SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





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

EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2011





OR





 ̈
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT





For the transition period from ______ to __________





COMMISSION FILE NUMBER: 001-34150





CHINA INFRASTRUCTURE INVESTMENT CORPORATION


(Exact name of registrant as specified in its charter)





Nevada

88-0484183(State or other jurisdiction of incorporation or

organization)

(IRS Employer Identification No.)





Room D, 2F, Building 12, Xinxin Huayuan, Jinshui Road, Zhengzhou, Henan Province


The People’s Republic of China


(Address of principal executive offices)





(011) 86-375-2754377


(Registrant’s Telephone Number, Including Area Code)





(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)





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 such 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.  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  ̈ No x





As of April 30, 2011 the registrant had 80,000,000 shares of common stock, par value $0.001 per share, issued and outstanding.





TABLE OF CONTENTS





PART I FINANCIAL INFORMATION

F-1ITEM 1. FINANCIAL STATEMENTS

F-1Condensed Consolidated Balance Sheets at March 31, 2011 (Unaudited) and June 30, 2010

F-1Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited)

F-3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 (Unaudited)

F-4Notes to Condensed Consolidated Financial Statements for the Three and Nine Months Ended March 31, 2011 (Unaudited)

F-6ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

1ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

14ITEM 4. CONTROLS AND PROCEDURES

14PART II OTHER INFORMATION

16ITEM 1. LEGAL PROCEEDINGS

16ITEM 1A. RISK FACTORS

16ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

16ITEM 3. DEFAULTS UPON SENIOR SECURITIES

16ITEM 4. (REMOVED AND RESERVED)

16ITEM 5. OTHER INFORMATION

16ITEM 6. EXHIBITS

16SIGNATURES

17





PART I FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS





CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(UNAUDITED)





ASSETSMarch 31,

2011


June 30,

2010CURRENT ASSETSCash and cash equivalents

$
1,189,434


$
1,267,199Restricted cash


24,765,118



3,961,227Accounts receivable, net of allowance for doubtful accounts of $56,793 and 
$54,637 at March 31, 2011 and June 30, 2010 respectively


3,891,408



8,812Other receivables


91,651



150,132Advances to related parties


1,358,961



146,873Prepaid expenses


1,546,496



465,329Other current assets


649,846



432,155Total current assets


33,492,914



6,431,727LONG-TERM ASSETSToll road infrastructures, net


438,770,077



428,661,699Plant and equipment, net


15,269,950



15,154,141Land use rights, net


45,741,740



45,509,651Notes receivable from related parties


166,671,470



158,347,962Advance to a related party


39,524,453



32,732,531Long-term investment


3,297,660



1,586,229Deferred taxes


3,497,398



4,213,238Total long-term assets


712,772,748



686,205,451TOTAL ASSETS

$
746,265,662


$
692,637,178





See accompanying notes to the condensed consolidated financial statements.


F-1


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(UNAUDITED)




LIABILITIES AND SHAREHOLDERS’ EQUITYMarch 31,

2011


June 30,

2010CURRENT LIABILITIESOther payables and accrued liabilities

$
2,334,137


$
2,125,696Short-term bank loans


16,488,298



14,687,307Current portion of long-term bank loans


13,740,248



20,086,361Notes payable


17,074,351



3,520,608Payable to contractors


11,965,644



15,873,729Deferred taxes


9,039,992



8,286,945Current portion of long-term deferred revenue


103,894



99,949Due to related parties


-



587,492Service zone deferred revenue


215,137



2,395,710Accrued payroll


118,166



347,297Other current liabilities


41,292



32,632Total current liabilities


71,121,159



68,043,726LONG-TERM LIABILITIESLong-term bank loans


473,690,478



434,591,546Long-term deferred revenue


6,695,967



6,521,458Total long-term liabilities


480,386,445



441,113,004TOTAL LIABILITIES


551,507,604



509,156,730CONTINGENCIESSHAREHOLDERS’ EQUITYCommon stock, $.001 par value, 150,000,000 shares authorized,80,000,000 shares issued and outstanding at March 31, 2011 and June 30, 2010, respectively


80,000



80,000Additional paid-in capital


141,374,184



141,374,184Accumulated other comprehensive income


35,797,177



28,484,004Retained earnings, (restricted portion was $43,234 at  March 31, 2011 and June 30, 2010)


17,506,697



13,542,260Total Shareholders’ Equity


194,758,058



183,480,448TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
746,265,662


$
692,637,178





See accompanying notes to the condensed consolidated financial statements.


F-2


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


(UNAUDITED)




Three Months Ended March 31,


Nine Months Ended March 31,2011


2010


2011


2010REVENUES

$
13,080,822


$
10,659,674


$
42,233,655


$
35,845,854OPERATING COSTS


958,431



1,074,027



4,813,781



3,161,795DEPRECIATION AND AMORTIZATION


2,724,697



2,013,835



8,380,104



6,503,106GROSS PROFIT


9,397,694



7,571,812



29,039,770



26,180,953General and administrative expenses


1,423,791



1,293,996



3,640,132



3,774,174INCOME FROM OPERATIONS


7,973,903



6,277,816



25,399,638



22,406,779OTHER INCOME (EXPENSES)Interest expense


(7,757,025
)


(6,867,988
)


(22,117,946
)


(21,410,205
)Interest income from related parties


-



2,055,602



2,133,321



6,277,033Other interest income (expense)


(386,476
)


13,226



(488,151
)


61,412Other income, net


275,029



252,896



323,913



752,786INCOME FROM OPERATIONS BEFORE INCOME TAXES


105,431



1,731,552



5,250,775



8,087,805INCOME TAX EXPENSE


(26,358
)


(444,093
)


(1,286,338
)


(2,093,616
)NET INCOME


79,073



1,287,459



3,964,437



5,994,189OTHER COMPREHENSIVE INCOMEForeign currency translation gain


4,264,244



29,477



7,313,173



230,379COMPREHENSIVE INCOME

$
4,343,317


$
1,316,936


$
11,277,710


$
6,224,568WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED


80,000,000



80,000,000



80,000,000



80,000,000NET INCOME PER COMMON SHARE, BASIC AND DILUTED

$
0.00


$
0.02


$
0.05


$
0.07





See accompanying notes to the condensed consolidated financial statements


F-3


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)




Nine Months Ended March 31,2011


2010CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
3,964,437


$
5,994,189Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts


93,557



107,714Depreciation and amortization


8,878,898



6,973,463Deferred taxes


1,468,887



1,769,503Long-term deferred revenue


(482,379
)


(454,432
)Imputed interest


400,898



395,269Expenses paid by shareholder


-



241,839Changes in operating assets and liabilities:(Increase) Decrease In:Accounts receivable


(3,882,596
)


318,234Other receivables


58,481



(8,715
)Prepaid expenses


(1,081,167
)


-Other current assets


(217,691
)


741,890Increase (Decrease) In:Other payables and accrued liabilities


208,444



28,408Deferred revenue


(2,180,573
)


-Accrued payroll


(229,131
)


-Other current liabilities


8,660



110,730Net cash provided by operating activities


7,008,725



16,218,092CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of plant and equipment


(212,024
)


(211,923
)Disposal of plant and equipment


40,675



-Purchases of long-term investment


(1,621,378
)


-Decrease in payable to contractors


(3,908,085
)


(6,215,788
)Increase in principal of notes receivable


-



-Increase in principal of notes receivable from related parties


-



2,193,710Increase in notes receivable from related parties for interest


(2,133,321
)


(6,280,071
)Increase in advance to related parties


(6,594,767
)


-Net cash used in investing activities


(14,428,900
)


(10,514,072
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long-term bank loans


19,066,206



-Repayments of long-term bank loans


(4,503,828
)


(13,171,038
)Proceeds from short-term bank loans


16,213,782



14,624,737Repayments of short-term bank loans


(15,012,761
)


(7,312,368
)Proceeds from notes payable


26,398,191



3,944,352Repayments of notes payable


(13,206,734
)


(3,963,925
)Prepayments of due to related parties


(600,510
)


-Restricted cash


(20,803,891
)


44,316Net cash provided by (used in) financing activities


7,550,455



(5,833,926
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


130,280



(129,906
)Effect of exchange rate changes on cash


(208,045
)


(24,848
)Cash and cash equivalents at beginning of period


1,267,199



1,614,260CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
1,189,434


$
1,459,506




See accompanying notes to the condensed consolidated financial statements.


F-4


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine Months Ended March 31,2011


2010SUPPLEMENTAL CASHFLOW INFORMATION:Interest paid

$
21,373,534


$
20,972,149Income taxes paid


92,335



-





See accompanying notes to the condensed consolidated financial statements.


F-5


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




1.           ORGANIZATION AND PRINCIPAL ACTIVITIES




China Infrastructure Investment Corporation and subsidiaries (“CIIC” or the “Company”) was incorporated under the laws of the State of Nevada on January 11, 2001.




The principal activities of the Company are the investment, construction, operation, and management of the Pingdingshan – Linru section (“Pinglin Expressway”), and the rental of petrol stations and service districts along the toll roads.  Currently, all the operations of the Company are in the People’s Republic of China (“PRC”).





2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




(a)         Basis of Presentation




The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q, Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The condensed consolidated balance sheet information as of June 30, 2010 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. These interim financial statements should be read in conjunction with that Annual Report.


F-6


CHINA INFRASTRUCTURE INVESTMENT CORPORATIONAND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(b)         Principles of Consolidation




The consolidated financial statements include the accounts of China Infrastructure Investment Corporation and the following subsidiaries:




(i)
Color Man Holdings Limited (“CMH”) (An inactive holding company, 100% subsidiary of CIIC).





(ii)
Wise On China Limited (“WOCL”) (An inactive holding company, 100% subsidiary of CMH)





(iii)
Pingdingshan Pinglin Expressway Co., Ltd. (“Ping”) (100% subsidiary of WOCL)





Inter-company accounts and transactions have been eliminated in consolidation.





(c)          Concentrations




The location of the toll road and the operations of the Company are solely in the Henan Province, PRC.




The Company has a concentration of related party receivables from Tai Ao Expressway Co., Ltd. (“Tai Ao”) and Xinyang Expressway Co., Ltd. (“Xinyang”) as of March 31, 2011 and June 30, 2010. Also see Notes 7, 8 and 9.




(d)          Economic and Political Risks




The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.


F-7


CHINA INFRASTRUCTURE INVESTMENT CORPORATIONAND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(e)          Use of Estimates




The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.




A significant estimate of the Company is the estimate of future total traffic volume. This estimate is used for the calculation of depreciation relating to the toll road. Also see Note 2(h).




Management makes these estimates using the best information available at the time the estimates are made.  Actual results could differ materially from those estimates.




