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CADC > SEC Filings for CADC > Form 10-K on 25-Sep-2013All Recent SEC Filings

Show all filings for CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC

Form 10-K for CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC


25-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Overview

We are a holding company whose primary business operations are conducted through our wholly-owned subsidiaries BVI-ACM and China-ACMH, and our variable interest entity, Xin Ao and its subsidiaries. We engage in the production and supply of advanced construction materials for large scale commercial, residential, and infrastructure developments, and are primarily focused on producing and supplying a wide range of advanced ready-mix concrete materials for highly technical, large scale, and environmentally-friendly construction projects.

During the year ended June 30, 2013, we supplied materials and provided services to our high speed railway projects through our network of ready-mixed concrete plants throughout Beijing (two as of June 30, 2013) and our portable plants (one as of June 30, 2013) located in An Hui province in China. We own one concrete plant and its related equipment.

Our manufacturing services are used primarily for our national high speed railway projects. Typically, the general contractors on the high speed railway projects supply the raw materials required for the project, which results in higher gross margins for us and reduces our upfront capital investments needed to purchase raw materials. We also produce ready-mix concrete at portable plants, which can be dismantled and moved to new sites for new projects. Our management believes that we have the ability to capture a greater share of the Beijing market and further expand our footprint in China via expanding relationships and networking, signing new contracts, and continually developing market-leading innovative and eco-friendly ready-mix concrete products.

Termination of Going-Private Transaction

On October 24, 2011, the Company announced that it had entered into a definitive agreement and plan of merger with Novel Gain Holdings Limited, a British Virgin Islands company ("Novel Gain"), CACMG Acquisition, Inc., a Delaware corporation and a wholly owned, direct subsidiary of Novel Gain ("Merger Sub"), Mr. Xianfu Han and Mr. Weili He, pursuant to which Merger Sub will merge with and into the Company with the Company continuing as the surviving corporation and a wholly owned subsidiary of Novel Gain.

Under the terms of the merger agreement, each share of the Company Common Stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $2.65 in cash without interest, except for (i) shares in respect of which appraisal rights have been properly exercised under Delaware law, and (ii) shares owned by Novel Gain and Merger Sub (including shares to be contributed to Novel Gain by Messrs. Han and He (the "Rollover Investors") pursuant to a rollover agreement between Novel Gain and the Rollover Investors immediately prior to the effective time of the merger), which shares will be cancelled without the Rollover Investors receiving any consideration.

On July 9, 2012, the Board of Directors of the Company, acting on the unanimous recommendation of the Special Committee of the Board of Directors, determined to terminate the merger agreement based on the determination by all parties that the conditions to consummate the Merger cannot be satisfied, and the Company and the other parties to the Merger Agreement entered into the Termination of Agreement and Merger Agreement to terminate the Merger Agreement. The termination takes effect immediately, and no fees are payable by the Company or the other parties in connection therewith.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect our financial performance:

- Large Scale Contractor Relationships. We have contracts with major construction contractors which are constructing key infrastructure, commercial and residential projects. Our sales efforts focus on large-scale projects and large customers which place large recurring orders and present less credit risk to us. For the years ended June 30, 2013, five customers accounted for approximately 22.1% of the Company's sales and 8.2% of the Company's account receivables as of June 30, 2013. Should we lose these customers in the future and are unable to obtain additional customers, our revenues will suffer.


- Experienced Management. Management's technical knowledge and business relationships give us the ability to secure major infrastructure projects, which provides us with leverage to acquire less sophisticated operators, increase production volumes, and implement quality standards and environmentally sensitive policies. If there be any significant turnover in our senior management, it could deplete the institutional knowledge held by our existing senior management team.

- Innovation Efforts. We strive to produce the most technically and scientifically advanced products for our customers and maintain close relationships with Tsinghua University, Xi'an University of Architecture and Technology and Beijing DongfangJianyu Institute of Concrete Science & Technology (the "Institute") which assist us with our research and development activities. During our five year agreement with the Institute, we have realized an advantage over many of our competitors by gaining access to a wide array of resources and knowledge. One payment of approximately $2.3 million to DongfangJianyu Institute of Concrete Science and Technology was paid under the agreement.

