UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE ACT OF 1934





For the quarterly period ended February 28, 2011


or





 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE ACT OF 1934





For the transition period from ___________ to ______________





Commission File Number: 333-146758





China Infrastructure Construction Corporation


(Exact name of registrant as specified in its charter)





Colorado

16-1718190(State or other jurisdiction of incorporation)

(IRS Employer Identification Number)





Shidai Caifu Tiandi Suite 1906-1909


1 Hangfeng Road Fengtai District


Beijing, China 100070


(Address of principal executive offices)





86-10-5809-0217


(Registrant’s telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  o Yes   x No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was Required to submit and post such files).


 ̈ Yes   ̈ No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer  ̈

Accelerated filer  ̈Non-accelerated filer  ̈  (Do not check if a smaller reporting

company)

Smaller reporting company x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ̈ Yes   x No





As of May 3, 2011, there were outstanding 12,930,620 shares of the registrant’s common stock, no par value.








TABLE OF CONTENTS





PagePART I Financial Information

F-1Item 1. Financial Statements.Consolidated Balance Sheets as of February 28, 2011 (Unaudited) and May 31, 2010

F-1Consolidated Statements of Income And Comprehensive Income for the three and nine months ended February 28, 2011 and 2010 (Unaudited)

F-2Consolidated Statements of Cash Flows for the nine months ended February 28, 2011 and February 28, 2010 (Unaudited)

F-3Notes to Consolidated Financial Statements (Unaudited)

F-4Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

3Item 4T. Controls and Procedures

10PART II Other Information

11Item 6. Exhibits.

11Signatures

12Exhibits/Certifications


2
 
 PART I-FINANCIAL INFORMATION


CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


CONSOLIDATED BALANCE SHEETS


AS OF FEBRUARY 28, 2011 AND MAY 31, 2010




February 28,


May 31,2011


2010(UNAUDITED)AssetsCurrent assetsCash and cash equivalents

$
351,016


$
1,102,879Restricted cash


69,409



146,089Trade accounts receivable, net


55,785,373



53,411,689Other receivables


1,879,724



950,671Inventories


763,972



575,452Total current assets


58,849,494



56,186,780Property, plant and equipment, net


7,579,553



7,995,701Prepayments


4,201,853



1,289,007Accounts receivables, net - long term


7,543,381



-Other receivables - long term


5,248,705



4,955,648Related party receivables


207,766



1,286,945Total other assets


17,201,705



7,531,600Total assets

$
83,630,752


$
71,714,081Liabilities and equityCurrent liabilitiesTrade accounts payable

$
13,568,448


$
13,376,119Related party payable


50,558



47,125Other payables


3,237,128



2,217,307Current portion of capital lease obligations


2,715,444



1,949,183Accrued expenses


585,244



491,885Tax payable


1,734,321



-Shares to be issued


77,700



-Bank loan payable


-



1,317,600Total current liabilities


21,968,843



19,399,219Long-term liabilitiesLong-term portion of capital lease obligations


946,505



2,185,820Total long-term liabilities


946,505



2,185,820Total liabilities


22,915,348



21,585,039Stockholders' EquityPreferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding


-



-Common stock: no par value; 100,000,000 shares authorized; 12,930,620 and 12,815,620 shares issued and outstanding as of February 28, 2011 and May 31, 2010


43,074,404



42,252,295Retained earnings


11,507,242



4,321,221Accumulated other comprehensive income


3,505,615



1,509,314Total China Infrastructure Construction Corporation stockholders' equity


58,087,261



48,082,830Noncontrolling interests


2,628,143



2,046,212Total liabilities and equity

$
83,630,752


$
71,714,081




The accompanying notes are an integral part of this statement.





F-1





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)


FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2011 AND 2010


(UNAUDITED)




THREE MONTHS ENDED FEBRUARY 28,


NINE MONTHS ENDED FEBRUARY 28,2011


2010


2011


2010Sales Revenue, NetConcrete Sales

$
18,211,981


$
20,249,742


$
65,329,631


$
51,660,602Manufacturing Service


2,571,701



-



2,571,701



-20,783,682



20,249,742



67,901,332



51,660,602Cost of goods soldConcrete Sales


11,549,212



16,472,119



45,306,297



40,976,286Manufacturing Service


710,935



-



710,935



-12,260,147



16,472,119



46,017,232



40,976,286Gross profit


8,523,535



3,777,623



21,884,100



10,684,316General and administrative expenses


10,083,492



763,041



13,377,622



29,946,526Net operating income (loss)


(1,559,957
)


3,014,582



8,506,478



(19,262,210
)Other income (expense):Interest income


9,219



-



10,213



-Interest expense


(51,688
)


(92,889
)


(154,895
)


(96,544
)Other income


137,660



498,249



156,326



503,245(Loss) from disposal of property, plant and equipment


-



-



(8,935
)


-Total other income


95,191



405,360



2,709



406,701Net income (loss) before income taxes


(1,464,766
)


3,419,942



8,509,187



(18,855,509
)Income taxes


273,429



-



854,359



-Net income (loss)


(1,738,195
)


3,419,942



7,654,828



(18,855,509
)Less (Add): Net income (loss) attributable to noncontrolling interests


(69,516
)


191,773



468,807



475,907Net income (loss) attributable to China Infrastructure Construction Corporation

$
(1,668,679
)

$
3,228,169


$
7,186,021


$
(19,331,416
)Earnings (loss) per share - basic

$
(0.13
)

$
0.28


$
0.56


$
(2.97
)Basic weighted average shares outstanding


12,930,620



11,546,195



12,930,199



6,514,531Earnings (loss) per share - diluted

$
(0.13
)

$
0.28


$
0.56


$
(2.97
)Diluted weighted average shares outstanding


12,930,620



11,587,053



12,930,199



6,527,849Comprehensive incomeNet income (loss)


(1,738,195
)


3,419,942



7,654,828



(18,855,509
)Foreign currency translation adjustment


887,918



17,787



2,109,425



(173,482
)Comprehensive income (loss)

$
(850,277
)

$
3,437,729


$
9,764,253


$
(19,028,991
)Comprehensive income (loss) attributable to non-controlling interests

$
(15,937
)

$
192,662


$
581,931


$
467,233Comprehensive income (loss) attributable to China Infrastructure Construction Corporation

$
(834,340
)

$
3,245,067


$
9,182,322


$
(19,496,224
)




The accompanying notes are an integral part of this statement.





