UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10−Q


(Mark
One)


o
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended: December 31, 2009




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ____________ to _____________




Commission
File Number: 333-141568





CHINA ADVANCED CONSTRUCTION
MATERIALS GROUP, INC.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
                  
                  20-8468508(State or other jurisdiction of incorporation or organization)
                  
                  (I.R.S. Employer Identification No.)





1515
Broadway, 11th Floor


New
York, NY 10036


(Address
of principal executive offices, Zip Code)




+86
10 82525361


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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   o   No  
o





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    o   No  
o





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 
      o
            Accelerated Filer 
      oNon-Accelerated Filer 
      o  (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   o   No  
o





The
number of shares outstanding of each of the issuer’s classes of common equity,
as of February 8, 2010 is as follows:




Class of Securities
              
              Shares OutstandingCommon
      Stock, $0.001 par value
              
              13,186,420








TABLE
OF CONTENTS




PART
      IFINANCIAL
      INFORMATIONITEM
      1.
                FINANCIAL
      STATEMENTS
                2ITEM
      2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                28ITEM
      3.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                41ITEM
      4(T).
                CONTROLS
      AND PROCEDURES
                41PART
      IIOTHER
      INFORMATIONITEM
      1.
                LEGAL
      PROCEEDINGS
                43ITEM
      1A.
                RISK
      FACTORS
                43ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                43ITEM
      3.
                DEFAULTS
      UPON SENIOR SECURITIES
                43ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                43ITEM
      5.
                OTHER
      INFORMATION
                43ITEM
      6.
                EXHIBITS
                43


1





PART
I





FINANCIAL
INFORMATION




ITEM
1.    FINANCIAL STATEMENTS.





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC.  AND SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS





PageConsolidated
      Balance Sheets as of December 31, 2009 (Unaudited) and as of June 30,
      2009
                3Consolidated
      Statements of Income and Other Comprehensive Income for the Three Months
      and Six Months Ended December 31, 2009 and 2008
(Unaudited)
                4Consolidated
      Statement of Stockholders’ Equity (Unaudited)
                5Consolidated
      Statements of Cash Flows for the Six Months Ended December 31, 2009 and
      2008 (Unaudited)
                6Notes
      to Consolidated Financial Statements (Unaudited)
                7


2




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND
SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


AS OF DECEMBER 31, 2009 AND
JUNE 30, 2009





December 31,
                
                
                June 30,2009
                
                
                2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                
                $
                1,696,339
                
                
                $
                3,634,805Restricted
      cash
                
                
                260,863
                
                
                
                453,192Marketable
      securities
                
                
                -
                
                
                
                71,880Notes
      receivable
                
                
                14,275
                
                
                
                10,799Accounts
      receivable, net of allowance for doubtful accounts of $95,866 and 
      $120,986, respectively
                
                
                23,231,389
                
                
                
                11,815,402Inventories
                
                
                1,878,710
                
                
                
                1,216,014Other
      receivables
                
                
                1,825,418
                
                
                
                3,845,186Prepayments
                
                
                5,524,792
                
                
                
                4,255,326Total
      current assets
                
                
                34,431,786
                
                
                
                25,302,604PLANT
      AND EQUIPMENT, net
                
                
                20,923,012
                
                
                
                22,089,717OTHER
      ASSETS:Accounts
      receivable (non-current), net of allowance for doubtful accounts of
      $223,685 and $328,563 respectively
                
                
                8,404,203
                
                
                
                4,132,706Long
      term prepayments
                
                
                9,447,976
                
                
                
                4,794,746Total
      other assets
                
                
                17,852,179
                
                
                
                8,927,452Total
      assets
                
                $
                73,206,977
                
                
                $
                56,319,773LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Short
      term loans
                
                $
                146,259
                
                
                $
                4,512,200Accounts
      payable
                
                
                22,081,971
                
                
                
                10,722,741Customer
      deposits
                
                
                463,047
                
                
                
                -Other
      payables
                
                
                306,266
                
                
                
                352,880Other
      payables - shareholders
                
                
                751,826
                
                
                
                806,946Accrued
      liabilities
                
                
                1,443,512
                
                
                
                593,057Taxes
      payable
                
                
                2,727,478
                
                
                
                3,048,179Total
      current liabilities
                
                
                27,920,359
                
                
                
                20,036,003OTHER
      LIABILITIESWarrants
      liabilities
                
                
                5,546,523
                
                
                
                -Total
      liabilities
                
                
                33,466,882
                
                
                
                20,036,003COMMITMENTS
      AND CONTINGENCIES (Note 20)REDEEMABLE
      CONVERTIBLE PREFERRED STOCK ($0.001 par value, 549,875 shares issued and
      outstanding as of December 31, 2009 and 851,125 shares issued and
      outstanding as of June 30, 2009), net of discount for the amount of
      $167,851 and $567,581 as of December 31 and June 30, 2009,
      respectively
                
                
                4,231,149
                
                
                
                6,241,419SHAREHOLDERS'
      EQUITY:Preferred
      stock $0.001 par value, 1,000,000 shares authorized, 549,875 issued and
      outstanding as of December 31, 2009 and 851,125 issued and outstanding as
      of June 30, 2009, and classified outside shareholders' equity (see above),
      liquidation preference of $8.00 per share and accrued dividends as of
      December 31, 2009 and June 30, 2009
                
                
                -
                
                
                
                -Common
      stock, $0.001 par value, 74,000,000 shares authorized, 12,751,971 and
      10,595,500 shares issued and outstanding, as of December 31, 2009 and June
      30, 2009, respectively
                
                
                12,752
                
                
                
                10,596Paid-in-capital
                
                
                17,735,448
                
                
                
                12,987,417Contribution
      receivable
                
                
                -
                
                
                
                (1,210,000
                )Retained
      earnings
                
                
                11,590,535
                
                
                
                12,783,892Statutory
      reserves
                
                
                3,545,038
                
                
                
                2,765,179Accumulated
      other comprehensive income
                
                
                2,625,173
                
                
                
                2,705,267Total
      shareholders' equity
                
                
                35,508,946
                
                
                
                30,042,351Total
      liabilities, redeemable preferred stock and shareholders'
      equity
                
                $
                73,206,977
                
                
                $
                56,319,773





The
accompanying notes are an integral part of these consolidated financial
statements.