The board of directors of the Company approved a share purchase resolution. Pursuant to a September 27, 2009 letter of intent, the Company shall purchase at least 51% of Tai Ao. The consideration for such purchase will be settled first with the note receivable from Xinyang, and the remainder in cash. The advance to Tai Ao will also be settled in the Company’s acquisition of Tai Ao. The collectibility of the notes receivables from related parties to a large extent depends on completion of the share purchase resolution as mentioned above. The Chinese government now requires foreign acquirers of assets based in China to use all cash in the acquisition. A share-based acquisition has to be approved by the Reform and Development Commission of the central government. The success of getting approval from the Reform and Development Commission is uncertain. The Company has to arrange a large amount of cross-border capital transactions, which can be time consuming and technically difficult due to the foreign exchange control in China. In addition, the Chinese government recently imposed a new national security review of future foreign acquisitions of certain types of businesses and assets that are of the strategic and national security interest of China, including infrastructure projects. Since this regulatory requirement just became effective, it is uncertain how the government will view this transaction and what steps will be taken. The Company is actively pursuing the acquisition. However, whether the application will be approved is still unclear as of March 31, 2011 due to the above mentioned reasons. Thus, there is uncertainty as to the collectibilty of the notes receivable and advances from related parties. At this time, the Company estimates that there is no need for a reserve against the amounts due from related parties. If the Company is unsuccessful in obtaining approval for the acquisition of Tai Ao, this reserve estimate could change significantly. The management of the Company plans to resolve the related party transactions prior to June 30, 2011, either by effectuating the acquisition or settling the related party receivables.




(f)          Fair Value of Financial Instruments




ASC 820-10 (fair value measurement) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.


F-8


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(f)          Fair Value of Financial Instruments (Continued)




These tiers include:




• Level 1—defined as observable inputs such as quoted prices in active markets;


• Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and


• Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.





Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known institutions with original maturities of three months or less. The original cost of these assets approximates fair value due to their short term maturity. The Company does not maintain any bank accounts in the United States of America.





The Company’s financial instruments include restricted cash, accounts receivable, notes receivable, due from related parties, other receivables, other payables and accrued liabilities, short-term bank loans, payable to contractors, other current liabilities and deferred taxes. We estimated that the carrying amount approximates fair value due to their short-term nature. The fair value of the Company’s long-term bank loans and deferred revenue are estimated based on the current rates offered to the Company for debt of similar terms and maturities. The Company’s fair value of long-term bank loans and deferred revenue was not significantly different from the carrying value at March 31, 2011 and June 30, 2010.





(g)         Plant and Equipment




Plant and equipment is carried at cost less accumulated depreciation and impairment losses. Depreciation is provided over the estimated useful lives, using the straight-line method.  Estimated useful lives of the plant and equipment are as follows:




Motor vehicles
8 yearsMachinery
8 yearsOffice equipment
6 yearsToll stations and ancillary facilities
27 yearsCommunication and monitoring equipment
10 years




The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to expense as incurred, whereas significant renewals and betterments are capitalized.


F-9


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(h)         Toll Road Infrastructures




Toll road infrastructures are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of the toll road infrastructures are calculated to write off their cost, commencing from the date of commencement of commercial operation of the toll roads, based on the ratio of actual traffic volume compared to the total expected traffic volume of the toll roads as assessed by management each year. The total expected traffic volume is derived from a traffic projection report prepared by an independent PRC organization. Also see Note 2(e).




(i)           Land Use Rights




According to the laws of China, land in the PRC is owned by the Government and cannot be sold to an individual or company.  However, the government grants the user a “land use right” to use the land. The land use rights granted to the Company are being amortized when the toll road is ready to operate, using the straight-line method over the approved toll road operating period of 27 years.




(j)           Impairment of Long-Term Assets




Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in ASC 360-10. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. There were no impairments for the nine months ended March 31, 2011 and 2010.




(k)          Revenue Recognition




Revenue represents toll revenue net of business tax, and is recognized when all of the following criteria are met:




-      The amount of revenue can be measured reliably,




-      It is probable that the economic benefits associated with the transaction will flow to the enterprise,




-      The costs incurred or to be incurred in respect of the transaction can be measured reliably, and


F-10


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(k)          Revenue Recognition (Continued)




-      Collectibility is reasonably assured.




(l)           Rental Income




The Company rents gas stations, advertising booths and toll road service districts to lessees. Rental income is measured at the fair value of the consideration receivable and represents amounts receivable for services provided in the normal course of business, net of discounts and sales tax. Also see Notes 17 and 18.




(m)         Retirement Benefits




Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to operations as incurred.  Retirement benefits amounting to $134,398 and $210,490 were charged to operations for the nine months ended March 31, 2011 and 2010.




(n)          Earnings Per Share




Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the nine months ended March 31, 2011 and 2010.





(o)          Foreign Currency Translation




The accompanying financial statements are presented in United States dollars.  The functional currency of the Company is the Renminbi (RMB).  The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.




March 31,

2011


June 30,

2010


March 31,

2010Period ended RMB:  US$ exchange rate


6.5501



6.8086



-Average RMB:  US$ exchange rate for three months ended


6.5713



-



6.8360Average RMB:  US$ exchange rate for nine months ended


6.6610



-



6.8377


F-11


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(p)         Comprehensive Income




Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.  Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income should be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s only component of comprehensive income is the foreign currency translation adjustment.




(q)         Recent Accounting Pronouncements




No new accounting pronouncements have been adopted that will have a material effect on the condensed consolidated financial statements.




3.           LIQUIDITY




The Company had a working capital deficit of $37,628,245 on March 31, 2011. This was primarily due to the Company providing notes receivable and advances to its related parties, Xinyang and Tai Ao for their highway construction and working capital. The Company currently generates its cash flow through its operating profit and borrowings from banks. During the reporting period, to increase its cash resources, the Company obtained a long-term loan of $19,066,206. As of the date of this report, the Company has not experienced any difficulty in raising funds through bank loans, and has not experienced any liquidity problems in settling payables in the normal course of business and repaying bank loans when they fall due. To improve liquidity, the Company may explore new expansion opportunities and external funding sources.


F-12


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




4.           RESTRICTED CASH




Restricted cash consists of the following:




March 31,

2011


June 30,

2010Deposits for notes payable

$
17,074,352


$
3,520,608Prepaid deposits for notes payable


57,295



440,619Deposit for pledge to Zhengzhou Zhengdong Thermoelectricity Co., Ltd.


7,633,471



-$
24,765,118


$
3,961,227




As of March 31, 2011, restricted cash of $7,633,471 was pledged to Zhengzhou Zhengdong Thermoelectricity Co., Ltd. for the notes payable issued by Zhengzhou Zhengdong Thermoelectricity Co., Ltd. Also see Notes 16 and 20.




5.           NOTES RECEIVABLE




Notes receivable from unrelated companies consist of the following:




March 31,

2011


June 30,

2010Notes receivable from unrelated companies

$
927,652


$
892,432Less: Provision for doubtful accounts


927,652



892,432$
-


$
-




On June 20, 2007, the Company loaned Pingdingshan Traffic Administration $655,403. The note is unsecured and was due December 20, 2007, bearing a 5.85% interest rate per annum. On December 20, 2007, the Company entered into a renewal agreement with Pingdingshan Traffic Administration, whereby the note was extended to December 20, 2008 with a 7.47% interest rate per annum. Considering the age of the note receivable has exceeded two years and the Company has never received the interest or principal from the note, the Company’s management believes there is uncertainty as to collection of the note and stopped accruing interest income on April 1, 2009. A full provision amounting to $815,094 was provided by the Company as of March 31, 2011.




On January 22, 2009, the Company loaned Pingdingshan Expressway Construction Co., Ltd. $104,676. The note is unsecured and is due January 21, 2010, and bears a 5.31% interest rate per annum. Considering the Company has never received the interest or principal from the note, the Company’s management believes there is uncertainty as to collection of the note and stopped accruing interest income on the due date. A full provision amounting to $112,558 was provided by the Company as of March 31, 2011.


F-13


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




5.           NOTES RECEIVABLE (CONTINUED)




Interest income from the notes receivable for the nine months ended March 31, 2011 and 2010 was $0 and $3,038, respectively.




6.           ACCOUNTS RECEIVABLE




March 31,

2011


June 30,

2010Accounts receivable for tolling charges

$
3,880,415


$
-Accounts receivable for rental income


67,786



63,4493,948,201



63,449Less: Provision for doubtful accounts


56,793



54,637$
3,891,408


$
8,812





As of March 31, 2011, accounts receivable for tolling charges of $3,880,415 were pledged as collateral for the bank loan from China Minsheng Banking Corp., Ltd. Also see Note 14.


F-14


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




7.           NOTES RECEIVABLE FROM RELATED PARTIES




March 31,

2011


June 30,

2010Xinyang Expressway Co., Ltd.Principal

$
73,285,319


$
70,040,757Interest receivable


10,316,008



8,835,38283,601,327



78,876,139Henan Ruijia Industry Co., Ltd.Interest receivable

$
71,272


$
68,566Less: Provision


(71,272
)


--



68,566Henan Hairun Trade Co., Ltd.Interest receivable

$
23,870


$
22,964Less: Provision


(23,870
)


--



22,964Tai Ao Expressway Co., Ltd.Principal

$
72,804,919


$
70,502,918Interest receivable


10,265,224



8,877,37583,070,143



79,380,293Total notes receivable from related parties

$
166,671,470


$
158,347,962





On June 29, 2010, Tai Ao Expressway Co., Ltd. entered into a renewal agreement with the Company. Pursuant to the agreement, the note receivable from Tai Ao was extended to June 29, 2011 with a 5.94% interest rate per annum. Interest shall be paid annually and the principal shall be repaid at maturity. The note receivable from Tai Ao is classified as a non-current asset because the Company expects to purchase a controlling interest in Tai Ao and the receivable will be part of the cost of acquiring the ownership interest. Also see September 27, 2009 letter of intent below. According to the letter of intent and board of directors’ minutes of September 2009, the entire principal and interest is going to be settled by the acquisition. The resolution of principal and interest of the notes receivable from related parties to a large extent depends on the government approval of the acquisition. Based on the uncertainty of the approval by the government or how long it will take the Company to get approval, the Company decided to cease accruing the interest income from the notes receivable from related parties from October 1, 2010.


F-15


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




7.           NOTES RECEIVABLE FROM RELATED PARTIES (CONTINUED)




On June 29, 2010, Xinyang Expressway Co., Ltd. entered into a renewal agreement with the Company. Pursuant to the agreement, the note receivable to Xinyang was extended to June 29, 2011 with a 5.94% interest rate per annum. Interest is paid annually and the principal is repaid at maturity. Also see September 27, 2009 letter of intent below. According to the letter of intent and board of directors’ minutes of September 2009, the entire principal and interest is going to be settled by the acquisition. The resolution of principal and interest of the notes receivable from related parties to a large extent depends on the government approval of the acquisition. Based on the uncertainty of the approval by the government or how long it will take the Company to get approval, the Company decided to cease accruing the interest income from the notes receivable from related parties from October 1, 2010.