F-2





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011 AND 2010


(UNAUDITED)


February 28,2011


2010Cash flows from operating activities:Net income (loss)

$
7,654,828


$
(18,855,509
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:(Gain) Loss from property, plant and equipment disposal


8,935



(496,782
)Bad debt expenses


8,016,081



420,217Depreciation


1,190,034



813,751Shares issued for compensation


316,250



27,422,242Stock option expenses


505,859



58,030Changes in operating liabilities and assets:Trade accounts receivable


(15,597,087
)


(14,867,003
)Prepayments


(2,805,594
)


-Inventories


(161,797
)


(1,088,087
)Other receivables


(961,399
)


(1,961,370
)Trade accounts payable


(342,068
)


487,288Other payables


886,375



76,478Accrued expenses and tax payable


101,161



9,887Shares to be issued


77,700



-Tax payable


1,701,318



-Net cash provided by (used in) operating activities


590,596



(7,980,858
)Cash flows from investing activities:Property, plant, and equipment additions


(506,657
)


(1,209,849
)Property, plant, and equipment disposal


37,375



-Proceeds from related party receivable


1,079,179



-Net cash provided by (used in) investing activities


609,897



(1,209,849
)Cash flows from financing activities:Shares issued for cash


-



8,605,626Restricted cash


76,680



(158,089
)Proceeds from Bank loan payable and capital lease obligations


31,111



1,466,300Payment to Bank loan payable and capital lease obligations


(2,006,905
)


-Proceeds from related party payable


-



211,755Payments to related party payable


(76,427
)


-Net cash provided by (used in) financing activities


(1,975,541
)


10,125,592Effect of rate changes on cash


23,185



10,691(Decrease) Increase in cash and cash equivalents


(751,863
)


945,576Cash and cash equivalents, beginning of period


1,102,879



921,841Cash and cash equivalents, end of period

$
351,016


$
1,867,417Supplemental disclosures of cash flow information:Interest paid in cash

$
102,703


$
94,159Income taxes paid in cash

$
-


$
-Non-cash investing activities:Acquisition of property, plant and equipment through other payable

$
-


$
2,261,763Disposal of property, plant and equipment through other receivable

$



$
3,808,660Related party receivable offset by payable to related party payable

$



$
674,289




The accompanying notes are an integral part of this statement.





F-3


CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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 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 the 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.





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.





F-4





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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, Shanxi 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.





The Company through its subsidiaries in Hong Kong and the People’s Republic of China (“PRC” or “China”), engages in the production of ready-mixed concrete for developers and the construction industry in the PRC. In addition, we have a technical service agreement with an independently owned concrete mixture station, pursuant to which we are paid by percentages of sales for technical support provided.





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. Operating results for the nine-month period ended February 28, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report for the year ended May 31, 2010.





F-5





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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. Noncontrolling 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-6





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Cash and Cash Equivalents





For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. Deposits held in financial institutions in the PRC are not insured by any government entity or agency.





Restricted Cash





In accordance with the Escrow Agreement and the Subscription Agreement (note 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 February 28, 2011 and May 31, 2010, the amount not disbursed was $69,409 and $146,089, 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 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 $8,584,891 and $397,042 as of February 28, 2011 and May 31, 2010, respectively.




The ultimate collection of the Company’s accounts receivable may take more than one year, and any portion of accounts receivable expected to be collected in more than one year is reflected as non-current, net of allowance for doubtful accounts relating to that portion of the receivables. The bifurcation between current and non-current portions of accounts receivable is based on management’s estimate and predicated on historical collection experience.




F-7





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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:





February 28, 2011


May 31, 2010Raw materials

$
763,972


$
575,452





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 yearsMachinery and equipment
3-8 yearsFurniture and office equipment
5-8 yearsMotor 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 February 28, 2011, the Company expects these assets to be fully recoverable. No impairment of assets was recorded in the periods reported.





F-8





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Accumulated Other Comprehensive Income





Accumulated other comprehensive income represents foreign currency translation adjustments.





Revenue Recognition





The Company receives revenue from sales of concrete products and from provision of concrete pumping services and consulting services. 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-9





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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 three and nine months ended February 28, 2011 and 2010, 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.





F-10





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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.





USA





The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. As the Group has no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of February 28, 2011 and May 31, 2010.





F-11





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Hong Kong





As the Group has no income generated in Hong Kong, there was no tax expense or tax liability due to the tax rule of Hong Kong as of February 28, 2011 and May 31, 2010.





PRC





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.





Beijing Concrete is subject to a special tax exemption approved by the PRC tax department. The exemption of income tax to the Company lasted until December 31, 2010, and from year 2011, the Company is subject to an income tax at a standard rate of 25%. The Company has an operating loss since January 1, 2011, and as a result, there is no income tax expense as of February 28, 2011.





BFCM has an accumulated operating loss, thus there is no income tax expense for BFCM. The Company has not recorded deferred taxes, as valuation allowances were provided because all significant differences in tax basis and financial statement amounts are permanent differences.





For the nine months ended February 28,2011


2010Income tax expensesCurrent tax

$
-


$
-Change in deferred tax assets


238,956



19,810Change in valuation allowance


(238,956
)


(19,810
)Total

$
-


$
-





Hongruida is subject to a 25% income tax rate. According to Chinese tax law, the income tax will be calculated at the year end. As of February 28, 2011, the Company has accrued income tax payable of $870,932 for income tax expenses for Hongruida.





The current income tax expense and deferred tax expense for the three and nine months ended February 28, 2011 and 2010 are as follows:





Three Months Ended February 28,


Nine Months EndedFebruary 28,2011


2010


2011


2010Current tax expense

$
273,429


$
-


$
854,359


$
-Deferred tax expense

$
-


$
-


$
-


$
-




F-12





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Restrictions on Transfer of Assets Out of the PRC





Dividend payments by the Company are limited by certain statutory regulations in the PRC. No dividends may be paid by the Company without first receiving prior approval from the Foreign Currency Exchange Management Bureau. However, no such restrictions exist with respect to loans and advances.