3




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)


FOR
THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008




Three months ended
                
                
                Six months endedDecember 31,
                
                
                December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)REVENUESales
      of concrete
                
                $
                20,316,502
                
                
                $
                7,969,878
                
                
                $
                35,203,259
                
                
                $
                9,837,565Manufacturing
      services
                
                
                3,663,114
                
                
                
                2,070,996
                
                
                
                6,468,728
                
                
                
                3,996,539Technical
      services
                
                
                1,234,760
                
                
                
                423,330
                
                
                
                2,479,655
                
                
                
                1,040,127Mixer
      rental
                
                
                416,770
                
                
                
                339,767
                
                
                
                960,640
                
                
                
                996,581Marketing
      cooperation
                
                
                247,796
                
                
                
                24,230
                
                
                
                247,796
                
                
                
                94,135Sales
      of materials
                
                
                285,370
                
                
                
                -
                
                
                
                285,370
                
                
                
                -Total
      revenue
                
                
                26,164,312
                
                
                
                10,828,201
                
                
                
                45,645,448
                
                
                
                15,964,947COST
      OF REVENUEConcrete
                
                
                18,453,296
                
                
                
                5,993,897
                
                
                
                32,790,012
                
                
                
                7,554,204Manufacturing
      services
                
                
                2,063,646
                
                
                
                795,880
                
                
                
                3,820,813
                
                
                
                1,293,088Technical
      services
                
                
                81,516
                
                
                
                29,781
                
                
                
                135,999
                
                
                
                97,683Mixer
      rental
                
                
                45,124
                
                
                
                44,998
                
                
                
                90,858
                
                
                
                337,043Marketing
      cooperation
                
                
                47,061
                
                
                
                7,837
                
                
                
                47,061
                
                
                
                38,707Sales
      of materials
                
                
                239,043
                
                
                
                -
                
                
                
                239,043
                
                
                
                -Total
      cost of revenue
                
                
                20,929,686
                
                
                
                6,872,393
                
                
                
                37,123,786
                
                
                
                9,320,725GROSS
      PROFIT
                
                
                5,234,626
                
                
                
                3,955,808
                
                
                
                8,521,662
                
                
                
                6,644,222SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                
                
                1,157,250
                
                
                
                612,371
                
                
                
                2,052,281
                
                
                
                1,269,480INCOME
      FROM OPERATIONS
                
                
                4,077,376
                
                
                
                3,343,437
                
                
                
                6,469,381
                
                
                
                5,374,742OTHER
      (EXPENSE) INCOME, NETOther
      subsidy income
                
                
                1,323,515
                
                
                
                602,427
                
                
                
                2,290,287
                
                
                
                830,021Realized
      gain from sales of marketable securities
                
                
                27,008
                
                
                
                -
                
                
                
                27,008
                
                
                
                -Non-operating
      (expense) income, net
                
                
                (29,325
                )
                
                
                (85,295
                )
                
                
                (78,528
                )
                
                
                (83,188
                )Change
      in fair value of warrants
                
                
                3,356,796
                
                
                
                -
                
                
                
                (3,916,645
                )
                
                
                -Interest
      income
                
                
                1,524
                
                
                
                2,406
                
                
                
                3,021
                
                
                
                3,840Interest
      expense
                
                
                -
                
                
                
                (217,570
                )
                
                
                (23,753
                )
                
                
                (446,344
                )TOTAL
      OTHER (EXPENSE) INCOME, NET
                
                
                4,679,518
                
                
                
                301,968
                
                
                
                (1,698,610
                )
                
                
                304,329INCOME
      BEFORE PROVISION FOR INCOME TAXES
                
                
                8,756,894
                
                
                
                3,645,405
                
                
                
                4,770,771
                
                
                
                5,679,071PROVISION
      FOR INCOME TAXES
                
                
                811,813
                
                
                
                1,000,403
                
                
                
                1,348,627
                
                
                
                1,575,230NET
      INCOME
                
                
                7,945,081
                
                
                
                2,645,002
                
                
                
                3,422,144
                
                
                
                4,103,841DIVIDENDS
      AND ACCRETION ON REDEEMABLE CONVERTIBLE PREFERRED STOCK
                
                
                318,835
                
                
                
                309,036
                
                
                
                659,699
                
                
                
                618,132NET
      INCOME AVAILABLE TO COMMON SHAREHOLDERS
                
                
                7,626,246
                
                
                
                2,335,966
                
                
                
                2,762,445
                
                
                
                3,485,709RECONCILIATION
      OF COMPREHENSIVE INCOME:Net
      Income
                
                
                7,945,081
                
                
                
                2,645,002
                
                
                
                3,422,144
                
                
                
                4,103,841Unrealized
      loss from marketable securities
                
                
                -
                
                
                
                (5,876
                )
                
                
                -
                
                
                
                (19,217
                )Foreign
      currency translation adjustment
                
                
                (17,663
                )
                
                
                74,755
                
                
                
                (80,094
                )
                
                
                138,179COMPREHENSIVE
      INCOME
                
                $
                7,927,418
                
                
                $
                2,713,881
                
                
                $
                3,342,050
                
                
                $
                4,222,803EARNING
      PER COMMON SHARE ALLOCATED TO COMMON SHAREHOLDERSWeighted
      average number of shares:Basic
                
                
                12,377,182
                
                
                
                10,525,000
                
                
                
                11,681,294
                
                
                
                10,525,000Diluted
                
                
                15,955,516
                
                
                
                14,220,410
                
                
                
                15,624,782
                
                
                
                14,220,410Earnings
      per share:Basic
                
                $
                0.62
                
                
                $
                0.22
                
                
                $
                0.24
                
                
                $
                0.33Diluted
                
                $
                0.50
                
                
                $
                0.19
                
                
                $
                0.22
                
                
                $
                0.29





The
accompanying notes are an integral part of these consolidated financial
statements.


4




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY





Common stock
                          
                          
                          Additional
                          
                          
                          
                          
                          
                          
                          
                          
                          Retained earnings
                          
                          
                          AccumulatedNumber
                          
                          
                          Par
                          
                          
                          Paid-in
                          
                          
                          Contribution
                          
                          
                          Deferred
                          
                          
                          
                          
                          
                          Statutory
                          
                          
                          other comprehensiveof shares
                          
                          
                          amount
                          
                          
                          capital
                          
                          
                          receivable
                          
                          
                          Compensation
                          
                          
                          Unrestricted
                          
                          
                          reserves
                          
                          
                          income
                          
                          
                          TotalBALANCE,
      June 30, 2008
                          
                          
                          10,525,000
                          
                          
                          $
                          10,525
                          
                          
                          $
                          12,722,260
                          
                          
                          $
                          (1,210,000
                          )
                          
                          $
                          (27,708
                          )
                          
                          $
                          3,257,276
                          
                          
                          $
                          1,452,779
                          
                          
                          $
                          2,598,466
                          
                          
                          $
                          18,803,598Dividends
      on redeemable preferred stock
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (317,650
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (317,650
                          )Accretion
      of discount on redeemable preferred stock
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (300,481
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (300,481
                          )Stock
      based compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          26,210
                          