On April 12, 2009, Henan Ruijia Industry Co., Ltd. (“Ruijia”) entered into an agreement with the Company. Pursuant to the agreement, the Company provided a note receivable for $2,191,445 to Ruijia. Such note receivable was due April 11, 2010, and bears a 5.31% interest rate per annum. The principal and the interest were payable at maturity. On November 12, 2009, the Company received the principal of such note receivable. Considering the Company has never received the interest from the note, the Company’s management believes there is uncertainty as to collection of the interest income. A full provision amounting to $71,272 was provided by the Company for the interest as of March 31, 2011.




On July 28, 2009, Henan Hairun Trade Co., Ltd. (“Hairun”) entered into an agreement with the Company. Pursuant to the agreement, the Company provided a note receivable for $1,465,975 to Hairun. Such note receivable was due July 27, 2010, and bears a 5.31% interest rate per annum. On November 12, 2009, the Company received the principal of such note receivable. Considering the Company has never received the interest from the note, the Company’s management believes there is uncertainty as to collection of the interest income. A full provision amounting to $23,870 was provided by the Company for the interest as of March 31, 2011.




The notes receivable were provided to these companies for their construction and operation working capital. Tai Ao, Xinyang and Ruijia are related to the Company through a common shareholder of the Company. Hairun is a trading company substantially controlled by Ms. Lin Jie, the Vice President of Operations of the Company. The notes receivable are interest bearing and unsecured. Interest income was $2,133,321 and $6,277,033 for the nine months ended March 31, 2011 and 2010, respectively.




On September 27, 2009, the board of directors of the Company approved a share purchase resolution. Pursuant to a letter of intent dated September 27, 2009, the Company shall purchase at least 51% of Tai Ao. The consideration for such purchase will be settled first with the note receivable from Xinyang of $83,601,327, and the remainder in cash. If the Company successfully negotiates with Tai Ao’s shareholders, the consideration will be determined in accordance with the audited net assets of Tai Ao at the purchase date. If the Company consummates such transaction, the transaction is expected to be accounted for as an acquisition of a company under common control.


F-16


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




7.           NOTES RECEIVABLE FROM RELATED PARTIES (CONTINUED)




The collectibility of the notes receivables from related parties to a large extent depends on completion of the share purchase resolution as mentioned below.




The Chinese government now requires foreign acquirers of assets based in China to use all cash in the acquisition. A share-based acquisition has to be approved by the Reform and Development Commission of the central government. The success of getting approval from the Reform and Development Commission is uncertain. The Company has to arrange for a large amount of cross-border capital, which can be time consuming and technically difficult due to the foreign exchange control in China.




In addition, the Chinese government recently imposed a new national security review on future foreign acquisitions of certain types of businesses and assets that are of the strategic and national security interest of China, including infrastructure projects. Since this regulatory requirement just became effective, it is uncertain how the government will view this transaction and what steps will be taken.




The Company is actively pursuing the acquisition. However, whether the application will be approved is still unclear as of March 31, 2011 due to the above mentioned reasons. Thus, there is uncertainty as to the collectibilty of the notes receivables from related parties. At this time, the Company estimates that there is no need for a reserve against the amounts due from related parties. If the Company is unsuccessful in obtaining approval for the acquisition of Tai Ao, this reserve estimate could change significantly. The management of the Company plans to resolve the related party transaction as of June 30, 2011, either effectuating the acquisition or settling the related party receivables. Also see Note 8.




According to ASC 605, “Revenue Recognition”, revenue generally is realized or realizable and earned when ALL of the following criteria are met


- There is persuasive evidence that an arrangement exists;


- Delivery has occurred or services have been rendered;


- The seller's price to the buyer is fixed or determinable, and


- Collectibility is reasonable assured.





The Company’s management believes that from October 1, 2010 the collectability of the future interest income resulting from the notes receivable is uncertain. Therefore, the Company believes such income does not meet the related revenue recognition policy as above, and is no longer realizable. The Company decided to cease accruing the interest income from the notes receivable from related parties from October 1, 2010.


F-17


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)





8.
ADVANCES TO RELATED PARTIES





March 31,

2011


June 30,

2010Current advances to related parties:Zhengzhou Zhengdong Thermoelectricity Co., Ltd.

$
900,953


$
-Xinyang Hongqiao Heat Co., Ltd.


458,008



-Henan Hairun Trade Co., Ltd.


-



146,873Total current advances


1,358,961



146,873Long-term advance to a related party:Tai Ao Expressway Co., Ltd.

$
39,524,453


$
32,732,531Total long-term advance


39,524,453



32,732,531$
40,883,414


$
32,879,404




The Company and Tai Ao Expressway Co., Ltd. have the same chairman, Li Xipeng. Li Xipeng owns 51% of the shares of Tai Ao. The Company made payments to suppliers on behalf of Tai Ao for the purchase of construction materials commencing in 2006 in order to assist Tai Ao with its working capital needs. For the nine months ended March 31, 2011, the payments to Tai Ao amounted to $11,064,405, and the repayments from Tai Ao amounted to $5,655,846. The balances of $39,524,453 and $32,732,531 at March 31, 2011 and June 30, 2010, respectively, are unsecured, interest free and due on demand.




On September 27, 2009, the board of directors of the Company approved a share purchase resolution. Pursuant to a letter of intent, the Company shall purchase at least 51% of Tai Ao. The consideration for such purchase will be settled first with the note receivable from Xinyang, and the remainder in cash. The advance to Tai Ao will also be involved in the Company’s acquisition of Tai Ao. The collectibility of the notes receivables from related parties to a large extent depends on completion of the share purchase resolution. Also see Note 7.


F-18


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)





8.
ADVANCES TO RELATED PARTIES (CONTINUED)




Henan Hairun Trade Co., Ltd. is substantially controlled by Ms. Lin Jie, the Vice President of Operations of the Company. The Company made payments to Hairun for its working capital needs. Hairun repaid the amount during the nine months ended March 31, 2011. The Company also borrowed working capital from Hairun. For the nine months ended March 31, 2011, the working capital borrowed from Hairun was $2,251,914, and the Company repaid the amount during the nine months ended March 31, 2011.




The Company and Xinyang Hongqiao Heat Co., Ltd. have the same chairman, Li Xipeng. Li Xipeng owns 92% of the shares of Xinyang Hongqiao Heat Co., Ltd. The Company made payments to Xinyang Hongqiao Heat Co., Ltd. for its working capital needs. The balance of $458,008 at March 31, 2011 is unsecured, interest free and due on demand.




The Company and Zhengzhou Zhengdong Thermoelectricity Co., Ltd. (“Zhengdong”) have the same chairman, Li Xipeng. Li Xipeng owns 80% of the shares of Zhengzhou Zhengdong Thermoelectricity Co., Ltd. The Company made payments to Zhengzhou Zhengdong Thermoelectricity Co., Ltd. for its working capital needs. For the nine months ended March 31, 2011, the payments to Zhengdong were $2,237,102, and the repayments from Zhengdong were $1,351,148. The balance at March 31, 2011 was $900,953. The balance at March 31, 2011 is unsecured, interest free and due on demand. For the nine months ended March 31, 2011, the working capital borrowed from Zhengzhou Zhengdong Thermoelectricity Co., Ltd. was $12,010,209 and the Company repaid the amount during the nine months ended March 31, 2011.


F-19


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




9.           DUE TO RELATED PARTIES




March 31,

2011


June 30,

2010Zhengzhou Zhengbian Tap Water Co., Ltd.

$
-


$
587,492Total

$
-


$
587,492




The Company borrowed working capital from Zhengzhou Zhengbian Tap Water Co., Ltd., which has the same chairman as the Company. Li Xipeng owns 80% of the shares of Zhengzhou Zhengbian Tap Water Co., Ltd. The Company repaid the amount during the nine months ended March 31, 2011.




10.         TOLL ROAD INFRASTRUCTURES, NET




Toll road infrastructures consist of the following:




March 31,

2011


June 30,

2010At cost:

$
477,051,127


$
458,939,075Less:  Accumulated depreciation


38,281,050



30,277,376Toll road infrastructures, net

$
438,770,077


$
428,661,699




Depreciation expense for the nine months ended March 31, 2011 and 2010 was $6,695,416 and $4,851,869, respectively. Also see Notes 2(e) and 2(h).




The Company financed its construction of the toll road infrastructures substantially through long-term loans from banks. These bank loans are secured by the toll road operating right owned by the Company. Also see Note 15.


F-20


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




11.         PLANT AND EQUIPMENT, NET




Plant and equipment consist of the following:




March 31,

2011


June 30,

2010At cost:Toll station and ancillary facilities

$
10,973,961


$
10,557,317Communication and monitoring equipment


6,152,166



5,852,164Motor vehicles


1,509,137



1,533,666Machinery


311,079



299,269Office equipment


723,163



614,88419,669,506



18,857,300Less:  Accumulated depreciationToll station and ancillary facilities


1,806,347



1,481,751Communication and monitoring equipment


944,666



766,348Motor vehicles


1,070,933



993,498Machinery


181,349



147,249Office equipment


396,261



314,3134,399,556



3,703,159Plant and equipment, net

$
15,269,950


$
15,154,141





Depreciation expense for the nine months ended March 31, 2011 and 2010 was $645,570 and $623,432, respectively.


F-21


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




12.         LAND USE RIGHTS




Land use rights consist of the following:




March 31,

2011


June 30,

2010Cost

$
56,134,874


$
54,003,618Less: Accumulated amortization


10,393,134



8,493,967Land use rights, net

$
45,741,740


$
45,509,651





Amortization expense for the nine months ended March 31, 2011 and 2010 was $1,537,912 and $1,498,162, respectively.




Amortization expense for the next five years and thereafter is as follows:




March 31, 2012

$
2,085,268March 31, 2013


2,085,268March 31, 2014


2,085,268March 31, 2015


2,085,268March 31, 2016


2,085,268Thereafter


35,315,400Total

$
45,741,740


F-22


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




13.         LONG-TERM INVESTMENT




March 31, 2011


June 30, 2010Ownership

Interest


Net Book

Value


Ownership

Interest


Net Book

ValueAt cost:Pingdingshan City Credit Corporation


2.8
%

$
3,297,660



2.03
%

$
1,586,229





The Company invested in Pingdingshan City Credit Corporation (“PCCC”), a commercial banking corporation established in 2005 by purchasing a 3% equity interest (10 million shares) for RMB 10 million (approximately $1.3 million) in December 2005. During the year 2009 and 2010, after PCCC increased its share capital, the Company’s share of the total equity interest in PCCC was diluted to 2.03%.




On March 1, 2011, pursuant to an agreement, the Company purchased an additional 0.77% equity interest in PCCC (10.8 million shares) from Tai Ao and obtained the share certificates on March 26, 2011. The consideration for the transaction was $1,648,830 (RMB 1.00 or $0.15 per share). After the transaction, the Company held 2.8% of the total equity interest in PCCC as of March 31, 2011.




