of $3.90 per share, which was the closest stock issuance price of the date of grant. The options will vest over 2 years and expire 3 years after the vesting date or after a termination date whichever is earlier. On February 12, 2010, we granted to our CEO options to purchase 400,000 shares of common stock, with an exercise price of $3.90 per share. The options will vest over 2 years and no option can be exercised after 5 years from the vesting date. F-31 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On February 12, 2010, we granted three independent directors each, options to purchase 10,000 shares of common stock, with an exercise price of $3.90 per share. The options will vest over 1 year and no option can be exercised after 3 years from the vesting date. On March 22, 2010, we granted one independent director options to purchase 10,000 shares of common stock, with an exercise price of $3.90 per share. The options will vest over 1 year and no option can be exercised after 3 years from the vesting date. The assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model are as follows: Risk-free interest rate 0.86 % Expected life of the options 1- 2 years Expected volatility 45 % Expected dividend yield 0 Following is a summary of the stock option activity: Options outstanding Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding, May 31, 2009 - $ - $ - Granted 740,000 $ 3.90 $ 0.00 Forfeited - - - Exercised - - - Outstanding May 31, 2010 740,000 $ 3.90 $ 0.00 Following is a summary of the status of options outstanding at May 31, 2010: Outstanding Options Exercisable Options Exercise Price Number Average Remaining Contractual Life Average Exercise Price Number Average Exercise Price $ 3.90 740,000 1.59 $ 3.90 - $ 3.90 F-32 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warrants On October 16, 2009, in connection with the Share Purchase Agreement in October 2009, 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. On March 22, 2010, in connection with the Share Purchase Agreement in March 2010, the Company issued 69,231 warrants to various parties as part of placement cost. 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. On March 22, 2010, in connection with the Share Purchase Agreement in March 2010, the Company issued 1,281,083 warrants to October 2009 investors. The warrants carry an exercise price of $6.00 and a 3-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 1,504,160 1,504,160 5.69 4.75 Forfeited - - - - Exercised - - - - Outstanding, May 31, 2010 1,504,160 1,504,160 $ 5.69 4.75 F-33 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. 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 $5,970 and $119,436 for the years ended May 31, 2010 and 2009, respectively. 14. Income Tax The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended May 31, 2010 and 2009: 2010 2009 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 Republic 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 years ended May 31, 2010 and 2009 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 years ended May 31, 2010 and 2009 amounted to approximately $3,821,280 and $2,802,334, 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 year ended May 31, 2010 by $0.47 and $0.47, 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 year ended May 31, 2009 by $0.20 and $0.20, respectively. F-34 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Other Income (Expenses) Other income was $857,170 for the year ended May 31, 2010. It mainly consists of $496,816 gain on property, plant and equipment disposal (note 4). The rest of the other income is mainly rental income by renting our equipment to unrelated third parties. Other expenses were $0 for the year ended May 31, 2010. Other income was $0 for the year ended May 31, 2009. Other expenses were $0 for the year ended May 31, 2009. 16. Concentration of Credit Risks and Uncertainties 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. The company had sales to one major customer, China Railway Construction Group, that represented 14% of the Company’s total sales for the fiscal year ended May 31, 2010. And the Company had sales to two major customers, China Railway Construction Group, and Guangzhou Tianli Construction Group , that represented 25% and 12% of the Company’s total sales for the fiscal year ended May 31, 2009. Two customers, China Railway Construction Group, and Guangzhou Tianli Construction Group, accounted for 26% and 10% of the Company’s accounts receivable balance at May 31, 2010. One customer, China Railway Construction Group, accounted for 33% of the Company’s accounts receivable balance at May 31, 2009. The top five major vendors account for 26% of the Company’s total inventory purchases for the fiscal year ended May 31, 2010 with one major vendor representing 8% of the total purchase. The top five major vendors account for 50% of the Company’s total inventory purchases for the fiscal year ended May 31, 2009 with one major vendor representing 23% of the total purchase. F-35 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS One major vendor accounted for 11% of the Company’s accounts payable at May 31, 2010. No vendor accounted for more than 10% of the Company’s accounts payable at May 31, 2009. One major vendor 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. Contingencies The Company has not, historically, carried any property or casualty insurance. No amounts have been accrued for any liability that could arise from the lack of insurance. Management feels the chances of such an obligation arising are remote. Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote. Operating Lease Commitment As of May 31, 2010, the Company was committed to minimum rentals for the leased land under long-term non-cancellable operating leases as follows: Fiscal Year Ended May 31, 2011 $ 255,529 2012 260,939 2013 212,641 2014 110,929 2015 106,872 Thereafter 737,491 Total: $ 1,684,401 We currently have a ten-year lease with annual payment of approximately $48,000, from March 1, 2008 to February 28, 2018, for our Beijing production base. We have built our offices and manufacturing facilities on this site. We also lease land for our Xi’an production facility. The annual payment is approximately $59,000. We also leased two offices in Beijing as our headquarter office. One office lease is from July 11, 2010 to July 10, 2012, with annual payment of approximately $48,000. One office lease is from December 15, 2009 to December 14, 2011, with annual payment of approximately $106,000. F-36 CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating lease expenses amounted to $124,013 and $48,391 for the years ended May 31, 2010 and 2009, respectively. Cooperation with Institute of Building Materials (“IBM”) On December 31, 2009, the Company reached a three year agreement with the Institute of Building Materials (“IBM”), a subsidiary of the China Academy of Building Research ("CABR"). Under the Agreement, CHNC will work exclusively with the Institute of Building Materials to obtain technical research, development and support. The Institute of Building Materials will also provide training courses to CHNC employees. CHNC will feature the Institute of Building Materials as CHNC’s technological partner in its corporate material. The Institute of Building Materials will use its relationships and brand influence in the construction industry to assist CHNC in business development. The Company agrees to pay IBM approximately $51,000 each year. 17. Subsequent Events On June 1, 2010, the Company hired an unrelated party as its consultant and a total of 100,000 restricted shares were issued. The Company has evaluated subsequent events from the balance sheet date through the date the report is issued. F-37