                          
                          
                          
                          
                          
                          
                          2,771
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          28,981Forfeited
      stock compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (24,937
                          )
                          
                          
                          
                          
                          
                          
                          24,937
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          4,103,841
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          4,103,841Adjustment
      to statutory reserve
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (459,217
                          )
                          
                          
                          459,217
                          
                          
                          
                          
                          
                          
                          
                          -Unrealized
      loss on marketable securities
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (19,217
                          )
                          
                          
                          (19,217
                          )Foreign
      currency translation gain
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          138,179
                          
                          
                          
                          138,179BALANCE,
      December 31, 2008
                          
                          
                          10,525,000
                          
                          
                          $
                          10,525
                          
                          
                          $
                          12,723,533
                          
                          
                          $
                          (1,210,000
                          )
                          
                          $
                          -
                          
                          
                          $
                          6,283,769
                          
                          
                          $
                          1,911,996
                          
                          
                          $
                          2,717,428
                          
                          
                          $
                          22,437,251Dividends
      on redeemable preferred stock
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (310,855
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (310,855
                          )Accretion
      of discount on redeemable preferred stock
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (300,487
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (300,487
                          )Stock
      based compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          81,267
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          81,267Forfeited
      stock compensation
                          
                          
                          (25,000
                          )
                          
                          
                          (25
                          )
                          
                          
                          (8,288
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (8,313
                          )Redeemable
      convertible preferred stock converted to common stock
                          
                          
                          95,500
                          
                          
                          
                          96
                          
                          
                          
                          190,905
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          191,001Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          7,964,648
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          7,964,648Adjustment
      to statutory reserve
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (853,183
                          )
                          
                          
                          853,183
                          
                          
                          
                          
                          
                          
                          
                          -Unrealized
      loss on marketable securities
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          39,822
                          
                          
                          
                          39,822Foreign
      currency translation gain
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (51,983
                          )
                          
                          
                          (51,983
                          )BALANCE,
      June 30, 2009, as previously reported
                          
                          
                          10,595,500
                          
                          
                          $
                          10,596
                          
                          
                          $
                          12,987,417
                          
                          
                          $
                          (1,210,000
                          )
                          
                          $
                          -
                          
                          
                          $
                          12,783,892
                          
                          
                          $
                          2,765,179
                          
                          
                          $
                          2,705,267
                          
                          
                          $
                          30,042,351Cumulative
      effect of reclassification of warrants
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,371,280
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,965,945
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (3,337,225
                          )BALANCE,
      June 30, 2009, as adjusted, (Unaudited)
                          
                          
                          10,595,500
                          
                          
                          $
                          10,596
                          
                          
                          $
                          11,616,137
                          
                          
                          $
                          (1,210,000
                          )
                          
                          $
                          -
                          
                          
                          $
                          10,817,947
                          
                          
                          $
                          2,765,179
                          
                          
                          $
                          2,705,267
                          
                          
                          $
                          26,705,126Dividends
      on redeemable preferred stock
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (259,969
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (259,969
                          )Accretion
      of discount on redeemable preferred stock
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (399,728
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (399,728
                          )Stock
      based compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          120,778
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          120,778Issuance
      of Common Stock for cash at $2.3
                          
                          
                          650,988
                          
                          
                          
                          651
                          
                          
                          
                          1,496,591
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,497,242Conversion
      of redeemable preferred stock into common stock
                          
                          
                          1,205,000
                          
                          
                          
                          1,205
                          
                          
                          
                          2,408,795
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,410,000Conversion
      of warrants into common stock
                          
                          
                          300,483
                          
                          
                          
                          300
                          
                          
                          
                          741,626
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          741,926Derivative
      value of warrants exercised
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,351,521
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,351,521Dividends
      paid to shareholders and contributed as share capital
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,210,000
                          
                          
                          
                          
                          
                          
                          
                          (1,210,000
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,422,144
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,422,144Adjustment
      to statutory reserve
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (779,859
                          )
                          
                          
                          779,859
                          
                          
                          
                          
                          
                          
                          
                          -Unrealized
      loss on marketable securities
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (20,698
                          )
                          
                          
                          (20,698
                          )Foreign
      currency translation loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (59,396
                          )
                          
                          
                          (59,396
                          )BALANCE,
      December 31, 2009
                          
                          
                          12,751,971
                          
                          
                          $
                          12,752
                          
                          
                          $
                          17,735,448
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          11,590,535
                          
                          
                          $
                          3,545,038
                          
                          
                          $
                          2,625,173
                          
                          
                          $
                          35,508,946





The
accompanying notes are an integral part of these consolidated financial
statements.


5




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS


FOR
THE SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008




December 31,
                
                
                December 31,2009
                
                
                2008(UNAUDITED)
                
                
                (UNAUDITED)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                3,422,144
                
                
                $
                4,103,841Adjustments
      to reconcile net income (loss) to cash provided by (used in) operating
      activities:Depreciation
                
                
                1,387,883
                
                
                
                1,071,362Amortization
      of long term deferred expense
                
                
                -
                
                
                
                2,771Bad
      debt expense
                
                
                (129,354
                )
                
                
                142,485Amortization
      of deferred compensation expense
                
                
                120,778
                
                
                
                26,210Change
      in fair value of warrants
                
                
                3,916,645
                
                
                
                -Realized
      gain on sale of marketable securities
                
                
                (27,007
                )
                
                
                -Changes
      in operating assets and liabilitiesAccounts
      receivable
                
                
                (19,737,550
                )
                
                
                (8,111,508
                )Note
      receivable
                
                
                (3,502
                )
                
                
                -Inventories
                
                
                (664,483
                )
                
                
                (861,184
                )Other
      receivables
                
                
                2,011,537
                
                
                
                (208,733
                )Prepayments
                
                
                (1,276,446
                )
                
                
                155,626Long
      term deferred expense
                
                
                (424,307
                )
                
                
                -Accounts
      payable
                
                
                11,375,636
                
                
                
                2,931,338Customer
      deposits
                
                
                462,849
                
                
                
                (2,232
                )Other
      payables
                
                
                39,898
                
                
                
                55,886Accrued
      liabilities
                
                
                896,045
                
                
                
                166,881Taxes
      payable
                
                
                (314,895
                )
                
                
                1,590,669Net
      cash provided by operating activities
                
                
                1,055,871
                
                
                
                1,063,412CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of marketable securities
                
                
                78,207
                
                
                
                -Advanced
      for equipment purchase
                
                
                (80,462
                )
                
                
                -Purchase
      of property, plant and equipment
                
                
                (258,580
                )
                