As of March 31, 2011 and June 30, 2010, the Company does not have more than a 20% interest in the investment and does not exercise significant influence over the investee. The Company accounts for the investment under the cost method.  Investment income is recognized by the Company when the investee declares a dividend and the Company believes it is collectible.  No dividend income was recognized for the nine months ended March 31, 2011 and 2010.


F-23


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




14.         SHORT-TERM BANK LOANS




Short-term bank loans as of March 31, 2011 and June 30, 2010 consist of the following:





March 31,

2011


June 30,

2010Loan from China Minsheng Banking Corp., Ltd., due May 18, 2011, monthly interest only payments at 6.666% per annum, co-secured by the Chief Executive Officer Mr. Li Xipeng, Henan Shengrun Land Investment Co., Ltd. and accounts receivable owned by the Company.  Also see Note 6.


7,633,471



-Loan from China Minsheng Banking Corp., Ltd., due March 22, 2011, monthly interest only payments at 5.841% per annum, co-secured by the Chief Executive Officer Mr. Li Xipeng, Henan Shengrun Land Investment Co., Ltd. and accounts receivable owned by the Company.


-



7,343,654Loan from China Citic Bank, due January 9, 2012, monthly interest only payments at 5.841% per annum, co-secured by Tai Ao Expressway Co., Ltd., the Chief Executive Officer Mr. Li Xipeng, and Henan Shengrun Venture Investment Management Co., Ltd.


7,633,471



-Loan from China Citic Bank, due January 11, 2011, monthly interest only payments at 5.31% per annum, co-secured by Tai Ao Expressway Co., Ltd., the Chief Executive Officer Mr. Li Xipeng, and Henan Shengrun Venture Investment Management Co., Ltd.


-



7,343,653Loan from Industry and Commercial Bank of China, due April 22, 2011, monthly interest only payments at 5.35% per annum (repaid on its due date).


763,347



-Loan from Industry and Commercial Bank of China, due May 22, 2011, monthly interest only payments at 5.35% per annum.


458,009



-Total short-term bank loans

$
16,488,298


$
14,687,307




Interest expense for the nine months ended March 31, 2011 and 2010 was $907,429 and $374,245, respectively.


F-24


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




15.         LONG-TERM BANK LOANS




Long-term bank loans consist of the following:


March 31,

2011


June 30,

2010Loan from National Development Bank of China Henan Branch, due May 20, 2017, 5.94% interest rate per annum, secured by the toll road operating right owned by the Company.  Principal is repaid every 6 months in 20 unequal installments from November 2007, and interest is paid quarterly.

$
88,548,266


$
88,123,843Loan from Agricultural Bank of China, due July 20, 2017, 5.94% interest rate per annum, secured by the toll road operating right owned by the Company.  Principal is to be repaid every year in 10 equal installments from February 2010, and interest is paid monthly.


27,480,496



26,437,154Loan from Agricultural Bank of China, due February 20, 2019, 5.94% interest rate per annum, secured by the toll road operating right owned by the Company.  Principal is to be repaid every year in 10 equal installments, and interest is paid monthly.


29,007,191



29,374,614Loan from Industrial and Commercial Bank of China Pingdingshan Branch, due November 19, 2019, 5.35% interest rate per annum, secured by the toll road operating right owned by the Company.  Principal is repaid every year in 26 unequal installments from November 2007, and interest is paid monthly.


170,336,331



163,869,224Loan from National Development Bank of China Henan Branch, due November 28, 2022, 5.94% interest rate per annum, secured by the toll road operating right owned by the Company. Principal is to be repaid every 6 months in 12 unequal installments from May 2017, and interest is paid quarterly.


152,669,425



146,873,072Loans from China Construction Bank, due August 17, 2013, 5.13% interest rate per annum, secured by the toll road operating right owned by the Company. Principal is to be repaid at maturity, and interest is paid monthly.


13,740,248



-


F-25


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




15.         LONG-TERM BANK LOANS (CONTINUED)




March 31,

2011


June 30,

2010Loans from China Construction Bank, due December 31, 2013, the monthly interest only payments at a 5.5575% interest rate per annum, secured by the toll road operating right owned by the Company. Principal is to be repaid at maturity.


5,648,769



-Total long-term bank loans


487,430,726



454,677,907Less: current portion


13,740,248



20,086,361Long-term portion

$
473,690,478


$
434,591,546




For the nine months ended March 31, 2011 and 2010, interest expense was $21,048,318 and $20,634,555, respectively.  No interest was capitalized as a component of construction costs during the reporting periods.




According to the loan agreements with National Development Bank of China Henan Branch, the bank has the right to demand repayment of the loans in full if the Company provides any guarantees to other third party debt that exceeds 70% of the Company’s total assets. As of March 31, 2011, the guarantees provided by the Company to other third party debt did not exceed 70% of the Company’s total assets.




The repayment schedule for the long-term bank loans is as follows:




March 31, 2011

$
13,740,248March 31, 2012


31,071,281March 31, 2013


54,008,336March 31, 2014


34,619,319March 31, 2015


28,249,950Thereafter


325,741,592Total

$
487,430,726




16.         NOTES PAYABLE




March 31,

2011


June 30,

2010Bank acceptance notes

$
17,074,351


$
3,520,608





Notes payable of $1,807,409 were issued to the Company’s contractors through China Construction Bank; notes payable of $7,633,471 were issued through China Citic Bank and notes payable of $7,633,471 were issued through China Minsheng Banking Corp., Ltd.


F-26


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




16.
NOTES PAYABLE (CONTINUED)




Notes payable as of March 31, 2011 consist of the following:




Notes payable issued on November 8, 2010, due May 8, 2011 (repaid on its due date)

$
152,669Notes payable issued on January 12, 2011 and due July 11, 2011


7,633,471Notes payable issued on January 26, 2011 and due July 25, 2011


1,088,613Notes payable issued on January 27, 2011 and due July 27, 2011


410,364Notes payable issued on January 28, 2011 and due July 28, 2011


45,801Notes payable issued on January 31, 2011 and due July 31, 2011


109,962Notes payable issued on March 18, 2011 and due September 18, 2011


7,633,471Total

$
17,074,351





Restricted cash of $17,074,351 and $3,520,608 collateralized the notes at March 31, 2011 and June 30, 2010, respectively. Also see Note 4. All of the bank acceptance notes at June 30, 2010 were repaid on their due dates. All the bank acceptance notes are subject to bank charges of 0.05% of the principal as a commission on their loan transaction. Bank charges for bank acceptance notes were $142,082 and $1,753 for the nine months ended March 31, 2011 and 2010, respectively.


F-27


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




17.
LONG-TERM DEFERRED REVENUE




March 31,

2011


June 30,

2010Long-term deferred revenue

$
15,726,603


$
15,601,437Imputed interest discount


(8,926,742
)


(8,980,030
)Total


6,799,861



6,621,407Less: current portion


103,894



99,949Long-term portion

$
6,695,967


$
6,521,458




On January 1, 2006, the Company rented four gas stations to Petro China Company Limited Pingdingshan Branch (“PCCL”) for 30 years. The Company received the entire 30 year rental fee of $5,372,708 from PCCL in 2006. The amount received was net of business tax.




The Company imputed interest on the amount using an 8% discount rate, under the effective interest rate method. The rental income recognized during the nine months ended March 31, 2011 and 2010 was $466,489 and $454,432 respectively. The imputed interest for the nine months ended March 31, 2011 and 2010 was $400,897 and $395,269, respectively.




On August 1, 2009, the Company rented communication channels along the expressway to China Mobile Company Limited Pingdingshan Branch for 15 years. The total rental fee is $309,782, which is paid in 3 installments of $103,261 in July every 5th year for 15 years. The amount received was before tax. The Company amortized deferred revenue under the straight-line method. The rental income recognized for the nine months ended March 31, 2011 and 2010 was $15,890 and $0 respectively.




18.
SERVICE ZONE DEFERRED REVENUE




March 31,

2011


June 30,

2010Henan Expressway Management Bureau

$
-


$
2,019,532Jiaxin Shitong Highway Service Management Limited Company


99,235



176,248Xinle Huitong Enterprise and Service Management Co., Ltd.


92,619



164,498Others


23,283



35,432Total

$
215,137


$
2,395,710


F-28


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




18.
SERVICE ZONE DEFERRED REVENUE (CONTINUED)




On June 26, 2010, the Company rented the West Pingdingshan Service Zone to Jiaxin Shitong Highway Service Management Limited Company for five years beginning October 16, 2010. The total rental fee is $916,017, and is payable in 5 installments of $183,203 every year. The Company amortized revenue under the straight-line method. The rental income recognized during the nine months ended March 31, 2011 was $82,570.




On June 26, 2010, the Company rented the West Pingdingshan and Ruzhou Service Zone to Xinle Huitong Enterprise and Service Management Co., Ltd. for five years beginning October 16, 2010. The total rental fee is $854,949, and is payable in 5 installments of $170,990 every year. The Company amortized revenue under the straight-line method. The rental income recognized during the nine months ended March 31, 2011 was $77,066.




19.
INCOME TAX




On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “new CIT Law”), which became effective on January 1, 2008. Under the new CIT Law, the corporate income tax rate applicable to the Company starting January 1, 2008 is 25%. The new CIT Law impacted deferred tax assets and liabilities of the Company. The Company adjusted deferred tax balances as of December 31, 2009 based on their best estimates and will continue to assess the impact of the new law in the future. The effects arising from the enforcement of the new CIT law have been reflected in the accounts.




ASC 740-10 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of March 31, 2011, the Company did not have a liability for unrecognized tax benefits.


F-29


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




19.
INCOME TAX (CONTINUED)




Income tax expense is summarized as follows:




Nine Months Ended

March 31,2011


2010Current

$
-


$
(13,656
)Deferred


1,286,338



2,107,272Income tax expense

$
1,286,338


$
2,093,616




The Company’s income tax expense differs from the “expected” tax expense (computed by applying the CIT rate of 25% percent to income before income taxes) as follows:




Nine Months Ended

March 31,2011


2010Computed “expected” expense

$
1,312,694


$
2,021,951Valuation allowance


(26,356
)


71,665Income tax expense

$
1,286,338


$
2,093,616


F-30


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




19.
INCOME TAX (CONTINUED)




The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities are as follows:




Current portion:

March 31,

2011


June 30,

2010G&A expenses

$
346,183


$
330,313Interest expense


116,350



-Road maintenance costs


451,308



316,408Other expenses


161,820



126,412Payroll expenses


-



58,368Bad debts


29,891



13,659US loss carry forward


242,352



268,708Valuation allowance


(242,352
)


(268,708
)PRC loss carry forward


154,315



939,492Total deferred tax assets


1,259,867



1,784,652Sales cut-off


(1,414,017
)


(920,961
)Interest income


(8,634,250
)


(8,940,112
)Interest expense


(105,795
)


(34,583
)Consulting fees


(3,366
)


(113,393
)Other expenses


(142,431
)


(62,548
)Total deferred tax liabilities


(10,299,859
)


(10,071,597
)Net current deferred tax liabilities

$
(9,039,992
)

$
(8,286,945
)Non-current portion:Rental income

$
135,345


$
149,941Capitalized interest


2,334,622



2,245,984Amortization


2,598,283



2,123,492Bad debts


2,812,934



2,706,136Total deferred tax assets


7,881,184



7,225,553Depreciation


(4,383,786
)


(3,012,315
)Total deferred tax liabilities


(4,383,786
)


(3,012,315
)Net non-current deferred tax assets

$
3,497,398


$
4,213,238


F-31


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




19.
INCOME TAX (CONTINUED)




As of March 31, 2011, the U.S. loss-carried-forward is $242,352. The net operating loss carry forward will expire in 2030. The Company estimated that there will not be sufficient profits available within the loss-carried-forward period and the loss-carried-forward will not be realized.