- Competition. Our competition includes a number of state-owned and large private PRC-based manufacturers and distributors that produce and sell products similar to ours. We compete primarily on the basis of quality, technological innovation and price. Essentially all of the contracts on which we bid are awarded through a competitive bid process, with awards often being made to the lowest bidder though other factors such as shorter schedules or prior experience with the customer are often just as important. Within our markets, we compete with many national, regional and local state-owned and private construction entities some of which have achieved greater market penetration or have greater financial and other resources than us. In addition, there are a number of larger national companies in our industry that could potentially establish a presence in our markets and compete with us for contracts. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.

PRC Taxation

China-ACMH and VIEs are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. After January 1, 2008, under the new Chinese Enterprise Income Tax ("EIT") law, the statutory corporate income tax rate applicable to most companies is 25%. As granted by the State Administration of Taxation of the PRC, Xin Ao was entitled to an income tax reduction from 25% to 15% from January 1, 2009 to June 12, 2012. The Company has received the approval of the income tax reduction from 25% to 15% for the period from June 13, 2012 to December 31, 2014.

In accordance with the EIT Law and related regulations, enterprises established under the laws of foreign countries or regions and whose "place of effective management" is located within the PRC territory are considered PRC resident enterprises and subject to the PRC income tax at the rate of 25% on worldwide income. The regulations define the term "place of effective management" as "establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise." The State Administration of Taxation issued a SAT Circular 82 on April 22, 2009, which provides that the "place of effective management" of a Chinese-controlled overseas incorporated enterprise is located in China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function are mainly located in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies located in the PRC;
(iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders' meetings are located or kept in the PRC; and (iv) no less than half of the enterprise's directors or senior management with voting rights reside in the PRC. SAT Circular 82 applies only to overseas registered enterprises controlled by PRC enterprises, not to those controlled by PRC individuals. If the Company's non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax under the EIT Law. The Company has analyzed the applicability of this law, and for each of the applicable periods presented, the Company has not accrued for PRC tax on such basis. The Company continues to monitor changes in the interpretation and/or guidance of this law.


The EIT Law also imposes a 10% withholding income tax, subject to reduction based on tax treaty where applicable, for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. Such dividends were exempted from PRC tax under the previous income tax law and regulations. The Company considers permanently reinvested undistributed earnings of Chinese operations located in the PRC. As a result, there is no deferred tax expense related to withholding tax on the future repatriation of these earnings.

Warrants Liability

The Company follows provisions of ASC 815, which determines whether an instrument (or embedded feature) is indexed to an entity's own stock. This accounting standard specifies that a contract which would otherwise meet the definition of a derivative but is both (a) indexed to the Company's own stock and (b) classified as stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. This accounting standard provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the scope exception.

As such, our warrants are not afforded equity treatment because the warrants have a downward ratchet provision on the exercise price. As a result, the warrants are not considered indexed to the Company's own stock, and, as such, all changes in the fair value of these warrants were recognized in earnings until they expired during the year ended June 30, 2013.

Business Segments and Periods Presented

We have provided a discussion of our results of operations on a consolidated basis and have also provided certain detailed segment information for each of our business segments below for the years ended June 30, 2013 and 2012, in order to provide a meaningful discussion of our business segments. We have organized our operations into three principal segments: concrete sales, manufacturing services, and corporate. We present our segment information along the same lines that our chief executives review our operating results in assessing performance and allocating resources.