                
                (31,666
                )Net
      cash used in investing activities
                
                
                (260,835
                )
                
                
                (31,666
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from short term loan
                
                
                146,284
                
                
                
                7,354,278Payments
      of short term loan
                
                
                (4,502,287
                )
                
                
                (6,749,544
                )Payment
      to shareholder for rent
                
                
                (141,060
                )
                
                
                (43,282
                )Restricted
      cash
                
                
                192,330
                
                
                
                31,608Proceeds
      from exercise of warrants
                
                
                386,100
                
                
                
                -Proceeds
      from issuance of common stock
                
                
                1,497,242
                
                
                
                -Preferred
      dividends paid
                
                
                (304,781
                )
                
                
                (317,648
                )Net
      cash (used in) provided by financing activities
                
                
                (2,726,172
                )
                
                
                275,412EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                
                
                (7,330
                )
                
                
                7,525NET
      (DECREASE) INCREASE IN CASH
                
                
                (1,938,466
                )
                
                
                1,314,683CASH,
      beginning of year
                
                
                3,634,805
                
                
                
                1,910,495CASH,
      end of period
                
                $
                1,696,339
                
                
                $
                3,225,178




The
accompanying notes are an integral part of these consolidated financial
statements.


6





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Note
1 – Organization and description of business





China
Advanced Construction Materials Group, Inc. (“China ACM” or the “Company”) was
founded on September 1, 2005, under the name TJS Wood Flooring, Inc. (“TJSW”),
and incorporated in the State of Delaware on February 15, 2007. On April 29,
2008, TJSW changed its name to China Advanced Construction Materials Group, Inc.
in connection with a share exchange transaction as described below.





On April
29, 2008, the Company executed a share exchange agreement with Xin Ao
Construction Materials, Inc. (“BVI-ACM”) whereby the Company issued to the
stockholders of BVI-ACM 8,809,583 shares of the Company’s common stock in
exchange for all of the issued and outstanding capital stock of BVI-ACM (the
“Share Exchange”). Prior to the Share Exchange, and after the cancellation of
9,990,000 shares, China ACM had 1,166,667 shares of common stock issued and
outstanding. After the Share Exchange, China ACM had 10,500,000 shares of common
stock outstanding and the former shareholders of BVI-ACM owned 83.9% of the
issued and outstanding shares. The directors and executive officers of BVI-ACM
became the directors and officers of China ACM. This transaction has been
accounted for as a reverse acquisition and recapitalization of the Company
whereby BVI-ACM is deemed to be the accounting acquirer (legal acquiree) and the
Company the accounting acquiree (legal acquirer). The historical financial
statements for periods prior to April 29, 2008, are those of BVI-ACM except that
the equity section and earnings per share have been retroactively restated to
reflect the reverse acquisition.





BVI-ACM
was established on October 9, 2007, under the laws of the British Virgin
Islands. The majority shareholders of BVI-ACM are Chinese citizens who own 100%
of Beijing Xin Ao Concrete Co., Ltd. (“Xin Ao”), a limited liability company
formed under the laws of the People’s Republic of China (“PRC”). BVI-ACM was
established as a “special purpose vehicle” for foreign fund raising for Xin Ao.
China State Administration of Foreign Exchange (“SAFE”) requires the owners of
any Chinese companies to obtain SAFE’s approval before establishing any offshore
holding company structure for foreign financing as well as subsequent
acquisition matters under Circular 106 in the PRC. On September 29, 2007,
BVI-ACM was approved by the local Chinese SAFE as a “special purpose vehicle”
offshore company.





On
November 23, 2007, BVI-ACM established a subsidiary, Beijing Ao Hang
Construction Material Technology Co., Ltd. (“China-ACMH”), in the PRC as a
wholly-owned foreign limited liability company (“WOFE”) with registered capital
of $5 million.





BVI-ACM,
through its 100% owned China-ACMH and its variable interest entity (“VIE”) Xin
Ao (see Note 2), is engaged in producing general ready-mix concrete, customized
mechanical refining concrete, and other concrete-related products that are
mainly sold in the PRC. Xin Ao, licensed by the Beijing Administration of
Industry & Commerce, PRC, was established on June 28, 2002, with an initial
capital contribution of approximately $3,630,000 (RMB30 million). On July 8,
2005, the Board of Directors of Xin Ao increased its registered capital to
$12,100,000 (RMB100 million) through the use of Xin Ao’s undistributed
profits.





On
November 28, 2007, China-ACMH entered a series of contractual arrangements (the
“Contractual Arrangements”) with Xin Ao and its shareholders in which China-ACMH
effectively took over management of the business activities of Xin Ao. The term
of these agreements is for ten (10) years and terminates automatically upon
expiration, and may be extended only if China-ACMH gives its written consent of
the extension before the expiration. The parties, through negotiations,
determine the extension term. During the term, Xin Ao may not terminate the
agreements except in the case of gross negligence, fraud or other illegal acts
or bankruptcy of China-ACMH.  Notwithstanding the foregoing, China-ACMH may
terminate the agreement at any time with a written notice to Xin Ao thirty (30)
days before such termination. Additionally, without China-ACMH’s prior written
consent, Xin Ao cannot assign or otherwise transfer its rights and obligations
under the agreements. Subject to compliance with the laws of China, China-ACMH
may assign the agreements to any affiliate or any other designated entity
without the prior consent of Xin Ao.





Through
China-ACMH, BVI-ACM operates and controls Xin Ao through the Contractual
Arrangements. BVI-ACM utilized the Contractual Arrangements to gain control of
the operations of Xin Ao, instead of acquiring Xin Ao, due to: (i) new PRC laws
governing share exchange transactions with foreign entities, effective since
September 8, 2006, make the consequences of such acquisitions uncertain and (ii)
other than by share exchange transactions, PRC laws require Xin Ao to be
acquired for cash and BVI-ACM was not able to raise sufficient funds to pay the
full appraised value for Xin Ao’s assets or shares as required under PRC
laws.


7


CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Through
this series of Contractual Arrangements, China-ACMH provides exclusive technical
consulting services to Xin Ao for an annual fee equal to Xin Ao’s yearly net
income.  China-ACMH effectively took over management of daily business
activities of Xin Ao and has the right to appoint all executives, senior
management and members of the board of directors of Xin Ao. China-ACMH
guarantees all of Xin Ao’s business activities with any third parties and in
return is guaranteed all of Xin Ao’s assets. In addition, shareholders of Xin Ao
pledged their shares in Xin Ao as collateral for the annual fees due to the
Company and granted China-ACMH the exclusive right and option to acquire all of
their equity interests in Xin Ao.