As of March 31, 2011, the PRC loss carry forward of $154,315 represents the net operating loss of the Company’s subsidiary Ping. According to the CIT Law of China, such loss can be carried forward to the succeeding years, but the limit of the carrying forward may not exceed five years. The net operating loss carry forward expires in year 2015.




20.
CONTINGENCIES




Litigation




From time to time the Company is involved in litigation primarily resulting from construction contract disputes. In the management’s opinion, they do not believe the outcome of such litigation will, individually or in the aggregate, have a material adverse effect on the Company's financial position.




Guarantee




The Company entered into a guarantee agreement with China Citic Bank Zhengzhou Branch (the “Bank”). Pursuant to the agreement, the Company provided corporate guarantees for bank loans to Tai Ao, with a debt ceiling of Rmb 65 million (approximately $9,923,513). The guarantee period is from September 1, 2010 to December 31, 2011.  As of March 31, 2011, Tai Ao borrowed Rmb 50 million (approximately $7,633,471), due September 15, 2011.





Associated with the corporate guarantee, Tai Ao also provided a cross guarantee for bank loans of $7,633,471 to the Company. Also see Note 14.





As of March 31, 2011, restricted cash of $7,633,471 was pledged to Zhengzhou Zhengdong Thermoelectricity Co., Ltd. for the notes payable issued by Zhengzhou Zhengdong Thermoelectricity Co., Ltd.





The Company’s management considered the risk of default by Tai Ao as remote, and therefore no liability for the guarantor's obligation under the guarantee was recognized as of March 31, 2011. No fee was paid to Tai Ao for its guarantee.





The Company’s management considered the risk of default by Zhengzhou Zhengdong Thermoelectricity Co., Ltd. as remote, and therefore no liability for the pledgor's obligation under the mortgage was recognized as of March 31, 2011. No fee was paid to Zhengzhou Zhengdong Thermoelectricity Co., Ltd. for its mortgage.


F-32


CHINA INFRASTRUCTURE INVESTMENT CORPORATION AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010


(UNAUDITED)




20.
CONTINGENCIES (CONTINUED)




NASDAQ Listing




The Company was notified by NASDAQ that it is not in compliance with the $1 stock price listing requirement for NASDAQ and that the Company has until September 6, 2011 to correct the issue. If it is not corrected timely or the Company is unsuccessful in an appeals process, the Company could be delisted from the NASDAQ exchange. The Company has communicated with NASDAQ that it has full intention to take the necessary timely steps to ensure that the Company's stock price will comply with the $1 requirement including effectuating a reverse stock split if necessary.


F-33




ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




Forward Looking Statements




The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this Report. This Report contains forward-looking statements. Generally, the words “believes”, ”anticipates”, “may”, “will”, “should”, “expect”, “intend”, “estimate”, “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.




Business Overview




The Company is engaged in the investment, construction, operation and management of the Pinglin Expressway toll road in the Province of Henan, China and the rental of petrol stations and service districts along the toll roads.




With the approval from Henan Communications Bureau and the State Development and Reform Committee of China [NO. 2003-1784], the Company is permitted to construct and operate the Pinglin Expressway in Henan, China for thirty (30) years from 2003. Pursuant to the permission from Henan Communications Bureau and Henan Development and Reform Committee [NO. 2005-1885], the Company is entitled to operate six toll gates. All the rates applicable to the automobiles are defined by the Henan Communications Bureau and Henan Development and Reform Committee.




The Pinglin Expressway is a significant part of the Nanluo Expressway, a key national trunk highway in China which connects Nanjing to Luoyang. The Nanluo Expressway links the northwestern regions to the southeastern coastal regions of China. The construction of the Pinglin Expressway started on October 23, 2003 and was completed in two (2) phases. The first phase of the construction (covering a section of approximately 86 kilometers in length) linking Ruzhou and Pingdingshan in Henan Province, began commercial operations on December 31, 2005. On May 31, 2006, the second phase of the construction (covering a section of approximately 21 kilometers in length) linking Pingdingshan to Yexian in Henan Province was completed.




The Pinglin Expressway is a dual carriageway four lane expressways, the toll section is 106 km in length. Toll revenue from vehicles passing through the Expressway’s six toll gates (South Pingdingshan, Pingdingshan New Town, Baofeng, Xiaotun, Ruzhou and Wenquan) is the primary source of the Company’s revenue. The Expressway is also located between two key cities, Luoyang and Luohe. The Expressway extends from east to west, from Shilipu (the end of the Luohe-Pingdingshan expressway), through Yexian and Pingdingshan and then to New Xiying village at the joint of Pingdingshan and Luoyang. The road is linked with the Lianhuo (Lianyungang-Huoerguosi) national highway in Luoyang, and then extends to the southeast of Luohe City and connects with the Beijing-Zhuhai national highway to form a convenient channel between Luoyang and Luohe. In addition to the traffic flow of the line itself, we believe it also attracts the traffic flow from the Lianhuo highway to Zhengzhou and then to the Beijing-Zhuhai national highway to alter the route of the Pinglin Expressway. Furthermore, the Expressway extends east to link the highway network of the Jiangsu and Anhui provinces and also links seaports, including Shanghai.


1


The Company’s operating revenue is generated through toll charges on vehicles that pass through the toll gate. The standard toll charges is approved and set by the provincial price administrative bureau. The Company’s revenue is equal to the relevant standard toll rate for the types of vehicles, multiplied by the relative miles of travel on the Expressway which the Company is operating, and is cleared by the Henan Expressway System Toll Collection Center each month (Henan Expressway has a system of charges and a clearing center which calculates and allocates toll charge income according to the charge standards and the miles of vehicle travel in the Expressway). The Company specializes in the operation and management of expressways, and maintenance projects are outsourced to professional road construction enterprises.




The Company began generating operating revenue in January 2006. The Expressway was not fully operational until June 2006, therefore our operating income was low and growth was moderate. After several years of operations, awareness of the Expressway and passenger and commercial vehicle traffic has gradually increased. We believe that along with income growth in the future, the profit earning capacity of the Company will improve steadily.




Enterprise Strategy




Henan is the province with the largest population in China.  However, its urbanization rate is far below the national average. With rapid economic and social development and the accelerated process of urbanization in Henan, demand is growing rapidly for infrastructure, such as the Expressway and other transportation infrastructure, urban facilities such as heating, water supply, and sewerage treatment. The existing infrastructure can no longer meet the needs of the region’s social development.





Because the Chinese government’s financial revenue growth is limited, its investments alone are unable to build huge infrastructure projects in a relatively short period of time. In order to attract other funding, local governments are willing to grant to commercial companies the right to invest in the construction and operation of projects, or directly sell the equity of the established enterprises to recover their early input.





The Company plans to invest in the construction and purchase of additional expressways, water supply, sewage treatment facilities and other infrastructure assets in the next few years. In doing so, it intends to seize the opportunities in infrastructure development in China, especially in Henan province.  We believe that through consolidation, the Company will strengthen its business in infrastructure development and create economics of scale resulting in reduction in operation costs.




The Company intends to actively seek various sources in the capital markets to raise funds for its future expansion and consolidation.




In addition, the Company will continue to maintain and improve its business operations in areas of operations management, information systems, customer services, and repair maintenance.




Significant Accounting Policies and Estimates




We prepare our financial statements in accordance with generally accepted accounting principles in the United States, which require us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, to disclose contingent assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than other in their application.




This section should be read together with the Summary of Significant Accounting Policies included as Note 2 to the consolidated financial statements included herein.


2


We determine the estimated useful lives and related depreciation charges for our toll road infrastructures, property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of toll road infrastructures, property, plant and equipment of a similar nature and functions and the practice in similar industries. Toll road infrastructures, property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of the toll road infrastructures are calculated to write off their cost, commencing from the date of commencement of commercial operations of the toll roads, based on the ratio of actual traffic volume compared to the total expected traffic volume of the toll roads as estimated by reference to traffic projection reports prepared by an independent PRC organization each year. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Other properties, plant and equipment are depreciated or amortized over their estimated useful lives, using the straight-line method. We will increase the depreciation charge where useful lives are less than previously estimated lives, or we will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.




The board of directors of the Company approved a share purchase resolution. Pursuant to a letter of intent, the Company shall purchase at least 51% of Tai Ao (a related party). The consideration for such purchase will be settled first with the note receivable from Xinyang, and the remainder in cash. The advance to Tai Ao will also be settled in the Company’s acquisition of Tai Ao. The collectibility of the notes receivables from related parties to a large extent depends on completion of the share purchase resolution as mentioned in related parties’ transactions.




Revenue Recognition




The Company’s revenue represents toll revenue net of business tax, and is recognized when all of the following criteria are met:




The amount of revenue can be measured reliably;




It is probable that the economic benefits associated with the transaction will flow to the enterprise;




The costs incurred or to be incurred in respect of the transaction can be measured reliably; and




Collectibility is reasonably assured.




Rental income is measured at the fair value of the consideration receivable and represents amounts receivable for services provided in the normal course of business, net of discounts and sales tax.




Fair Value of Financial Instruments




The Company’s financial instruments include restricted cash, accounts receivable, notes receivable, due from related parties, other receivables, other payables and accrued liabilities, short-term bank loans, payable to contractors, other current liabilities and deferred taxes. We estimated that the carrying amount approximates fair value due to their short-term nature. The fair value of the Company’s long-term bank loans and deferred revenue are estimated based on the current rates offered to the Company for debt of similar terms and maturities. The Company’s fair value of long-term bank loans and deferred revenue was not significantly different from the carrying value at March 31, 2011 and June 30, 2010.




Depreciation of Toll Road Infrastructures




Toll road infrastructures are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of the toll road infrastructures are calculated to write off their cost, commencing from the date of commencement of commercial operation of the toll roads, based on the ratio of actual traffic volume compared to the total expected traffic volume of the toll roads as assessed by management each year.  The total expected traffic volume is derived from a traffic projection report prepared by an independent PRC organization.