Financial Instruments





ASC 825 (formerly SFAS 107, “Disclosures about Fair Value of Financial Instruments”) defines financial instruments and requires disclosure of the fair value of those instruments. ASC 820 (formerly SFAS 157, “Fair Value Measurements”), adopted July 1, 2008, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables and payables, including short-term loans, qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available. The three levels are defined as follows:


 ̈
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.





 ̈
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.





 ̈
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value.





The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with ASC 820 (formerly SFAS 157).





F-13





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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.




The following is a reconciliation of the basic and diluted earnings per share for the three and nine months ended February 28, 2011 and 2010:





F-14





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





THREE MONTHS ENDED

FEBRUARY 28,


NINE MONTHS ENDED

FEBRUARY 28,2011


2010


2011


2010Net income (loss) for earnings per shareattributable to China InfrastructureConstruction Corporation

$
(1,668,679
)

$
3,228,169


$
7,186,021


$
(19,331,416
)Weighted average shares used in basic computation


12,930,620



11,546,195



12,930,199



6,514,531Diluted effect of warrants and options


-



40,858



-



13,318Weighted average shares used in diluted computation


12,930,620



11,587,053



12,930,199



6,527,849Earnings (loss) per share, basic

$
(0.13
)

$
0.28


$
0.56


$
(2.97
)Earnings (loss) per share, diluted

$
(0.13
)

$
0.28


$
0.56


$
(2.97
)





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.




For the three and nine months ended February 28 2010, the Company does not have more than one segment. For the three and nine months ended February 28, 2011, the Company has revenues from manufacturing service and concrete sales. The Company does not disaggregate the sales and administrative expenses for these two segments. Detailed information of the segments is as follows:




THREE MONTHS ENDED

FEBRUARY 28,


NINE MONTHS ENDED FEBRUARY 28,2011


2010


2011


2010Sales Revenue, NetConcrete Sales

$
18,211,981


$
20,249,742


$
65,329,631


$
51,660,602Manufacturing Service


2,571,701



-



2,571,701



-20,783,682



20,249,742



67,901,332



51,660,602Cost of goods soldConcrete Sales


11,549,212



16,472,119



45,306,297



40,976,286Manufacturing Service


710,935



-



710,935



-$
12,260,147


$
16,472,119


$
46,017,232


$
40,976,286




F-15





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Recent Accounting Pronouncements





In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will assess the impact of these amendments on its consolidated financial statements if and when an acquisition occurs.


In December 2010, the FASB issued amended guidance related to intangibles—goodwill and other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.


The Company has reviewed the Accounting Standards Updates up through 2011-03.





Reclassifications





Certain prior period amounts have been reclassified to conform to the current period presentation.





F-16





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





4.
Property, Plant and Equipment





Plant and equipment consist of the following:





February 28, 2011


May 31, 2010Office trailers

$
939,546


$
902,556Machinery and equipment


9,431,263



8,292,669Motor vehicles


746,503



1,452,308Furniture and office equipment


595,182



509,611Construction in progress


743,499



421,716Total property, plant and equipment


12,455,993



11,578,860Accumulated depreciation


(4,876,440
)


(3,583,159
)Net property, plant and equipment

$
7,579,553


$
7,995,701





Depreciation expense included in general and administrative expenses for the three months ended February 28, 2011 and 2010 was $39,520 and $54,303, respectively. Depreciation expense included in general and administrative expenses for the nine months ended February 28, 2011 and 2010 was $144,504 and $160,656, respectively. Depreciation expense included in cost of sales for the three months ended February 28, 2011 and 2010 was $277,301 and $211,016, respectively. Depreciation expense included in cost of sales for the nine months ended February 28, 2011 and 2010 was $1,045,530 and $653,095, 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.





Interest costs totaling $0 were capitalized into construction in progress for the three and nine months ended February 28, 2011 and 2010.





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 was $4,201,853 and $1,289,007 as of February 28, 2011 and May 31, 2010, respectively. There is no provision made for the prepayment at February 28, 2011 and May 31, 2010.





F-17





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





6.
Other Receivables





Other receivables in current assets amounted to $1,879,724 and $950,671 as of February 28, 2011 and May 31, 2010, respectively.





Other receivables in long-term assets amounted to $5,248,705 and $4,955,648 as of February 28, 2011 and May 31, 2010, respectively.





As of February 28, 2011, other receivables include approximately $3.36 million related to construction in progress disposal to an unrelated party. 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. The receivable is unsecured, interest free, and with fixed repayment dates. Approximately $960,120 of this total $3.8 million was received by April 2011.





Other receivables also include insurance claims and deposits that are due from unrelated parties, interest free, unsecured, and with no fixed repayment date, and advances to employees for business purposes.





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 February 28, 2011 and May 31, 2010.





7.
Other Payables





Other payables in current liabilities consist of the following as of February 28, 2011 and May 31, 2010





February 28, 2011


May 31,2010Commission payable

$
1,732,102


$
1,488,213Payable to CRCG (note 1)


1,113,704



265,838Staff and other companies deposit


391,322



463,256Total other payables

$
3,237,128


$
2,217,307


Commission expense has been included in cost of goods sold.





F-18





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





8.
Accrued Expenses





Accrued expenses amounted to $585,244 and $491,885 as of February 28, 2011 and May 31, 2010, respectively. 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 $50,558 and $47,125 as of February 28, 2011 and May 31, 2010, respectively. These payables bear no interest and have no fixed payment terms. Currently, the related party payable consists of the following:





February 28, 2011


May 31,2010Rong Yang (Chairman)

$
50,558


$
47,125Total

$
50,558


$
47,125





Total outstanding amount of related party receivables was $207,766 and $1,286,945 as of February 28, 2011 and May 31, 2010, respectively. These receivables require no interest and have no fixed re-payment terms. Currently, the receivables from related party consist of the following:





February 28, 2011


May 31, 2010Yang Ming (Chairman Yang Rong’s brother)

$
40,000
(1)

$
147,817Guiping Liao (CEO’s wife)


147,766
(1)


1,126,661Xi Yang (CEO’s son)


20,000
(1)


12,467$
207,766


$
1,286,945








(1)
The purpose of these related party receivables are for business purposes such as travel advances and advances to vendors paid through related parties.