Note
2 – Summary of significant accounting policies





Basis of
presentation





The
Company’s accounting policies used in the preparation of the accompanying
consolidated financial statements conform to accounting principles generally
accepted in the United States of America ("US GAAP") and have been consistently
applied.





Management
has included all normal recurring adjustments considered necessary to give a
fair presentation of operating results for the periods presented. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction
with information included in the 2009 annual report filed on Form
10-K.





Principles of
consolidation





The
accompanying consolidated financial statements include the accounts of China
ACM, BVI-ACM, including its wholly-owned subsidiary China-ACMH, and its variable
interest entity Xin Ao. All significant inter-company transactions and balances
have been eliminated in consolidation.





In
accordance with FASB guidance on variable interest entities (“VIE”), all VIEs
with which the Company is involved must be evaluated to determine the primary
beneficiary of the risks for financial reporting purposes. Based upon a series
of Contractual Arrangements, The Company determined that Xin Ao is a variable
interest entity subject to consolidation and that the Company is the primary
beneficiary. Accordingly, the financial statements of Xin Ao are consolidated
into the financial statements of the Company.





Use of
estimates





The
preparation of financial statements in conformity with U.S. GAAP 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 period. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
assessment of the fair value of share-based payments and the collectability of
accounts receivable. Actual results could be materially different from those
estimates, upon which the carrying values were based.





Foreign currency
translation





The
reporting currency of the Company is the U.S. dollar. The functional currency of
China ACM and BVI-ACM is the U.S. dollar. China-ACMH and Xin Ao use their local
currency Chinese Renminbi (“RMB”) as their functional currency. In accordance
with the FASB’s guidance on Foreign Currency Translation, the Company’s results
of operations and cash flows are translated at the average exchange rates during
the period, assets and liabilities are translated at the exchange rates at the
balance sheet dates, and equity is translated at the historical exchange rates.
As a result, amounts related to assets and liabilities reported on the
consolidated statements of cash flows will not necessarily agree with changes in
the corresponding balances on the consolidated balance sheets.





Accumulated
other comprehensive income in the consolidated statements of shareholders’
equity amounted to $2,625,173 and $2,705,267 as of December 31 and June 30,
2009, respectively. Asset and liability accounts at December 31, 2009 and June
30, 2009 were translated at RMB 6.84 and RMB 6.83 to $1.00, respectively. The
average translation rates applied to the consolidated statements of income and
cash flows for the six months ended December 31, 2009 and 2008 were RMB 6.84 and
RMB 6.83 to $1.00, respectively.





Translation
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operations. There were no material
transaction gains or losses for the three and six months ended December 31, 2009
and 2008.





Revenue
recognition





The
Company recognizes revenue in accordance with FASB issued accounting standards
regarding revenue recognition which specifies that revenue is realized or
realizable and earned when four criteria are met:


8


CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Ÿ
            Persuasive
      evidence of an arrangement exists (the Company considers its sales
      contracts and technical service agreements to be pervasive evidence of an
      arrangement);





Ÿ
            Delivery
      has occurred or services have been
rendered;





Ÿ
            The
      seller’s price to the buyer is fixed or determinable;
  and





Ÿ
            Collectability
      of payment is reasonably assured.





The
Company sells its concrete products and provides concrete technical services
primarily to major local construction companies. Sales agreements are signed
with each customer. The agreements list all terms and conditions with the
exception of delivery date and quantity, which are evidenced separately in
purchase orders. The purchase price of products is fixed in the agreement and
customers are not permitted to renegotiate after the contracts have been signed.
The agreements include a cancellation clause if the Company or customers breach
the contract terms specified in the agreement.





The
Company does not sell products to customers on a consignment basis. There is no
right of return after the product has been injected into the location specified
by the contract and accepted by the customer. The Company recognizes revenue
when the goods and services are provided by the Company and are accepted by the
customer.





Sales
revenue represents the invoiced value of goods, net of a value added tax
(“VAT”). All of the Company’s concrete products that are sold in the PRC are
subject to a Chinese VAT at the rate of 6% of the gross sales
price.





Due to
the fact that the Company uses recycled raw materials to manufacture its
products, the State Administration of Taxation has granted the Company VAT tax
exemption from August 2005 to August 2009 and a two year extension on the VAT
tax exemption from August 2009 to August 2011. The VAT tax collected during the
aforementioned period from the Company’s customers is retained by the Company
and recorded as other subsidy income.





The
Company also provides manufacturing services, technical consulting services and
strategic cooperation including market sharing and equipment rental with other
independently owned concrete companies. The Company signs a Technical Service
Agreement or Strategic Cooperation Agreement with each concrete company, which
specifies all terms and conditions including prices to be charged. Once concrete
products are produced by the concrete company and supplied to builders referred
by the Company or cost savings are realized by the use of technical solutions
provided by the Company, the Company has in effect rendered its service pursuant
to the agreements. The Company recognizes revenue and invoices the concrete
companies monthly for technical service and marketing cooperation on a
per-cubic-meter basis and for equipment rental on a per-mixer truck
basis.





The
Company also earns income from the renting of certain of its vehicles to other
non-related concrete companies.  The rental amounts are based on
pre-determined rental rates on a per cubic meter basis.





Shipping and
handling





Shipping
and handling costs related to costs of the raw materials purchased is included
in cost of revenues.  Further, transportation costs incurred in the
delivery of the Company’s concrete products are also included in cost of
revenues.


9




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Financial
instruments





The
accounting standards regarding fair value of financial instruments and related
fair value measurements define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement, and enhance disclosure
requirements for fair value measures.





The three
levels are defined as follows:





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





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





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





Marketable
securities, warrant liabilities, receivables and current liabilities qualify as
financial instruments. Marketable securities were determined using
Level 1, which are carried on the consolidated balance sheets at fair value,
with fair values determined by the financial institution who sold the
securities. The carrying amounts reported in the consolidated balance sheets for
receivables and current liabilities are reasonable estimates of fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rates of
interest.





As required by a FASB accounting standard,
financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value
measurement.  The fair value of the warrants was determined using the
CRR Binomial Model, as level 2 inputs, and recorded the change in earnings. As a
result, the derivative liability is carried on the balance sheet at its fair
value.





The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of December 31, 2009 (unaudited).





Carrying Value at
                                December 31, 2009
                              
                              
                              Fair Value Measurement at
                                December 31, 2009Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3Marketable
      securities
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -Derivative
      liability - warrants
                              
                              $
                              5,546,523
                              
                              
                              $
                              -
                              
                              
                              $
                              5,546,523
                              
                              
                              $
                              -





Other
than the marketable securities and derivative liability - warrants carried at
fair value, the Company did not identify any other assets and liabilities that
are required to be presented on the consolidated balance sheet at fair value in
accordance with the FASB accounting standard.