3




Impairment of Long-Lived Assets




We review periodically the carrying amounts of long-lived assets including toll road infrastructures, property, plant and equipment, land use rights, construction in progress, long-term investment and long-term deferred assets with finite useful lives or beneficial periods, to assess whether they are impaired. We evaluate these assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable such as a change of business plan or a period of continuous losses. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its projected future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. In determining estimates of future cash flows, significant judgment in terms of projection of future cash flows and assumptions is required. There were no impairments for the nine months ended March 31, 2011 and 2010.




Related Parties Transactions




The Company considers parties to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.




Relationship between the Company and related parties without controlling relationships are as follow:




Company name

Relationship with the CompanyTai Ao Expressway Co., Ltd. (“Tai Ao”)

Li Xipeng, the Chief Executive Officer, Chairman and significant shareholder of the Company is the Chairman and 51% owner of Tai Ao.Xinyang Expressway Co., Ltd. (“Xinyang”)

Li Xipeng, the Chief Executive Officer, Chairman and significant shareholder of the Company is the Chairman and 100% owner of Xinyang.Henan Ruijia Industry Co., Ltd. (“Ruijia”)

Li Xipeng, the Chief Executive Officer, Chairman and significant shareholder of the Company is the Chairman and 60% owner of Ruijia.Henan Hairun Trade Co., Ltd. (“Hairun”)

Substantially controlled by the Vice President of Operations of the CompanyZhengZhou Zhengbian Heat Ltd. (“Zhengbian Heat”)

Li Xipeng, the Chief Executive Officer, Chairman and significant shareholder of the Company is the Chairman and 80% owner of Zhengbian Heat.Xinyang Hongqiao Heat Co., Ltd. (“Hongqiao”)

Li Xipeng, the Chief Executive Officer, Chairman and significant shareholder of the Company is the Chairman and 92% owner of Hongqiao.Zhengzhou Zhengdong Thermoelectricity Co., Ltd. (“Zhengdong”)

Li Xipeng, the Chief Executive Officer, Chairman and significant shareholder of the Company is the Chairman and 80% owner of Zhengdong.


4




Zhengzhou Zhengbian Tap Water Co., Ltd. (“Zhengbian”)

Li Xipeng, the Chief Executive Officer, Chairman and significant shareholder of the Company is the Chairman and 80% owner of Zhengbian.




The material related party transactions of the Company mainly relates to borrowings and loans for working capital needs, which are disclosed as follows:




On June 29, 2010, Tai Ao Expressway Co., Ltd. entered into a renewal agreement with the Company. Pursuant to the agreement, the note receivable from Tai Ao was extended to June 29, 2011 with a 5.94% interest rate per annum. Interest shall be paid annually and the principal shall be repaid at maturity. The note receivable from Tai Ao is classified as a non-current asset because the Company expects to purchase a controlling interest in Tai Ao and the receivable will be part of the cost of acquiring the ownership interest. Also see September 27, 2009 letter of intent below. According to the letter of intent and board of directors’ minutes of September 2009, the entire principal and interest is going to be settled by the acquisition. The resolution of principal and interest of the notes receivable from related parties to a large extent depends on the government approval of the acquisition. Based on the uncertainty of the approval by the government or how long it will take the Company to get approval, the Company decided to cease accruing the interest income from the notes receivable from related parties from October 1, 2010.




On June 29, 2010, Xinyang Expressway Co., Ltd. entered into a renewal agreement with the Company. Pursuant to the agreement, the note receivable to Xinyang was extended to June 29, 2011 with a 5.94% interest rate per annum. Interest is paid annually and the principal is repaid at maturity. Also see September 27, 2009 letter of intent below. According to the letter of intent and board of directors’ minutes of September 2009, the entire principal and interest is going to be settled by the acquisition. The resolution of principal and interest of the notes receivable from related parties to a large extent depends on the government approval of the acquisition. Based on the uncertainty of the approval by the government or how long it will take the Company to get approval, the Company decided to cease accruing the interest income from the notes receivable from related parties from October 1, 2010.




On September 27, 2009, the board of directors of the Company approved a share purchase resolution. Pursuant to a letter of intent dated September 27, 2009, the Company shall purchase at least 51% of Tai Ao. The consideration for such purchase will be settled first with the note receivable from Xinyang of $83,601,327, and the remainder in cash. If the Company successfully negotiates with Tai Ao’s shareholders, the consideration will be determined in accordance with the audited net assets of Tai Ao at the purchase date. If the Company consummates such transaction, the transaction is expected to be accounted for as an acquisition of a company under common control.




The collectibility of the notes receivables from related parties to a large extent depends on completion of the share purchase resolution as mentioned below.




The Chinese government now requires foreign acquirers of assets based in China to use all cash in the acquisition. A share-based acquisition has to be approved by the Reform and Development Commission of the central government. The success of getting approval from the Reform and Development Commission is uncertain. The Company has to arrange for a large amount of cross-border capital, which can be time consuming and technically difficult due to the foreign exchange control in China.




In addition, the Chinese government recently imposed a new national security review on future foreign acquisitions of certain types of businesses and assets that are of the strategic and national security interest of China, including infrastructure projects. Since this regulatory requirement just became effective, it is uncertain how the government will view this transaction and what steps will be taken.


5





The Company is actively pursuing the acquisition. However, whether the application will be approved is still unclear as of March 31, 2011 due to the above mentioned reasons. Thus, there is uncertainty as to the collectibilty of the notes receivables from related parties. At this time, the Company estimates that there is no need for a reserve against the amounts due from related parties. If the Company is unsuccessful in obtaining approval for the acquisition of Tai Ao, this reserve estimate could change significantly. The management of the Company plans to resolve the related party transaction as of June 30, 2011, either effectuating the acquisition or settling the related party receivables.


On April 12, 2009, Henan Ruijia Industry Co., Ltd. entered into an agreement with the Company. Pursuant to the agreement, the Company provided a note receivable for $2,191,445 to Ruijia. Such note receivable was due April 11, 2010, and bears a 5.31% interest rate per annum. The principal and the interest were payable at maturity. On November 12, 2009, the Company received the principal of such note receivable. Considering the Company has never received the interest from the note, the Company’s management believes there is uncertainty as to collection of the interest income. A full provision amounting to $71,272 was provided by the Company for the interest as of March 31, 2011.




On July 28, 2009, Henan Hairun Trade Co., Ltd. entered into an agreement with the Company. Pursuant to the agreement, the Company provided a note receivable for $1,465,975 to Hairun. Such note receivable was due July 27, 2010, and bears a 5.31% interest rate per annum. On November 12, 2009, the Company received the principal of such note receivable. Considering the Company has never received the interest from the note, the Company’s management believes there is uncertainty as to collection of the interest income. A full provision amounting to $23,870 was provided by the Company for the interest as of March 31, 2011.




The above mentioned notes receivable were provided to these companies for their construction and operation working capital. Tai Ao, Xinyang and Ruijia are related to the Company through a common shareholder of the Company. Hairun is a trading company substantially controlled by Ms. Lin Jie, the Vice President of Operations of the Company. The notes receivable are interest bearing and unsecured. Interest income was $2,133,321 and $6,277,033 for the nine months ended March 31, 2011 and 2010, respectively.




Tai Ao Expressway Co., Ltd. is substantially controlled by the same Chairman of the Company, Li Xipeng. 51% shares of Tai Ao are substantially held by Li Xipeng. The Company made payments to Tai Ao for its working capital needs. For the nine months ended March 31, 2011, the payments to Tai Ao amounted to $11,064,405, and the repayments from Tai Ao amounted to $5,655,846. The balances of $39,524,453 and $32,732,531 at March 31, 2011 and June 30, 2010, respectively, are unsecured, interest free and due on demand.




Henan Hairun Trade Co., Ltd. is substantially controlled by Ms. Lin Jie, the Vice President of Operations of the Company. The Company made payments to Hairun for its working capital needs. Hairun repaid the amount during the nine months ended March 31, 2011.




Xinyang Hongqiao Heat Co., Ltd. is substantially controlled by the same chairman of the Company, Li Xipeng. 92% shares of Xinyang Hongqiao Heat Co., Ltd. are substantially held by Li Xipeng. The Company made payment to Hongqiao for its working capital needs. The balance of $458,008 at March 31, 2011 is unsecured, interest free and due on demand.




The Company and Zhengzhou Zhengdong Thermoelectricity Co., Ltd. have the same chairman, Li Xipeng. 80% shares of Zhengzhou Zhengdong Thermoelectricity Co., Ltd. are substantially held by Li Xipeng. The Company made payments to Zhengzhou Zhengdong Thermoelectricity Co., Ltd. for its working capital needs. For the nine months ended March 31, 2011, the payments to Zhengdong were $2,237,102, and the repayments from Zhengdong were $1,351,148. The balance at March 31, 2011 was $900,953. The balance at March 31, 2011 is unsecured, interest free and due on demand.




The Company borrowed working capital from Henan Hairun Trade Co., Ltd., which is substantially controlled by Ms. Lin Jie, the Vice President of Operations of the Company. For the nine months ended March 31, 2011, the working capital borrowed from Hairun was $2,251,914. The Company repaid the amount during the nine months ended March 31, 2011.


6





The Company borrowed working capital from Zhengzhou Zhengbian Tap Water Co., Ltd., which has the same chairman of the Company, Li Xipeng. 80% shares of Zhengzhou Zhengbian Tap Water Co., Ltd. are substantially held by Li Xipeng. The Company repaid the amount during the nine months ended March 31, 2011.


The Company borrowed working capital from Zhengzhou Zhengdong Thermoelectricity Co., Ltd., which has the same chairman of the Company, Li Xipeng. 80% shares of Zhengzhou Zhengdong Thermoelectricity Co., Ltd. are substantially held by Li Xipeng. For the nine months ended March 31, 2011, the working capital borrowed from Zhengzhou Zhengdong Thermoelectricity Co., Ltd. was $12,010,209 and the Company repaid the amount during the nine months ended March 31, 2011.




Contingencies




In the normal course of business, we are subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters. We recognize a liability for such contingency if we determine that it is probable that a loss has incurred and a reasonable estimate of the loss can be made. We may consider many factors in making these assessments, including past history and the specifics of each matter.




The Company entered into a guarantee agreement with China Citic Bank Zhengzhou Branch. Pursuant to the agreement, the Company provided corporate guarantees for bank loans to Tai Ao, with a debt ceiling of 65 million RMB (approximately $9,923,513). The guarantee period is from September 1, 2010 to December 31, 2011.  As of March 31, 2011, Tai Ao borrowed 50 million RMB (approximately $7,633,471), due September 15, 2011. Associated with the corporate guarantee, Tai Ao also provided a cross guarantee for bank loans of $7,633,471 to the Company.