For the year ended June 30, 2013:

                             Sales of       Manufacturing      Corporate
                             concrete         services            (1)            Total
Net revenue              $   69,314,758   $     5,172,214   $           -   $   74,486,972
Depreciation                 (1,779,944 )      (1,171,860 )      (347,676 )     (3,299,480 )
Segment profit (loss)         3,468,291           644,366     (30,638,746 )    (26,526,089 )
(2)
Other income (expenses)       4,153,257           329,114        (247,072 )      4,235,299
Interest income                   1,779                16         657,967          659,762
Interest expense                      -                 -      (1,798,025 )     (1,798,025 )
Capital expenditures           (308,167 )         (22,995 )             -         (331,162 )
Total assets as of June  $  135,651,579   $    10,122,217   $           -   $  145,773,796
30, 2013


For the year ended June 30, 2012:

                             Sales of       Manufacturing      Corporate
                             concrete         services            (1)            Total
Net revenue              $  134,773,387   $    10,369,387   $           -   $  145,142,774
Depreciation                 (3,725,938 )        (286,691 )      (374,125 )     (4,386,754 )
Segment profit (loss)        25,865,627        (2,664,061 )   (36,496,284 )    (13,294,718 )
(2)
Other income (expenses)       9,054,443           632,551        (611,297 )      9,075,697
Interest income                       -                 -         448,279          448,279
Interest expense                      -                 -      (1,620,562 )     (1,620,562 )
Capital expenditures           (369,804 )         (28,453 )             -         (398,257 )
Total assets as of June
30,
2012                     $  155,860,115   $     8,350,707   $           -   $  164,210,822

(1) All amounts shown in the Corporate column were incurred at the company headquarter level and did not relate specifically to any of the other reportable segments. Included in the segment loss was the provision for doubtful accounts which was recorded based on by customers and not by segment on the accounts receivable aging.

(2) Segment profit reflects general and administrative expenses not specifically allocated by segments.

Concrete Sales Business

Our concrete sales business segment is comprised of the formulation, production and delivery of the Company's line of C10-C100 concrete mixtures primarily through our current fixed plant network of two ready mix concrete batching plants in Beijing. For this segment of our business, we procure all of our own raw materials, mix them according to our measured mixing formula, ship the final products in mounted transit mixers to the destination work sites, and, for more sophisticated structures, will pump the mixture and set it into structural frame molds as per structural design parameters.

Manufacturing Services Business

Our manufacturing services business segment is comprised of the formulation, production and delivery of project-specific concrete mixtures primarily through our current portable plant network of 10 rapid assembly and deployment batching plants, located in various provinces throughout China. Our clients will purchase and provide the raw materials in volume on a separate account which we will then proportion and mix according to our formulation for a given project's specifications. At present, our manufacturing services business segment is primarily dedicated to various high-speed rail projects in China which demand very high quality standards on a time sensitive work schedule.

Consolidated Results of Operations


The following table sets forth key components of our results of operations for the years ended June 30, 2013 and 2012, in US dollars:

                                                      Years ended
                                                       June 30,
                                 2013             2012                          Percentage
                                                                Increase /      Increase /
                                                                (Decrease)      (Decrease)
Total revenue              $   74,486,972   $  145,142,774   $  (70,655,802 )        (49)%
Total cost of revenue          60,766,527      116,555,114      (55,788,617 )        (48)%
Gross profit                   13,720,445       28,587,630      (14,867,185 )        (52)%
Provision for doubtful        (15,183,439 )    (22,490,204 )     (7,306,765 )        (32)%
accounts
Selling, general and          (12,535,344 )    (13,064,966 )       (529,622 )         (4)%
administrative expenses
Research and development       (2,178,113 )     (2,946,226 )       (768,113 )        (26)%
expenses
Loss from termination of       (4,117,663 )              -        4,117,663           100%
lease
Loss realized from             (5,980,281 )       (968,093 )      5,012,188           518%
disposal of property,
plant and equipment
Impairment loss of               (251,694 )     (3,380,952 )     (3,129,258 )        (93)%
long-lived assets
Loss from operations          (26,526,089 )    (14,262,811 )    (12,263,278 )          86%
Other income, net               3,097,036        7,903,414       (4,806,378 )        (61)%
Loss before provision for     (23,429,053 )     (6,359,397 )    (17,069,656 )         268%
income taxes
Income taxes provision            169,326         (129,312 )        298,638         (231)%
(benefit)
Net loss available to      $  (23,598,379 ) $   (6,230,085 ) $  (17,368,294 )         279%
Common shareholders