F-19





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)


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 February 28, 2011 and May 31, 2010, the loan payable to bank amounted to $0 and $1,317,600, respectively. There is no interest expense capitalized into construction in progress for the three and nine months ended February 28, 2011 and 2010.





Interest





Total interest expense and financial charges for the three months ended February 28, 2011 and 2010 on all debt amounted to $51,688 and $92,889, respectively. Total interest expense and financial charges for the nine months ended February 28, 2011 and 2010 on all debt amounted to $154,895 and $96,544, respectively. Total interest income for the three months ended February 28, 2011 and 2010 amounted to $9,219 and $0, respectively. Total interest income for the nine months ended February 28, 2011 and 2010 amounted to $10,213 and $0, respectively.





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 16 months from March 2011 to June 2012 are as follows:





Total lease payment

$
1,193,444Less imputed interest


70,873Total capital lease obligation as of February 28, 2011


1,122,571Less current maturity


898,416Capital lease obligation – long-term portion as of February 28, 2011

$
224,155




F-20





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
966,1152013


227,3292014


-Total

$
1,193,444





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 25 months from March 2011 to March 2013 are as follows:





Total lease payment

$
160,090Less imputed interest


10,586Total capital lease obligation as of February 28, 2011


149,504Less current maturity


75,034Capital lease obligation – long-term portion as of February 28, 2011

$
74,470





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
83,0102013


71,1512014


5,929Total

$
160,090





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 26 months from March 2011 to April 2013 are as follows:





F-21





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Total lease payment

$
587,138Less imputed interest


47,975Total capital lease obligation as of February 28, 2011


539,163Less current maturity


306,146Capital lease obligation – long-term portion as of February 28, 2011

$
233,017





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
345,3752013


207,2252014


34,538Total

$
587,138





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 25 months from March 2011 to March 2013 are as follows:





Total lease payment

$
244,692Less imputed interest


18,369Total capital lease obligation as of February 28, 2011


226,323Less current maturity


127,181Capital lease obligation – long-term portion as of February 28, 2011

$
99,142





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
142,0792013


94,7192014


7,894Total

$
244,692


F-22





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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 24 months from March 2011 to February 2013 are as follows:





Total lease payment

$
11,799Less imputed interest


1,143Total capital lease obligation as of February 28, 2011


10,656Less current maturity


5,063Capital lease obligation – long-term portion as of February 28, 2011

$
5,593





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
5,8992013


5,9002014


-Total

$
11,799





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 25 months from March 2011 to March 2013 are as follows:





Total lease payment

$
193,442Less imputed interest


14,092Total capital lease obligation as of February 28, 2011


179,350Less current maturity


98,362Capital lease obligation – long-term portion as of February 28, 2011

$
80,988





F-23





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
109,6172013


77,3772014


6,448Total

$
193,442





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 2 months from March 2011 to April 2011 are as follows:





Total lease payment

$
7,686Less imputed interest


85Total capital lease obligation as of February 28, 2011


7,601Less current maturity


7,601Capital lease obligation – long-term portion as of February 28, 2011

$
0





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
7,6862013


-2014


-Total

$
7,686





In March 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $375,370 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 $437,645. 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 14 months from March 2011 to April 2012 are as follows:





F-24





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Total lease payment

$
328,234Less imputed interest


27,212Total capital lease obligation as of February 28, 2011


301,022Less current maturity


265,053Capital lease obligation – long-term portion as of February 28, 2011

$
35,969





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
291,7642013


36,4702014


-Total

$
328,234





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 14 months from March 2011 to April 2012 are as follows:





Total lease payment

$
1,072,386Less imputed interest


93,303Total capital lease obligation as of February 28, 2011


979,083Less current maturity


867,750Capital lease obligation – long-term portion as of February 28, 2011

$
111,333





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
959,5032013


112,8832014


-Total

$
1,072,386





F-25





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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 2 months from March 2011 to May 2011 are as follows:





Total lease payment

$
7,690Less imputed interest


85Total capital lease obligation as of February 28, 2011


7,605Less current maturity


7,605Capital lease obligation – long-term portion as of February 28, 2011

$
0





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
7,6902013


-2014


-Total

$
7,690





In August 2010, the Company entered into a capital leaseback arrangement with an unrelated third party for approximately $154,473 with an annual interest rate of 7.98%. The lease has been accounted for as a capital lease with the same third party to lease the auto for three years, with total payments of approximately $174,212. The title of the auto will be transferred back to the Company upon the last payment. A first payment of $66,203 was paid by the Company related to this lease. The minimum payments for the remaining lease term of 33 months from March 2011 to August 2013 are as follows:





Total lease payment

$
154,854Less imputed interest


15,783Total capital lease obligation as of February 28, 2011


139,071Less current maturity


57,234Capital lease obligation – long-term portion as of February 28, 2011

$
81,837





The future lease commitments for the next three years after February 28, 2011 are as follows:





2012

$
58,0702013


43,5522014


53,232Total

$
154,854




F-26





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





The summary of all lease commitments is as follows:





Total lease payment

$
3,961,455Less imputed interest


299,506Total capital lease obligation as of February 28, 2011


3,661,949Less current maturity


2,715,444Capital lease obligation – long term portion as of February 28, 2011

$
946,505





The summary of future lease commitments for the next three years after February 28, 2011 is as follows:





2012

$
2,976,8072013


876,6062014


108,042Total

$
3,961,455





11.
Noncontrolling Interest





Noncontrolling 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 noncontrolling interest and 5.32% of the total ownership after the change of the noncontrolling interest (Note 1). As of February 28, 2011 and May 31, 2010, the balance of noncontrolling interest was $2,628,143 and $2,046,212, respectively.





12.
Shareholder’s Equity





Stock Issuance for Compensation





On June 1, 2010, the Company hired a consulting company. As compensation, the Company paid $45,000 and issued 115,000 shares of restricted common stock, and another 100,000 shares of restricted common stock will be issued upon certain terms. The shares are valued at market price of a total of $316,250 at $2.75 per share. The cash paid was first recorded as prepaid expenses. The shares issued are recorded as deferred consulting fee. Both the prepaid expenses and deferred consulting fee will amortize to expense over the agreement term of the six-month period. As of February 28, 2011, prepaid expenses for this service has a balance of $0 and deferred consulting fee has a balance of $0.