10





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Stock-based
compensation





The
Company records stock-based compensation expense pursuant to FASB’s accounting
standard regarding stock compensation which requires companies to measure
compensation cost for stock-based employee compensation plans at fair value at
the grant date and recognize the expense over the employee's requisite service
period. Under ASC Topic 718, the Company’s expected volatility assumption is
based on the historical volatility of Company’s stock or the expected volatility
of similar entities. The expected life assumption is primarily based on
historical exercise patterns and employee post-vesting termination behavior. The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.





Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. This accounting standard requires forfeitures to be estimated at the
time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.





The
Company estimates the fair value of the awards using the CRR binomial model.
Option pricing models, such as the CRR binomial model, require the input of
highly complex and subjective variables including the expected life of options
granted and the Company’s expected stock price volatility over a period equal to
or greater than the expected life of the options. Because changes in the
subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the CRR
binomial model may not provide an accurate measure of the fair value of the
Company’s employee stock options. Although the fair value of employee stock
options is determined in accordance with the accounting standard aforementioned
using an option-pricing model, the value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.





Concentration of
risk





Cash -
Cash includes cash on hand and demand deposits in accounts maintained with state
owned banks within the PRC. The Company considers all highly liquid instruments
purchased with original maturities of three months or less, and money market
accounts, to be cash equivalents. Total cash in these banks at December 31 and
June 30, 2009 amounted to $827,589 and $3,634,805, respectively, of which no
deposits were covered by insurance. Also, as of December 31 and June 30, 2009,
the Company held $260,863 and $453,192 in restricted cash in a corporate legal
counsel’s trust account respectively , in accordance with an agreement with
investors for the restricted use of preferred stock dividend and investor
relation related expenses. Nonperformance by these institutions could expose the
Company to losses not covered by insurance. Management reviews the financial
condition of these institutions on a periodic basis.  The Company has
not incurred any losses on these accounts from nonperformance by the
aforementioned institutions.





Major
customers – For the three months and six months ended December 31, 2009, the
Company does not have customer over 10% of sales. For the three months ended
December 31, 2008, two customers accounted for approximately 24.7% of the
Company’s sales and 25.6% of the Company’s account receivables as of December
31, 2008. For the six months ended December 31, 2008, three customers accounted
for approximately 21% of the Company’s sales and 39% of the Company’s account
receivable as of December 31, 2008.





Major
suppliers – For the three months and six months ended December 31, 2009, the
Company does not have supplier over 10% of purchases. For the three months ended
December 31, 2008, one supplier accounted for approximately 14.4% of the Company
purchase and approximately 1.48% of the Company’s accounts payable as of
December 31, 2008. For the six months ended December 31, 2008, two suppliers
accounted for approximately 19% of the Company purchase and approximately 45% of
the Company’s accounts payable as of December 31, 2008.





Political
and economic risks - The Company's operations are carried out in the PRC.
Accordingly, the Company's business, financial condition, and results of
operations may be influenced by the political, economic, and legal environments
in the PRC, and by the general state of the PRC's economy. The Company's
operations in the PRC are subject to specific considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic, and legal environments, and foreign currency exchange. The Company's
results may be adversely affected by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among
others.





Restricted
Cash





Restricted
cash represents portion of the proceeds received from the June 11, 2008, Private
Placement that was deposited in a trust account held by the Company’s legal
counsel for payment of dividends, investor relations fees, and other
professional fees. The restricted cash balance was $260,863 and $453,192 as of
December 31 and June 30, 2009, respectively.





11





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Accounts
receivable





During
the normal course of business, the Company extends unsecured credit to its
customers. Management reviews its accounts receivable each reporting period to
determine if the allowance for doubtful accounts is adequate. An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
probable.  Known bad debts are written off against allowance for
doubtful accounts when identified. The Company’s reserves are consistent with
its historical experience and considered adequate by management.





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





Inventories





Inventories
consist of raw materials and are stated at the lower of cost or market, using
the weighted average cost method. The Company reviews its inventory periodically
for possible obsolescence or if a write down is necessary because the carrying
value exceeds net realizable value. As of December 31 and June 30, 2009, the
Company determined no reserves for obsolescence were necessary.





Prepayments





The
Company advances monies to certain suppliers for raw materials and short term
prepaid rent. These advances are interest free and unsecured. In addition, the
prepayments also include amounts prepaid for rent.





Plant, machinery and
equipment





Plant,
machinery and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred while additions, renewals and
betterments are capitalized. Depreciation is provided over the estimated useful
life of each class of depreciable assets and is computed using the straight-line
method with 5% residual value.





The
estimated useful lives of assets are as follows:





Useful
      LifeTransportation
      equipment
              10
      yearsPlant
      and machinery
              10
      yearsOffice
      equipment
              5
      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
consolidated statements of income.  Construction-in-progress
represents labor costs, materials, and capitalized interest incurred in
connection with the construction of a new mixer station inside the current plant
facility in and outside of Beijing.  Interest incurred during
construction is capitalized into construction in progress. All other interest is
expensed as incurred.  No depreciation is provided for construction in
progress until it is completed and placed into service. Maintenance, repairs and
minor renewals are charged to expense as incurred. Major additions and
betterment to property and equipment are capitalized.





Long-lived
assets of the Company are reviewed at least annually, more often if
circumstances dictate, for possible impairment. Whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable, the Company records an impairment charge to reduce the related
assets to their net realizable value. The Company believes no impairment exists
at December 31, 2009.





Redeemable convertible
preferred stock





On June
11, 2008, the Company completed the sale to certain accredited investors of
875,000 investment units for gross proceeds of $7,000,000, each unit consisting
of one share of the Company’s Series A Convertible Preferred Stock and one
warrant to purchase two shares of the Company’s common stock. The preferred
stock pays annual dividends of 9% regardless of the Company’s profitability.
Each preferred share is convertible into four shares of common stock. The
Company received net proceeds of approximately $5.3 million after offering
expenses and net of $930,000 restricted cash which was required to be placed in
escrow. Upon the two year anniversary of the closing date, the Company is
required to redeem for cash the outstanding preferred stock, if not previously
converted by the holders, for $8.00 per share plus accrued but unpaid
dividends.  Because the Company is required to redeem the
preferred stock on June 11, 2010, if it has not been previously converted by the
holders, in accordance with a FASB accounting standard, the preferred stock is
classified outside of shareholders’ equity.