The Company’s management considers the risk of default by Tai Ao as remote, and therefore no liability for the guarantor's obligation under the guarantee was recognized as of March 31, 2011. No fee was paid to Tai Ao for its guarantee.




As of March 31, 2011, restricted cash of $7,633,471 was pledged to Zhengzhou Zhengdong Thermoelectricity Co., Ltd. for the notes payable issued by Zhengzhou Zhengdong Thermoelectricity Co., Ltd.




The Company’s management considered the risk of default by Zhengdong as remote, and therefore no liability for the pledgor's obligation under the mortgage was recognized as of March 31, 2011. No fee was paid to Zhengdong for its mortgage.




The Company was notified by NASDAQ that it is not in compliance with the $1 stock price listing requirement for the NASDAQ and that the Company has until September 6, 2011 to correct the issue. If it is not corrected timely or the Company is unsuccessful in an appeals process, the Company could be delisted from the NASDAQ exchange. The Company has communicated with NASDAQ that it has full intention to take the necessary timely steps to ensure that the Company's stock price will comply with the $1 requirement including effectuating a reverse stock split if necessary.




Recent Accounting Pronouncements




No new accounting pronouncements have been adopted that will have a material effect on the condensed consolidated financial statements.


7


Results of Operations




Results of Operations for the Three (3) Months Ended March 31, 2011 Compared to the Three (3) Months Ended March 31, 2010




The following table sets forth a summary of certain key components of our results of operations for the periods indicated, in dollars and as a percentage of revenues.




Three Months Ended

March 31

(Unaudited)


Three Months Ended

March 31

(Unaudited)2011


2010


2011


2010Revenues


13,080,822



10,659,674



100.0
%


100.0
%Operating costs


958,431



1,074,027



7.3
%


10.1
%Depreciation and amortization


2,724,697



2,013,835



20.8
%


18.9
%Gross profit


9,397,694



7,571,812



71.8
%


71.0
%General and administrative expenses


1,423,791



1,293,996



10.9
%


12.1
%Income from operations


7,973,903



6,277,816



61.0
%


58.9
%Interest income from related parties


-



2,055,602



0.0
%


19.3
%Other interest income (expense)


(386,476
)


13,226



(3.0
)%


0.1
%Interest expense


7,757,025



6,867,988



59.3
%


64.4
%Other income, net


275,029



252,896



2.1
%


2.4
%Income from operations before income taxes


105,431



1,731,552



0.8
%


16.2
%Income tax expense


26,358



444,093



0.2
%


4.2
%Net income


79,073



1,287,459



0.6
%


12.1
%




Revenues




Our revenues are derived from the operation of Pinglin Expressway. Our revenues increased by approximately $2.4 million, or 22.7%, from approximately $10.7 million for the three months ended March 31, 2010 to approximately $13.1 million for the three months ended March 31, 2011. The increase was mainly due to:




The converted average daily traffic volume, a guideline specifically used in the toll road industry to evaluate operational performance, increased 2,642 units, or 22.5%, from 11,762 units for the three months ended March 31, 2010 to 14,404 units for the three months ended March 31, 2011.




Pinglin Expressway is part of Ningnuo Expressway, which intersects the Lianhuo Expressway (the main freight channel from east to west) at Luoyang. Due to the rebuilding of the Lianhuo Expressway, which finished in October 2010, trucks chose our Expressway because of the improved road conditions and additional traffic lanes. With the completion of rebuilding of the Lianhuo Expressway, the traffic volume of the Expressway will be back to normal growth. As a result, the long-haul truck flow through Pinglin Expressway for the three months ended March 31, 2011 increased approximately 22% compared to the same period in 2010. Thus, the revenues increased accordingly. Considering the short time after the completion of the rebuilding of the Lianhuo Expressway, the Company cannot assess the impact of the future total traffic volume of Pinglin Expressway in the current reporting period, and will assess it each reporting period.




Due to these factors set forth above, our revenues for the three months ended March 31, 2011 increased 22.7% compared to the three months ended March 31, 2010.


8




Operating Costs




Our operating costs mainly represent the road maintenance costs, road management costs and labor costs associated with the toll operations. Our operating costs decreased by approximately $0.1 million, or 10.8%, from approximately $1.1 million for the three months ended March 31, 2010 to approximately $1.0 million for the three months ended March 31, 2011. The decrease is mainly due to the decrease in our specific project costs and the road surface evenness project for three months ended March 31, 2011.




Depreciation and Amortization




Our total depreciation and amortization related to toll operations increased by approximately $0.7 million, or 35.3%, from approximately $2.0 million for the three months ended March 31, 2010 to approximately $2.7 million for the three months ended March 31, 2011. The increase was mainly caused by the increase of the converted average daily traffic volume and the reassessment of the future expected traffic volume.




Depreciation of toll road infrastructures is calculated on a units-of-usage basis. The Company recorded the depreciation based on the ratio of actual traffic volume during the period compared to the total expected traffic volume of the toll roads during the estimated operation licensing period.




The converted average daily traffic volume increased 2,642 units, or 22.5%, from 11,762 units for the three months ended March 31, 2010 to 14,404 units for the three months ended March 31, 2011




Management assesses the future total expected traffic volume at each year end. Considering the current economic environment and the actual traffic volume during the year ended June 30, 2010, compared to prior years’ estimate, management believes that there was significant decline in future total anticipated volume. Based on such estimation, the management reassessed the future total traffic volume at June 30, 2010, which decreased by approximately 15.6% compared to the assessment of prior year. As a result, depreciation of toll road infrastructures increased for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. Considering the short time after the completion of rebuilding of the Lianhuo Expressway, the Company cannot assess the impact of the future total traffic volume of the Expressway in the current reporting period, and will assess it each reporting period.




Gross Profit




Our gross profit increased by approximately $1.8 million, or 24.1%, from approximately $7.6 million for the three months ended March 31, 2010 to approximately $9.4 million for the three months ended March 31, 2011. Such gross profit increase is primarily due to the increase in our revenues and decrease in operating costs.




Gross profit as a percentage of revenues increased from 71.0% for the three months ended March 31, 2010 to 71.8% for the three months ended March 31, 2011 as a result of the explanation above.




General and Administrative Expenses




Our general and administrative expenses mainly represent employee payroll and welfare, traveling expenses, vehicle gasoline and maintenance costs, entertainment expenses, consulting fees, provisions for doubtful accounts, depreciation and miscellaneous taxes. General and administrative expenses increased by approximately $0.1 million, or 10.0%, from approximately $1.3 million for the three months ended March 31, 2010 to approximately $1.4 million for the three months ended March 31, 2011. Such increase is primarily due to the increase in payroll. With the high CPI in China, the Company provided the higher payroll for its employees.


9




Interest Income and Expense




Interest income from related parties decreased by approximately $2.06 million, or 100%, from approximately $2.06 million for the three months ended March 31, 2010 to $0 for the three months ended March 31, 2011. The decrease is primarily due to the Company’s management’s decision to cease to accrue the interest income from notes receivable from related parties from October 1, 2010.




Interest expense increased by approximately $0.9 million, or 12.9%, from approximately $6.9 million for the three months ended March 31, 2010 to approximately $7.8 million for the three months ended March 31, 2011. This increase is primarily due to the increase in our loan principal.




Income Tax Expense




Income tax expense decreased by approximately $0.4 million, or 94.1%, from approximately $0.4 million for the three months ended March 31, 2010 to approximately $0.03 million for the three months ended March 31, 2011, as a result of the decrease in our income from operations. Our effective tax rate was 25% and 26% for the three months ended March 31, 2011 and 2010, respectively.




Net Income




Our net income decreased by approximately $1.2 million, or 93.9%, from approximately $1.3 million for the three months ended March 31, 2010 to approximately $0.08 million for the three months ended March 31, 2011. This decrease is primarily due to the decrease in our interest income from related parties and the increase in interest expense, partially offset by the increase in our revenue.




Results of Operations for the Nine (9) Months Ended March 31, 2011 Compared to the Nine (9) Months Ended March 31, 2010




The following table sets forth a summary of certain key components of our results of operations for the periods indicated, in dollars and as a percentage of revenues.




Nine Months Ended

March 31

(Unaudited)


Nine Months Ended

March 31

(Unaudited)2011


2010


2011


2010Revenues


42,233,655



35,845,854



100.0
%


100.0
%Operating costs


4,813,781



3,161,795



11.4
%


8.8
%Depreciation and amortization


8,380,104



6,503,106



19.8
%


18.1
%Gross profit


29,039,770



26,180,953



68.8
%


73.0
%General and administrative expenses


3,640,132



3,774,174



8.6
%


10.5
%Income from operations


25,399,638



22,406,779



60.1
%


62.5
%Interest income from related parties


2,133,321



6,277,033



5.1
%


17.5
%Other interest income (expense)


(488,151
)


61,412



(1.2
)%


0.2
%Interest expense


22,117,946



21,410,205



52.4
%


59.7
%Other income, net


323,913



752,786



0.8
%


2.1
%Income from operations before income taxes


5,250,775



8,087,805



12.4
%


22.6
%Income tax expense


1,286,338



2,093,616



3.0
%


5.8
%Net income


3,964,437



5,994,189



9.4
%


16.7
%


10




Revenues




Our revenues are derived from the operation of Pinglin Expressway. Our revenues increased by approximately $6.4 million, or 17.8%, from approximately $35.8 million for the nine months ended March 31, 2010 to approximately $42.2 million for the nine months ended March 31, 2011. The increase was mainly due to:




The converted average daily traffic volume, a guideline specifically used in the toll road industry to evaluate operational performance, increased 2,056 units, or 15.9%, from 12,899 units for the nine months ended March 31, 2010 to 14,955 units for the nine months ended March 31, 2011.




Pinglin Expressway is part of Ningnuo Expressway, which intersects the Lianhuo Expressway (the main freight channel from east to west) at Luoyang. Due to the rebuilding of the Lianhuo Expressway, which finished in October 2010, trucks chose our Expressway because of the improved road conditions and additional traffic lanes. With the completion of rebuilding of the Lianhuo Expressway, the traffic volume of the Expressway will be back to normal growth. As a result, the long-haul truck flow through Pinglin Expressway for the nine months ended March 31, 2011 increased approximately 18% compared to the same period in 2010.  Thus, the revenues increased accordingly. Considering the short time after the completion of rebuilding of the Lianhuo Expressway, the Company cannot assess the impact of the future total traffic volume of Pinglin Expressway in the current reporting period, and will assess it each reporting period.




With the global economic recovery, the coal demand for industry increases. Therefore, the weight and flow rate of trucks carrying coal through Pinglin Expressway increased accordingly.




Due to these factors set forth above, our revenues for the nine months ended March 31, 2011 increased 17.8% compared to the nine months ended March 31, 2010.