F-27





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





On November 18, 2010, the Company hired an investor relationship company. As compensation, the Company agreed to issue 30,000 shares of restricted common stock. The shares are valued at market price of a total of $77,700 at $2.59 per share. As of February 28, 2011, the shares have not been issued and are recorded as shares to be issued in the liabilities section of the balance sheet.





Options





On December 17, 2009, we granted to the previous 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 at 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. All the options were forfeited immediately when the CFO resigned the position on October 25, 2010.





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.





The assumptions used in calculating the fair value of the above 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 yearsExpected volatility


45
%Expected dividend yield


0





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.





F-28





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





The assumptions used in calculating the fair value of the above options granted using the Black-Scholes option- pricing model are as follows:





Risk-free interest rate


0.35
%Expected life of the options

1- 2 yearsExpected volatility


45
%Expected dividend yield


0





On October 25, 2010, we granted to our newly appointed CFO options to purchase 150,000 shares of common stock, with an exercise price of $3.90 per share. The options will vest over 1 year and expire 3 years after the vesting date or after a termination date whichever is earlier.





The assumptions used in calculating the fair value of the above option granted using the Black-Scholes option- pricing model are as follows:





Risk-free interest rate


0.22
%Expected life of the options

1- 2 yearsExpected volatility


81
%Expected dividend yield


0





Following is a summary of the stock option activity for the three months ended February 28, 2011:





Options

outstanding


Weighted

Average

Exercise

Price


Aggregate

Intrinsic

ValueOutstanding, May 31, 2010


740,000


$
3.90


$
0.00Granted


150,000



-



-Forfeited


300,000



-



-Exercised


-



-



-Outstanding February 28, 2011


590,000


$
3.90


$
0.00





F-29





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)




Following is a summary of the status of options outstanding at February 28, 2011:





Outstanding Options

Exercisable OptionsExercise Price


Number


Average

Remaining

Contractual

Life

Average

Exercise

Price


Number

Average

Exercise Price$
3.90



590,000



0.81


$
3.90



-


$
3.90





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

LifeOutstanding, May 31, 2010


1,504,160



1,504,160


$
5.69



3.05Granted


-



-



-



-Forfeited


-



-



-



-Exercised


-



-



-



-Outstanding, February 28, 2011


1,504,160



1,504,160


$
5.69



2.30





F-30





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





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 $51,441 and $30,407 for the three months ended February 28, 2011 and 2010, respectively. The total expense for the above plan was $86,999 and $78,572 for the nine months ended February 28, 2011 and 2010, respectively.





14.
Income Tax





The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended February 28, 2011 and 2010:





2011


2010U.S. Statutory rates


34.0
%


34.0
%Foreign income not recognized in USA


(34.0
)


(34.0
)China income taxes


25.0



0China income tax exemption


15.0



0Total provision for income taxes


10.0
%


0
%





USA





The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. As the Group has no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of February 28, 2011 and May 31, 2010.








F-31





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Hong Kong





As the Group has no income generated in Hong Kong, there was no tax expense or tax liability due to the tax rule of Hong Kong as of February 28, 2011 and May 31, 2010.





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.





Beijing Concrete is subject to a special tax exemption approved by the PRC tax department. The exemption of income tax to the Company lasted until December 31, 2010, and from year 2011, the Company is subject to an income tax at a standard rate of 25%. The Company has an operating loss since January 1, 2011, and as a result, there is no income tax expense as of February 28, 2011.





BFCM has an accumulated operating loss, thus there is no income tax expense for BFCM. The Company has not recorded deferred taxes, as valuation allowances were provided because all significant differences in tax basis and financial statement amounts are permanent differences.





For the nine months ended February 28,2011


2010Income tax expensesCurrent tax

$
-


$
-Change in deferred tax assets


238,956



19,810Change in valuation allowance


(238,956
)


(19,810
)Total

$
-


$
-





Hongruida is subject to a 25% income tax rate. According to Chinese tax law, the income tax will be calculated at the year end. As of February 28, 2011, the Company has accrued tax payable of $870,932 for income tax expenses for Hongruida.





The estimated tax savings due to the tax exemption for the three months ended February 28, 2011 and 2010 amounted to approximately $0 and $893,876, respectively. The estimated tax savings due to the tax exemption for the nine months ended February 28, 2011 and 2010 amounted to approximately $2,800,486 and $2,193,876, respectively. The net effect on earnings per share if the income tax had been applied would decrease the basic and diluted earnings per share for the three months ended February 28, 2011 by $0.00. 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 nine months ended February 28, 2011 by $0.22. The net effect on earnings per share if the income tax had been applied would decrease the basic and diluted earnings per share for the three months ended February 28, 2010 by $0.08. 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 nine months ended February 28, 2010 by $0.34.





F-32





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





15.
Other Income (Expenses)





Other income was $137,660 and $156,326 for the three and nine months ended February 28, 2011, respectively. It consists of income from selling recycled paper and vehicle accident compensation. Other expenses were $0 and $8,935 for the three and nine months ended February 28, 2011, respectively. Other expenses are net losses from property, plant and equipment disposal.





Other income was $498,249 and $503,245 for the three and nine months ended February 28, 2010, respectively. It mainly consists of gain on property, plant and equipment disposal. Other expenses were $0 for the three and nine months ended February 28, 2010, respectively.





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.





One major customer, China Railway Construction Group accounted for 31% of the Company’s total sales for the three months ended February 28, 2011. Two major customers, China Railway Construction Group and Jiangxi Jinggangshan Road and Bridge construction Company accounted for 23% and 12% of the Company’s total sales for the nine months ended February 28, 2011.





One major customer, China Railway Construction Group., accounted for 11% of the Company’s total sales for the three months ended February 28, 2010. One major customer, China Railway Construction Corp., accounted for 16% of the Company’s total sales for the nine months ended February 28, 2010.