In
accordance with an accounting standard issued by the FASB regarding debt with
conversion and other options, the Company allocated the proceeds received
between the preferred stock and the warrants.  The resulting discount
from the face amount of the preferred stock is being amortized using the
effective interest method over the period to the required redemption date. After
allocating a portion of the proceeds to the warrants, the effective conversion
price of the preferred stock was higher than the market price at the date of
issuance, and therefore, no beneficial conversion feature was recorded. The
dividends on the preferred stock, together with the periodic accretion of the
preferred stock to its redemption value, are charged to retained
earnings.


12





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Income
taxes





The
Company’s subsidiaries Xin Ao and WOFE are governed by the income tax laws
of the PRC. The Company accounts for income taxes in accordance with a FASB
accounting standard, which requires the Company to use the assets and liability
method of accounting for income taxes. Under the assets and liability method,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between financial statement carrying amounts and the tax bases of
existing assets and liabilities. Under this accounting standard, the effect on
deferred income taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recognized if
it is more likely than not that some portion, or all of, a deferred tax asset
will not be realized. Since the Company’s operations are outside of the U.S.,
the Company did not have any provision for U.S. income taxes including any
deferred income taxes, for the six months ended December 31, 2009 and 2008,
respectively.





Under the
accounting standard defines uncertainty in income taxes, the evaluation of a tax
position is a two-step process. The first step is to determine whether it is
more likely than not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the
technical merits of that position. The second step is to measure a tax position
that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50 percent likelihood of being
realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures, and transition.  The adoption had no effect on the
Company’s consolidated financial statements.  There were no material
deferred tax amounts as of December 31 and June 30, 2009,
respectively.





The
Company has cumulative undistributed earnings of China ACMH of approximately
$21.6 million as of December 31, 2009, is included in consolidated retained
earnings and will continue to be indefinitely reinvested in international
operations.  Accordingly, no provision has been made for U.S. deferred
taxes related to future repatriation of these earnings.





Chinese Income
Taxes





The
Company and its subsidiaries are governed by the income tax laws of the PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (the “Income Tax Laws”).





Xin Ao’s
use of recycled raw materials in its production since its inception entitled the
Company to an income tax exemption from January 1, 2003, through to December 31,
2007 and an income tax reduction from 25% to 15% from January 1, 2009 to
December 31, 2012  as granted by the State Administration of Taxation
of the PRC. The income tax exemption granted to the Company was eliminated after
December 31, 2007.  Beginning January 1, 2008, the new Chinese
Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic
Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). Effective January
1, 2009, the new reduced EIT rate of 15% replaced the existing rates of 25%
currently applicable to both DES and FIEs.





PRC laws
require that before a FIE can legally distribute profits to its shareholders, it
must satisfy all tax liabilities, provide for losses in previous years, and make
allocations in proportions made at the discretion of the board of directors,
after the statutory reserve. The statutory reserve includes the surplus reserve
fund, the common welfare fund, and represents restricted retained
earnings.





The
Company adopted accounting policies in accordance to U.S. GAAP with regard to
provisions, reserves, inventory valuation method, and depreciation that are
consistent with requirements under Chinese income tax laws. Therefore, there
were no significant deferred tax assets or liabilities during the six months
ended December 31, 2009 and 2008, respectively.





The
Company classifies interest and penalties assessed due to underpayment of income
taxes as interest expense and other expenses, respectively. The Company incurred
no such expenses for the six months ended December 31, 2009 and 2008,
respectively.





Value added
tax





Enterprises
or individuals, who sell commodities, engage in repair and maintenance, or
import and export goods in the PRC are subject to a value added tax. The
standard VAT rate is 6% of gross sales for the Company’s industry. A credit is
available whereby VAT paid on the purchases of raw materials used in the
production of the Company’s finished products can be used to offset the VAT due
on sales of finished products. Due to the fact that the Company uses recycled
raw materials to manufacture its products, the State Administration of Taxation
has granted the Company VAT exemption from August 2005 through to August 2009
and a two year tax (VAT) credit extension from August 2009 through August
2011.


13





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Research and development
costs





Research
and development costs are expensed as incurred. The cost of materials and
equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and
development, marketing, or sales, are classified as property and equipment, and
depreciated over their estimated useful lives. Research and development expenses
for the three and six months ended December 31, 2009 were $2,898 and $40,479,
respectively. The Company did not incur any research and development expense for
the six months ended December 31, 2008.





Earnings per
share





The
Company reports earnings per share in accordance with a FASB accounting
standard, requires presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing such
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the weighted average
common shares outstanding during the period.  Diluted earnings per
share takes into account the potential dilution that could occur if securities
or other contracts, such as warrants, options and convertible preferred stock,
to issue common stock were exercised and converted into common stock. Dilutive
securities having an anti-dilutive effect on diluted earnings per share are
excluded from the calculation.





Comprehensive
income





The FASB
accounting standard for reporting and display of comprehensive income and its
components in financial statement, requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same providence
as other financial statements. The accompanying consolidated financial
statements include the provision of this accounting standard, and therefore,
comprehensive income consists of net income, unrealized gains and losses from
marketable securities, and foreign currency translation
adjustments.





Recently issued accounting
pronouncements





In
January 2009, the FASB issued an accounting standard which amended the
impairment model by removing its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the “market
participant” view to a holder’s estimate of whether there has been a “probable”
adverse change in estimated cash flows allows companies to apply reasonable
judgment in assessing whether an other-than-temporary impairment has occurred.
The adoption of this accounting standard did not have a material impact on the
Company’s consolidated financial statements because all of the investments
in debt securities are classified as trading securities.





In April
2009, the FASB issued authoritative guidance related to the determination of
fair value when the volume and level of activity for an asset or liability has
significantly decreased, the identification of transactions that are not
orderly, the recognition and presentation of other-than-temporary impairments,
and the disclosure of the fair value of financial instruments on an interim
basis. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements.





In April
2009, the FASB issued an accounting standard to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard provides increased disclosure
about the credit and noncredit components of impaired debt securities that are
not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result
in a change in the carrying amount of debt securities, it does require that
the portion of an other-than-temporary impairment not related to a credit loss
for a held-to-maturity security be recognized in a new category of other
comprehensive income and be amortized over the remaining life of the debt
security as an increase in the carrying value of the security. This standard
became effective for interim and annual periods ending after June 15, 2009.
The adoption of this standard did not have a material impact on the Company’s
consolidated financial statements.





In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.


14





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the
rationale for why that date was selected. The standard is effective for
interim and annual periods ending after June 15, 2009, and accordingly, the
Company adopted this Standard during the second quarter of 2009. The
standard requires that public entities evaluate subsequent events through
the date that the financial statements are issued.





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed the
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.