Operating Costs




Our operating costs mainly represent the road maintenance costs, road management costs and labor costs associated with the toll operations. Our operating costs increased by approximately $1.6 million, or 52.2%, from approximately $3.2 million for the nine months ended March 31, 2010 to approximately $4.8 million for the nine months ended March 31, 2011. The increase is mainly due to the increase in our specific project costs and the road surface evenness project for the nine months ended March 31, 2011.




Depreciation and Amortization




Our total depreciation and amortization related to toll operations increased by approximately $1.9 million, or 28.9%, from approximately $6.5 million for the nine months ended March 31, 2010 to approximately $8.4 million for the nine months ended March 31, 2011. The increase was mainly caused by the increase of the converted average daily traffic volume and the reassessment of the future expected traffic volume.




Depreciation of toll road infrastructures is calculated on a units-of-usage basis. The Company recorded the depreciation based on the ratio of actual traffic volume during the period compared to the total expected traffic volume of the toll roads during the estimated operation licensing period.




The converted average daily traffic volume increased 2,056 units, or 15.9%, from 12,899 units for the nine months ended March 31, 2010 to 14,955 units for the nine months ended March 31, 2011.




Management assesses the future total expected traffic volume at each year end. Considering the current economic environment and the actual traffic volume during the year ended June 30, 2010, compared to prior years’ estimate, management believed that there was significant decline in future total anticipated volume. Based on such estimation, the management reassessed the future total traffic volume at June 30, 2010, which decreased by approximately 15.6% compared to the assessment of prior year. As a result, depreciation of toll road infrastructures increased for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010. Considering the short time after the completion of rebuilding of the Lianhuo Expressway, the Company cannot assess the impact of the future total traffic volume of the Expressway in the current reporting period, and will assess it each reporting period.


11




Gross Profit




Our gross profit increased by approximately $2.8 million, or 10.9%, from approximately $26.2 million for the nine months ended March 31, 2010 to approximately $29.0 million for the nine months ended March 31, 2011. Such gross profit increase is primarily due to the increase in our revenues, partially offset by the increase in operating cost and depreciation expense.




Gross profit as a percentage of revenues decreased from 73.0% for the nine months ended March 31, 2010 to 68.8% for the nine months ended March 31, 2011 as a result of the explanation above.




General and Administrative Expenses




Our general and administrative expenses mainly represent employee payroll and welfare, traveling expenses, vehicle gasoline and maintenance costs, entertainment expenses, consulting fees, provisions for doubtful accounts and miscellaneous taxes. General and administrative expenses decreased by approximately $0.1 million, or 3.6%, from approximately $3.7 million for the nine months ended March 31, 2010 to approximately $3.6 million for the nine months ended March 31, 2011. Such decrease is primarily due to the decrease in consulting fee. Consulting fee decreased due to the completion of the review and verification of the project “Part of State Key Highway Construction”.




Interest Income and Expense




Interest income from related parties decreased by approximately $4.1 million, or 66.0%, from approximately $6.2 million for the nine months ended March 31, 2010 to approximately $2.1 million for the nine months ended March 31, 2011. The decrease is primarily due to the Company’s management’s decision to cease to accrue the interest income from notes receivable from related parties from October 1, 2010.




Interest expense increased by approximately $0.7 million, or 3.3%, from approximately $21.4 million for the nine months ended March 31, 2010 to approximately $22.1 million for the nine months ended March 31, 2011. This increase is primarily due to the increase in our loan principal.




Income Tax Expense




Income tax expense decreased by approximately $0.8 million, or 38.6%, from approximately $2.1 million for the nine months ended March 31, 2010 to approximately $1.3 million for the nine months ended March 31, 2011, as a result of the decrease in our income from operations. Our effective tax rate was 24% and 26% for the nine months ended March 31, 2011 and 2010, respectively.




Net Income




Our net income decreased by approximately $2.0 million, or 33.9%, from approximately $6.0 million for the nine months ended March 31, 2010 to approximately $4.0 million for the nine months ended March 31, 2011. This decrease is primarily due to the increase in our operating costs and depreciation and amortization expenses, the decrease in interest income from related parties, and the increase in interest expenses, partially offset by the increase in our revenues.


12




Liquidity and Capital Resources




We generally finance our operations through, to a substantial extent, from operating profit and a combination of borrowings from banks. We use cash generated from operations to pay current liabilities. To increase our cash resources, we will renew short-term loans when due and obtain long-term loans, if necessary. During the current reporting period, we obtained long-term loans of $19,066,206.




Management assesses the future total expected traffic volume at each fiscal year end. Considering the current economic environment and the actual traffic volume during the year ended June 31, 2010, compared to the prior years’ estimate, management believes that there was significant decline in future total anticipated volume. However, the converted average daily traffic volume for the nine months ended March 31, 2011 increased compared with the nine months ended March 31, 2010. Therefore, our current revenue generated through operations increased accordingly during the current reporting period.




As of the date of this report, we have not experienced (1) any difficulty in raising funds by bank loans, (2) any liquidity problems in settling the payables in the normal course of business, and (3) any difficulty in repaying bank loans when they fall due. To improve liquidity, we may explore new expansion opportunities and funding sources from which the management may consider seeking external funding and financing.




The following table sets forth the summary of our cash flow, in dollars, for the periods indicated:




Nine Months Ended March 312011


2010Net cash provided by operating activities

$
7,008,725


$
16,218,092Net cash used in investing activities


(14,428,900
)


(10,514,072
)Net cash provided in financing activities


7,550,455



(5,833,926
)Net decrease in cash and cash equivalents


130,280



(129,906
)Effect of exchange rate changes on cash


(208,045
)


(24,848
)Cash and cash equivalents at beginning of period


1,267,199



1,614,260Cash and cash equivalents at end of period

$
1,189,434


$
1,459,506




Operating Activities




Net cash provided by operating activities was approximately $7.0 million for the nine months ended March 31, 2011, as compared to $16.2 million for the nine months ended March 31, 2010. This decrease is primarily due to the decrease in our net income of approximately $2.0 million, and the decrease in our current deferred revenue of approximately $2.2 million and the increase in our accounts receivables of approximately $3.9 million for the nine months ended March 31, 2011.




Investing Activities




Net cash used in investing activities was approximately $14.4 million for the nine months ended March 31, 2011 as compared to approximately $10.5 million for the nine months ended March 31, 2010. The change is primarily due to the fact that (a) we provided additional working capital for related parties, Zhengbian and Tai Ao, for the nine months ended March 31, 2011, as compared to the nine months ended March 31, 2010; (b) we paid the amount to purchase shares of Pingdingshan City Credit Corporation of approximately $1.6 million for the nine months ended March 31, 2011; and (c) we provided additional payables to contractors of approximately $3.9 million for the nine months ended March 31, 2011.


13




Financing Activities




Net cash provided in financing activities was approximately $7.6 million for the nine months ended March 31, 2011 as compared to net cash used of approximately $5.8 million for the nine months ended March 31, 2010. Such change is primarily due to the fact that (a) we received $19.1 million in proceeds from long-term bank loans from China Construction Bank due to working capital needs; and (b) the repayment of long-term bank loans decreased approximately $8.6 million for the nine months ended March 31, 2011 as compared to the nine months ended March 31, 2010; and (c) the restricted cash increased approximately $20.8 million for the nine months ended March 31, 2011 as compared to the nine months ended March 31, 2010.




Working Capital




Our working capital increased by approximately $24.0 million from a deficit of approximately $61.6 million as of June 30, 2010 to a deficit of approximately $37.6 million as of March 31, 2011. This was primarily due to a change in the payment schedule of long-term loans, which resulted in a decrease in the current portion of long-term bank loans of approximately $6.4 million and the restricted cash increased approximately $20.8 million. The negative working capital of the Company as of March 31, 2011 and June 30, 2010 is mainly due to the current notes receivables from related parties that are reclassified into long-term assets.




On September 27, 2009, the board of directors of the Company approved a share purchase resolution. Pursuant to a letter of intent, the Company shall purchase at least 51% of Tai Ao. The consideration for such purchase will be settled first with the note receivable from Xinyang, and the remainder in cash. The advance to Tai Ao will also be involved in the Company’s acquisition of Tai Ao. The collectibility of the notes receivables from related parties to a large extent depends on completion of the share purchase resolution as mentioned in related parties’ transactions.




The Company currently generates its cash flow through operations and bank loans, and the Company believes that its cash flow generated from operations will be sufficient to sustain operations for the next twelve (12) months. From time to time, the Company may explore new expansion opportunities and funding sources from which our management may consider seeking external funding and financing.




Capital Expenditures




We made capital expenditures of approximately $0.2 and $0.2 million for the nine months ended March 31, 2011 and 2010, respectively. Capital expenditures principally consisted of toll road infrastructures, toll stations and ancillary facilities, communication and monitoring equipment and other equipment related to our toll operations. If we are permitted to construct and operate a new toll road or invest other toll road companies, we may require additional funds.




Off-Balance Sheet Arrangements




We entered into a guarantee agreement with China Citic Bank Zhengzhou Branch. Pursuant to the agreement, we provided corporate guarantees for bank loans to Tai Ao, with a debt ceiling of Rmb 65 million (approximately $9,923,513). The guarantee period is from September 1, 2010 to December 31, 2011.  As of March 31, 2011, Tai Ao borrowed Rmb 50 million (approximately $7,633,471), due September 15, 2011.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not required.





ITEM 4. CONTROLS AND PROCEDURES





Disclosure Controls and Procedures





Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, our management, including our principal executive officer and our principal financial officer, concluded that our disclosure controls and procedures were effective as of the fiscal quarter covered by this Report, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act (i) is recorded, processed, summarized and reported within the time period specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow appropriate decisions on a timely basis regarding required disclosure.


14


Internal Control over Financial Reporting





There were no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


15


PART II OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





In the normal course of business, we are named as defendant in lawsuits in which claims are asserted against us. In our opinion, the liabilities, if any, which may ultimately result from such lawsuits, are not expected to have a material adverse effect on our financial position, results of operations or cash flows. As of the date hereof, there is no outstanding litigation with the Company.





ITEM 1A. RISK FACTORS





Not required.





ITEM 2. UREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





During the quarter ended March 31, 2011, the Company had no unregistered sales of equity securities.





ITEM 3. DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4. (REMOVED AND RESERVED)





ITEM 5. OTHER INFORMATION





None.





ITEM 6. EXHIBITS





(a)           Exhibits





EXHIBIT NO.

DESCRIPTION31.1

Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002.31.2

Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002.32.1

Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002.32.2

Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002.


16


SIGNATURES





Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q report to be signed on its behalf by the undersigned, thereunto duly authorized.





Date: May 16, 2011
By:
/s/ Li XipengName: Li XipengChief Executive Officer, PrincipalExecutive Officer and Chairman of the BoardDate: May 16, 2011
By:
/s/ Zhang ChunxianName: Zhang ChunxianChief Financial Officer, Principal

Financial and Accounting Officer and Director


17