One customer, China Construction Group accounted for 18% of the Company’s accounts receivable balance at February 28, 2011. 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.





F-33





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Three major vendors, Hekai Stone and Sand Company, Beijing Beijing Hongmaoweiye Additive Company and Tangshan Jidong Cement Company accounted for 14%, 11% and 11% of the Company’s total inventory purchases for the three months ended February 28, 2011. One major vendor, Hekai Stone and Sand Company accounted for accounted for 12% of the Company’s total inventory purchases for the nine months ended February 28, 2011.





The top five major vendors accounted for 26% of the Company’s total purchases for the three months ended February 28, 2010, with no one major vendor accounting for more than 10% of the total purchases. The top five major vendors accounted for 28% of the Company’s total purchases for the nine months ended February 28, 2010, with no one major vendor accounting for more than 10% of the total purchases.





One major vendor, Shuhong Liu accounted for 11% of the Company’s accounts payable at February 28, 2011. No major vendor accounted for more than 10% of the Company’s accounts payable at February 28, 2010. One major vendor accounted for 11% of the Company’s accounts payable at May 31, 2010.





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.





F-34





CHINA INFRASTRUCTURE CONSTRUCTION CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FEBRUARY 28, 2011


(UNAUDITED)





Operating Lease Commitment





As of February 28, 2011, the Company was committed to minimum rentals for the leased land under long-term non-cancellable operating leases as follows:





Twelve Months Ended February 28,2012

$
198,0962013


111,2522014


111,2522015


111,2522016


111,252Thereafter


633,984Total:

$
1,277,088





We currently have a ten-year lease with an 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 an annual payment of approximately $48,000. One office lease is from December 15, 2009 to December 14, 2011, with an annual payment of approximately $106,000.





Operating lease expenses amounted to $58,023 and $48,735 for the three months ended February 28, 2011 and 2010, respectively. Operating lease expenses amounted to $184,911 and $72,927 for the nine months ended February 28, 2011 and 2010, respectively.





17.
Subsequent events





There are no material subsequent events. The Company has evaluated subsequent events from the balance sheet date through the date the report is issued.




F-35




ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION





SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS





CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD-LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS "PLANS", "INTENDS", "WILL", "HOPES", "SEEKS", "ANTICIPATES", "EXPECTS "AND THE LIKE OFTEN IDENTIFY SUCH FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD-LOOKING STATEMENT. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.





Unless the context otherwise requires, The "Company", "we," "us," and "our," refer to (i) China Infrastructure Construction Corporation; (ii) Beijing Chengzhi Qianmao Concrete Co., Ltd. (“Beijing Concrete”), (iii) Beijing Fortune Capital Management, Ltd. (“BFCM”), (iv) Shaanxi Hongruida Concrete, Ltd. (“Hongruida”), and (v) Northern Construction Holdings, Ltd. (“NCH”).





Overview





China Infrastructure Construction Corporation (the “Company”, “China Infrastructure”, “CHNC”, “We”, “Our”) was organized in Colorado on February 28, 2003. The Company through its subsidiaries in Hong Kong and the People’s Republic of China (“PRC” or “China”), engages in production of ready-mixed concrete for developers and the construction industry in the PRC.





Beijing Concrete currently has four production facilities. One facility is located in the Nanhaizi area, on the west side of the Yizhuang economic development zone in Beijing, one is in Shidu, a suburban area of Beijing, one is in Xi’an West New High-tech Zone, and another one is located at the Tangshan harbor, about two hundred kilometers from Beijing. The plant located in Xi’an was put into operation at the end of March 2010.





Results of Operations





Three months ended February 28, 2011 Compared to Three months ended February 28, 2010





Net Revenue





Net Revenue for the three months ended February 28, 2011 was $20,783,682 as compared to $20,249,742 for the same period last year, an increase of $533,940, or approximately 2.64%. The increase in net revenue is mainly attributable to the production increase in Xi’an and the revenue from our Shidu facility and also the revenue from technical service but offset by projection decrease at our Tangshang (Jiahua) facility, which completed the project in Tangshang and stopped production, the equipment of which has been relocated to our Caofeidian facility.  The revenue increase is further offset by the gradual change of the business model in our Caofeidian facility and Shidu facility from supplying concrete to providing manufacturing service, by which our general contractors supply the needed raw materials. The business model change in Caofeidian started in March 2010, and starting from 2011 the Caofeidian facility only provides the manufacturing service. The business change in the Shidu facility took place in October 2010 when it switched to providing only manufacturing service.


3





Costs of Goods Sold





Cost of goods sold for the three months ended February 28, 2011 was $12,260,147 as compared to $16,472,119 for the same period last year, a decrease of $4,211,972 or approximately 25.57%. The decrease in cost of goods sold is mainly due to the change of the business model to providing manufacturing service from supplying concrete in our Caofeidian facility and Shidu facility, where the general contractors supply raw materials and we only provide the manufacturing service. The decrease in cost of goods sold is also caused by our vertical integration with sand and stone mining operation, which took place in March 2010, whereby we rent a sand and stone pit and mine sand and stone and supply them to our Beijing facility.





Gross Profit





Gross profit for the three months ended February 28, 2011 was $8,523,535, an increase of $4,745,912 or approximately 125.63%, as compared to $3,777,623 for the same period last year. The increase in gross profit is mainly attributable to the decrease of the cost of good sold due to the business mix changes including more manufacturing service and technical services, and vertical integration with sand and stone Operation.





Gross Profit Margin





Gross profit margin for the three months ended February 28, 2011 was 41.01%, compared to 18.66% for the same period last year. The increase of the gross profit margin is mainly because manufacturing service and technical services provided a higher margin and our integration with sand and stone operation lowered the cost of goods sold.





General and Administrative Expenses





General and administrative expenses for the three months ended February 28, 2011 were $10,083,492, as compared to $763,041 for the same period last year, an increase of $9,320,451, or approximately 1,221.49%. This increase was primarily due to the charge of $8,016,081 as provision for bad debt as well as the increase of revenue and geographic expansion.