Revenue. Our revenue is primarily generated from sales of our advanced ready-mix concrete products and manufacturing services. For the year ended June 30, 2013, we generated total revenue of approximately $74.5 million, as compared to approximately $145.1 million during the year ended June 30, 2012, a decrease of approximately $70.7 million, or 49%. Such decrease was primarily due to our sales generated from the concrete division for the year ended June 30, 2013, which was approximately $69.3 million, a decrease of approximately $65.5 million, or 49%, as compared to $134.8 million for the year ended June 30, 2012. The decrease in revenue attributable to concrete sales was principally due to the decreased demand of concrete sales in line with continuing slowing down of the local housing markets in the areas in which we operate, and the overall slowing of economic growth in China. China's central government continues to impose restrictions on the purchase of residential apartments in order to regulate housing prices in China, and, in addition, China's economic growth has been decelerating since 2012, which has caused adverse impact on construction industry in China.

During the year ended June 30, 2013, we continued to supply concrete products to three railway projects in China through our portable plants, specifically our projects located in Anhui Province. We temporarily suspended the operations of some portable plants in the first quarter ended March 31, 2013 due to inspections of high speed railroad projects by the government in China. The three railway projects contributed approximately $5.2 million to our total revenue for the year ended June 30, 2013, a decrease of approximately $5.2 million, or 50%, as compared $10.4 million for the year ended June 30, 2012. The decrease in revenues attributable to our manufacturing services was principally due to the suspension of operations of a number of our portable plants during the year ended June 30, 2013.

Cost of Revenue. Total cost of revenue, which consists of direct labor, rentals, depreciation, other overhead and raw materials, including inbound freight charges, was approximately $60.8 million for the year ended June 30, 2013, as compared to approximately $116.6 million for the year ended June 30, 2012, a decrease of approximately $55.8 million, or 48%. The decrease of cost of revenue was primarily due to the overall decrease in production from our fixed concrete plants in the Beijing area and decreased production on manufacturing services compared to the year ended June 30, 2012.


The cost of revenue on concrete decreased approximately $50.8 million, or 47%, for the year ended June 30, 2013, as compared to the year ended June 30, 2012. Such decrease was due to a decrease in our concrete production leading to a smaller base of raw material purchases with lower overall volume of traditional concrete sales.

Cost of revenue with respect to our manufacturing services was primarily due to our manufacturing services, which decreased approximately $5.0 million, or 53%, during the year ended June 30, 2013, as compared to the same period last year.

Gross Profit. Our gross profit is equal to the difference between our revenue and cost of sales. Total gross profit was approximately $13.7 million for the year ended June 30, 2013, as compared to approximately $28.6 million for the year ended June 30, 2012. Our gross profit for sale of concrete was approximately $13.0 million, or 19% of revenue, for the year ended June 30, 2013, as compared to approximately $27.7 million, or 21% of revenue for the year ended, 2012, a decrease of approximately $14.7 million. The lower gross profit for concrete sales for the year ended June 30, 2013, as compared with the same period last year, reflects lower demand and lower prices for our concrete products in Beijing as compared to the prior fiscal year.

Our gross profit with respect to our manufacturing services was approximately $0.7 million, or 13%, for the year ended June 30, 2013, a decrease of $0.2 million from $0.9 million during the year ended June 30, 2012, while the gross profit margin increased from 8% for the year ended June 30, 2012 to 13% for the year ended June 30, 2013. Such decrease was principally due to the decrease cost of revenue for manufacturing services for year ended June 30, 2013, as a result of the decrease in the number of portable plants. The primary reasons for the margin increase compared to the same period last year were higher production rates at our plants and a decrease in costs of transportation and cost for lease.