Operating Income (Loss)





Our operating loss for the three months ended February 28, 2011 was $1,559,957, as compared to the operating income of $3,014,582 for the same period last year. The increased loss was due to the increased General and Administrative Expenses, which increase resulted from the provision for bad debt of $8,016,081, offset by the increasedsales revenue as a result of our business expansion as well as our transition towards the business of a higher profit margin.





Income Taxes





Income tax expense was $273,429 and $0 for the three months ended February 28, 2011 and 2010.The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended February 28, 2011 and 2010:





2011


2010U.S. Statutory rates


34.0
%


34.0
%Foreign income not recognized in USA


(34.0
)


(34.0
)China income taxes


25.0



0China income tax exemption


15.0



0Total provision for income taxes


10.0
%


0
%


4





USA





The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. As the Company has no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of February 28, 2011 and May 31, 2010.





Hong Kong





As the Group has no income generated in Hong Kong, there was no tax expense or tax liability due to the tax rule of Hong Kong as of February 28, 2011 and May 31, 2010.





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.





Beijing Concrete is subject to a special tax exemption approved by the PRC tax department. The exemption of income tax to the Company lasted until December 31, 2010, and starting from year 2011, the Company is subject to an income tax at a standard rate of 25%.





BFCM has an accumulated operating loss, thus there is no income tax expense for BFCM. The Company has not recorded deferred taxes, as valuation allowances were provided because all significant differences in tax basis and financial statement amounts are permanent differences.





For the three months ended February 282011


2010Income tax expensesCurrent tax

$
-


$
-Change in deferred tax assets


110,310



16,614Change in valuation allowance


(110,310
)


(16,614
)Total

$
-


$
-





Hongruida is subject to a 25% income tax rate. According to Chinese tax law, the income tax will be calculated at the year end. As of February 28, 2011, the Company has accrued tax payable of $870,932 for income tax expenses for Hongruida.





The estimated tax savings due to the tax exemption for the three months ended February 28, 2011 and 2010 amounted to approximately $0 and $893,876, respectively. The net effect on earnings per share if the income tax had been applied would decrease the basic and diluted earnings per share for the three months ended February 28, 2011 by $0. The net effect on earnings per share if the income tax had been applied would decrease the basic and diluted earnings per share for the three months ended February 28, 2010 by $0.08.


5





Net Income (Loss) Attributable To China Infrastructure Construction Corporation





Net loss was $1,668,679 for the three months ended February 28, 2011, as compared to the net income of $3,228,169 for the same period last year. The increase of net loss was primarily due to the charge of $8,016,081 as provision for bad debt on accounts receivable offset bythe increased sales as a result of our business expansion and towards the business of a higher profit margin.





Nine months ended February 28, 2011 Compared to Nine months ended February 28, 2010





Net Revenue





Net Revenue for the nine months ended February 28, 2011 was $67,901,332 as compared to $51,660,602 for the same period last year, an increase of $16,240,730, or approximately 31.44%. The increase in net revenue is mainly attributable to our geographic expansion. We had set up new factories in Xi’an and Shidu in 2010.  The increase in net revenue is also attributable to technical services we provided since March 2010.





Costs of Goods Sold





Cost of goods sold for the nine months ended February 28, 2011 was $46,017,232 as compared to $40,976,286 for the same period last year, an increase of $5,040,946 or approximately 12.30%. The increase in cost of goods sold is mainly because of our increased sales volume.





Gross Profit





Gross profit for the nine months ended February 28, 2011 was $21,884,100, an increase of $11,199,784 or approximately 104.82% as compared to $10,684,316 for the same period last year. The increase in gross profit is attributable to the increase of sales due to geographic development of our business, our business expansion into the technical services sector, and our vertical integration with sand and stone mining operations.





Gross Profit Margin





Gross profit margin for the nine months ended February 28, 2011 was 32.23%, compared to 20.68% for the same period last year. The increase of the gross profit margin is mainly because manufacturing services and technical services provided a higher margin and our operating in the sand and stone pit we rent lowered the cost of goods sold.





General and Administrative Expenses





General and administrative expenses for the nine months ended February 28, 2011 were $13,377,622, as compared to $29,946,526 for the same period last year, a decrease of $16,568,904 or approximately 55.33%. The decrease was mainly because the one-time non-cash compensation expenses of $27,422,242 were included in the general and administrative expenses for the nine months ended February 28, 2010, which is offset by the $8,016,081 provision for bad debt and the increase of the expenses related to increase of sales.





Operating Income (Loss)





Our operating income for the nine months ended February 28, 2011 was $8,506,478, an increase of $27,768,688, as compared to operating loss of $19,262,210 for the same period last year. The increased income was due to the increased sales revenue as a result of our business expansion geographically and our transition towards the business with higher profit margin offset by $8,016,081 of the provision for bad debt. In addition, the one-time non-cash compensation expenses of $27,422,242 were included in the general and administrative expenses for the nine months ended February 28, 2010.





Income Taxes





Income tax expense was $854,395 and $0 for the nine months ended February 28, 2011 and 2010.The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended February 28, 2011 and 2010:


6





2011


2010U.S. Statutory rates


34.0
%


34.0
%Foreign income not recognized in USA


(34.0
)


(34.0
)China income taxes


25.0



0China income tax exemption


15.0



0Total provision for income taxes


10.0
%


0
%





USA





The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. As the Group has no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of February 28, 2011 and May 31, 2010.





Hong Kong





As the Group has no income generated in Hong Kong, there was no tax expense or tax liability due to the tax rule of Hong Kong as of February 28, 2011 and May 31, 2010.





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.





Beijing Concrete is subject to a special tax exemption approved by the PRC tax department. The exemption of income tax to the Company lasted until December 31, 2010, and from year 2011, the Company is subject to an income tax at a standard rate of 25%.





BFCM has an accumulated operating loss, thus there is no income tax expense for BFCM. The Company has not recorded deferred taxes, as valuation allowances were provided because all significant differences in tax basis and financial statement amounts are permanent differences.





For the nine months ended February 28,2011


2010Income tax expensesCurrent tax

$
-


$
-Change in deferred tax assets


238,956



19,810Change in valuation allowance


(238,956
)


(19,810
)Total

$
-


$
-


7





Hongruida is subject to a 25% income tax rate. According to Chinese tax law, the income tax will be calculated at the year end. As of February 28, 2011, the Company has accrued tax payable of $870,932 for income tax expenses for Hongruida.