Provision for Doubtful Accounts. Provision for doubtful accounts was approximately $15.2 million for the year ended June 30, 2013, a decrease of approximately $7.3 million, as compared to approximately $22.5 million for year ended June 30, 2012. In accordance with our allowance for doubtful accounts policy, at the end of each quarter, we conduct aging analysis of each customer's arrears to determine whether allowance for doubtful accounts is adequate. In establishing allowance for doubtful accounts, we consider the historical experience, economy, the trend in the construction industry, the expected collectability of amount receivable that past due and the expected collectability of overdue receivable. An estimate of doubtful accounts is recorded when collection of the full amount is no longer probable. Known bad debts are written off against allowance for doubtful accounts when identified. The provision is 15% for accounts receivable past due more than 180 days but less than one year, 60% for accounts receivable past due from one to two years and 75% for accounts receivable past due beyond two years. The allowance for doubtful accounts increased to approximately $36.5 million at June 30, 2013, as compared to approximately $24.9 million at June 30, 2012, as a result of tightening monetary policy by the Chinese government causing shortage in cash and declining business to certain of our customers.

As of June 30, 2013, our accounts and notes receivable aging are as follows:


Accounts and notes receivable aging as of June 30, 2013:

               Balance          1-90          91-180        181-360         361-720        over 720
                                days           days           days           days            days
Accounts   $  96,165,487   $  13,914,785   $ 5,529,329   $ 25,909,358   $  36,841,725   $  13,970,290
receivable
and notes
Allowance    (36,469,156 )             -             -     (3,886,404 )   (22,105,035 )   (10,477,717 )
for
doubtful
accounts
Accounts   $  59,696,331   $  13,914,785   $ 5,529,329   $ 22,022,954   $  14,736,690   $   3,492,573
receivable
and notes,
net

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of sales commissions, advertising and marketing costs, office rent and expenses, costs associated with staff and support personnel who manage our business activities, professional and legal fees paid to third parties. We incurred selling, general and administrative expenses of approximately $12.5 million for the year ended June 30, 2013, a decrease of approximately $0.5 million, or 4%, as compared to approximately $13.1 million for the year ended June 30, 2012. The decrease was principally due to a $0.3 million decrease in professional expenses and a $0.2 million decrease in board of director fee.

Research and development expenses. Research and development expenses were approximately $2.2 million and $2.9 million for the years ended June 30, 2013 and 2012, respectively. The Company's R&D expenditure was maintained at a certain percentage of revenue. The $0.8 million decrease was mainly due to lower R&D expenditures resulting from decreased revenue.

Loss from termination of lease. On September 25, 2012, the Company entered an agreement with a third party to terminate one operating lease, which was originally effective from June 15, 2009 to June 14, 2014. Under the agreement, the fair value of net assets of the related operation were determined to be RMB 130.1 million (approximately $20.6 million) on September 25, 2012, and were settled for RMB 112 million (approximately $17.8 million). The Company recognized approximately $4.1 million loss from the termination of the lease for the year ended June 30, 2013.

Loss realized from disposal of property, plant and equipment. For the year ended June 30, 2013, we incurred $6.0 million loss realized from disposal of property, plant and equipment. During the year ended June 30, 2012, we incurred $1.0 million loss realized from disposal of property, plant and equipment. The increase of $5.0 million was due to disposal of certain portable plants and related equipment.

Impairment loss of long-lived assets. For the year ended June 30, 2013, we incurred $0.3 million impairment of long-lived assets due to the carrying values of some of our portable plants were impaired. During the year ended June 30, 2013, the operations of a number of our portable plants were temporarily suspended. The sum of the discounted future cash flows expected to result from the portable plants and their disposition is less than the carrying value. Therefore we determined the fair value of those portable plants was $0.3 million less than the carrying value at June 30, 2013.

Loss from Operations. We recognized loss from operations of approximately $26.5 million for the year ended June 30, 2013, as compared to loss from operations of approximately $14.3 million for the year ended June 30, 2012, an increase of approximately $12.3 million in loss from operations. Such increase in loss from operations was primarily due to a $14.9 million decrease in gross profits of our concrete sales and manufacturing services, a $4.1 million increase in loss from the termination of a lease and a $5.0 million increase in loss realized from disposal of property, plant and equipment, offset by a $7.3 million decrease in provision of doubtful accounts, a $0.5 million decrease in selling, general and administration expenses and a $0.8 million decrease in research and development expenses.


Income from operations of our concrete sales business for the year ended June . . .
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