The estimated tax savings due to the tax exemption for the nine months ended February 28, 2011 and 2010 amounted to approximately $2,800,486 and $2,193,876, 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 nine months ended February 28, 2011 by $0.22. 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 nine months ended February 28, 2010 by $0.34.





Net Income (Loss) Attributable To China Infrastructure Construction Corporation





Net income was $7,186,021 for the nine months ended February 28, 2011, an increase of $26,517,437 as compared to net loss of $19,331,416 for the same period last year. The increase was primarily due to the increased sales as a result of our business expansion geographically and our transition towards business of a higher profit margin offset by the $8,016,081 provision for bad debt. In addition, the one-time non-cash compensation expenses of $27,422,242 were included in the general and administrative expenses for the nice months ended February 28, 2010.





Liquidity and Capital Resources





As of February 28, 2011, we had cash and cash equivalents of $351,016. We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital from shareholders. Due to the competitive environment, our raw materials suppliers are willing to accept our accounts receivable and credit the Company for the payments to the accounts payable. We usually enter into assignment agreements with our suppliers, whereby the suppliers shall be entitled to the amounts due and owed by our customer and the Company shall assist the suppliers on collection. Under these assignment agreements, the Company has the obligation of notifying the customers about the assignment, and in any event that the suppliers are not able to collect such accounts receivable due to a fault other than the suppliers’, the Company shall still have the obligation to pay off the suppliers. In the concrete industry, the raw material suppliers, with their locality and good relationships with local construction companies who often become our customers, are in a better position to collect the receivable from our customers. All assigned accounts receivable to our suppliers were collected as of the end of our third fiscal quarter of 2011. In the nine months ended February 28, 2011, we paid approximately $21,995,652 or 64.10% of the raw materials with our accounts receivable. Our working capital requirements are influenced by the level of our operations, the numerical and dollar volume of our project contracts, the progress of our contract execution, the timing of accounts receivable collections, and the acceptance of our accounts receivable as payment instrument by raw material suppliers.





The following table sets forth a summary of our cash flows for the periods indicated:





Nine months Ended

February 282011


2010Unaudited


UnauditedNet cash provided by (used in) operating activities

$
590,596


$
(7,980,858
)Net cash provided by (used in) investing activities


609,897



(1,209,849
)Net cash provided by (used in) financing activities


(1,975,541
)


10,125,592Effect of exchange rate change on cash and cash equivalents


23,185



10,691(Decrease) Increase in cash and cash equivalents


(751,863
)


945,576Cash and cash equivalents, beginning balance


1,102,879



921,841Cash and cash equivalents, ending balance


351,016



1,867,417


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Operating Activities





Net cash provided by operating activities was $590,596 for the nine months ended February 28, 2011, an increase of $8,571,454 as compared to $7,980,858 net cash used in operating activities for the same period last year. The increase of net cash provided by operating activities was mainly due to the increase of net income and tax payable and decrease of inventory and decrease of shares issued for compensation and increase in prepayments. Accounts receivable increased as well as a result of the growing sales. We typically had long-term annual and multi-year contracts with our major customers. We entered into varying payment terms with our customers ranging from payment before delivery, payment on delivery, or up to 1 year after the project completion. As of February 28, 2011, trade accounts receivable with aging over twelve months old amounted to $7,543,381, accounting for about 11.9% of total trade accounts receivable.





Investing Activities





Net cash provided by investing activities was $609,897 for the nine months ended February 28, 2011, an increase of $1,819,746 as compared to $1,209,849 used for the same period last year. The increase was primarily due to the increased proceeds from related-party receivable, decreased investments of property, plant, and equipment, and an increase in the disposal of property, plant, and equipment,





Financing Activities





Net cash used in financing activities was $1,975,541 for the nine months ended February 28, 2011, compared to $10,125,592 net cash provided by financing activities for the same period last year. In addition to the cash from the proceeds of the sale of the Company’s Common Stock in October 2009, the decrease of net cash provided by financing activities was also attributable to the repayment of the Company’s bank loans that matured during the nine months ended February 28, 2011 and the increased payment to our capital lease obligations offset by the proceeds from related party payable.





Critical Accounting Policies and Estimates





Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See note 3 to our consolidated financial statements, "Summary of Significant Accounting Policies." Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.





Revenue recognition





The Company receives revenue from sales of concrete products and from provision of concrete pumping service and consulting service. The Company's revenue recognition policies are in compliance with ASC 605 (previously Staff Accounting Bulletin 104). Sales revenue is recognized at the date of shipment to customers or services have been rendered when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Our sales are non-returnable. Therefore, we do not estimate deductions or allowance for sales returns. Sales are presented net of any discounts, reward, or incentive given to customers.  Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.


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Our products delivered to customers would be checked on site by customers and, once the products are accepted by customers, they will sign the acceptance notice. There is no warranty issue after the delivery.





Reward or incentive given to our customers is an adjustment of the selling prices of our products; therefore, the consideration is characterized as a reduction of revenue when recognized in our income statement.





The Company recognizes its revenues net of value-added taxes (“VAT”).  The Company is subject to VAT which is levied at the rate of 6% on the invoiced value of sales. However, the Company enjoys a free VAT policy according to the national policy, which encourages the development of the cement industry if the manufacturer satisfies the environmental protection requirements. The Company has enjoyed the free VAT policy from January 1, 2006 and has been reviewed every year by the local tax bureau.





Use of estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.





Inventories





Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.





Off-Balance Sheet Arrangements





The Company does not have any off-balance sheet arrangements.





ITEM 4T.   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.


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Changes in Internal Control over Financial Reporting





Except for the above, there was no other change in the Company's internal control over financial reporting during the period ended February 28, 2011, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.





PART II-OTHER INFORMATION





ITEM 6.   EXHIBITS.





(a) The following exhibits are filed herewith:





31.1
Certifications by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certifications by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURES





Pursuant to the requirements 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





By:
/s/ Rong YangRong YangChief Executive Officer, Director(principal executive officer)





By:
/s/ John BaiJohn BaiChief Financial Officer(principal financial and accounting officer)





Date:  May 3, 2011




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