In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within
this accounting standard. Further, this accounting standard requires a
company to perform a qualitative analysis when determining whether or not it
must consolidate a VIE. It also requires a company to continuously reassess
whether it must consolidate a VIE. Additionally, it requires enhanced
disclosures about a company’s involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how its involvement
with VIEs impacts the company’s financial statements. Finally, a company will be
required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This accounting standard is effective
for financial statements issued for fiscal years beginning after November 15,
2009.  The Company has not completed their assessment of the
impact that this pronouncement will have on the Company’s financial condition,
results of operations or cash flows.





In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards CodificationTM (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, the
Company’s Quarterly Report on Form 10-Q for the quarter ending September 30,
2009 and all current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.





In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value
using one or more of valuation techniques, as defined. This ASU is effective for
the first reporting period, including interim periods, beginning after the
issuance of this ASU. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an
offset to additional paid-in capital. Further, loaned shares are excluded from
basic and diluted earnings per share unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share
calculation.  This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The Company
is currently evaluating the impact of this ASU on its consolidated financial
statements.





In
October 2009, the FASB issued new standards that revised the guidance for
revenue recognition with multiple deliverables. These new standards impact the
determination of when the individual deliverables included in a multiple-element
arrangement may be treated as separate units of accounting. Additionally, these
new standards modify the manner in which the transaction consideration is
allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. The guidance is
effective for revenue arrangements entered into for fiscal years beginning on or
after June 15, 2010.  The Company does not expect the adoption will
have a material impact on its consolidated financial statements.





Decreases
in Ownership of a Subsidiary – a Scope Clarification


15





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




In
January 2010, the FASB issued an accounting standard update to address the
accounting and reporting for Decreases in ownership of a subsidiary. This
amendment to Topic 810 clarifies, but does not change, the scope of current US
GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and
removes the potential conflict between guidance in that Subtopic and asset
derecognition and gain or loss recognition guidance that may exist in other US
GAAP. An entity will be required to follow the amended guidance beginning in the
period that it first adopts FAS 160 (now included in Subtopic 810-10). For those
entities that have already adopted FAS 160, the amendments are effective at the
beginning of the first interim or annual reporting period ending on or after
December 15, 2009. The amendments should be applied retrospectively to the first
period that an entity adopted FAS 160. The Company does not expect the
provisions of ASU 2010-02 to have a material effect on the financial position,
results of operations, or cash flows of the Company.





Distributions
to Shareholders with Components of Stock and Cash


In
January 2010, the FASB issued an accounting standard update to address the
accounting for distributions to shareholders with components of stock and cash
(A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic
505 clarifies the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a limit on the amount of cash that
will be distributed is not a stock dividend for purposes of applying Topics 505
and 260 for interim and annual periods ending on or after December 15, 2009, and
should be applied on a retrospective basis. The Company does not expect the
provisions of ASU 2010-01 to have a material effect on the financial position,
results of operations, or cash flows of the Company.





Note
3 – Supplemental disclosure of cash flow information





During
the six months ended December 31, 2009 and 2008, the Company paid interest in
the amount of $328,543 and $443,786, respectively.





Cash
payments for income taxes for the six months ended December 31, 2009 and 2008
were $1,682,537 and $0, respectively. The Company was subject to corporate
income tax exemption for calendar 2008.





For the
six months ended December 31, 2009, 230,687 shares of common stock underlying
warrants were converted into 139,608 shares of common stock by the exercise of
such warrants on a cashless basis.





For the
six months ended December 31, 2009, 301,250 shares of redeemable convertible
preferred stock were converted into 1,205,000 shares of common stock on a
cashless basis.





For the
six months ended December 31, 2009, $4.2 million was assigned as prepayment for
purchase of equipment.





Non-cash transactions in the
six months ended December 31, 2008





For the
six months ended December 31, 2008, the Company assigned accounts receivables
totaling approximately $3,600,000 as payment to suppliers whose balances were
included in accounts payable. Balances of accounts receivable and payable
reported on the balance sheets are net of the assignments.





For the
six months ended December 31, 2008, the accretion of the discount on redeemable
preferred stock amounted to approximately $300,000, and has been included in the
consolidated statements of shareholders’ equity.





Note
4 – Marketable securities





Marketable
securities are the mutual fund that XinAo purchased from CYJA Allianz Fund, all
securities are available for sale and therefore are carried at fair value with
unrealized gains and losses reported as accumulated other comprehensive income
in shareholders’ equity. Realized gains and losses on marketable securities are
included in other income or expense in the period they incurred, and when
applicable, are reported as a reclassification adjustment in other comprehensive
income. Gains and losses on the sale of marketable securities are determined
using the specific-identification method.





Note
5 – Accounts receivable





Accounts
receivable are generated from concrete products sold, vehicle rental services
provided to other unrelated concrete companies, and technological consulting
services provided to the Company’s customers and other concrete companies with
which the Company conducts business. The payment terms are defined in the
respective contracts. Over 73% of the Company’s receivables are due within a
year by contract and are classified as current assets on the consolidated
balance sheets. For certain large construction projects that can take several
years to complete, the Company provides extended payment terms to the general
contractors. These contractors are usually large state-owned builders with good
credit ratings. At the end of each period, the Company evaluates the structure
and collectability of accounts receivable and for these receivables that are
past due or not being paid according to payment terms, the Company takes
appropriate actions including seeking legal resolution in a court of law, for
its collection efforts.




16




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


As of
December 31 and June 30, 2009, accounts receivable and allowance for doubtful
accounts consisted of the following:





December 31,
                    
                    
                    June 30,2009
                      (Unaudited)
                    
                    
                    2009Accounts
      receivable, current
                    
                    $
                    23,327,255
                    
                    
                    $
                    11,936,388Less:  allowance
      for doubtful accounts, current
                    
                    
                    (95,866
                    )
                    
                    
                    (120,986
                    )Net
      accounts receivable, current
                    
                    
                    23,231,389
                    
                    
                    
                    11,815,402Accounts
      receivable, non-current
                    
                    
                    8,627,888
                    
                    
                    
                    4,461,269Less:  allowance
      for doubtful accounts, non-current
                    
                    
                    (223,685
                    )
                    
                    
                    (328,563
                    )Net
      accounts receivable, non-current
                    
                    
                    8,404,203
                    
                    
                    
                    4,132,706Total
      accounts receivable, net
                    
                    $
                    31,635,592
                    
                    
                    $
                    15,948,108





Note
6 – Plant and equipment





Plant and
equipment consist of the following as of December 31 and June 30,
2009:





December 31,
                    
                    
                    June 30,2009
                      (Unaudited)
                    
                    
                    2009Transportation
      equipment
                    
                    $
                    20,358,047
                    
                    
                    $
                    20,375,873Plant
      and machinery
                    
                    
                    9,833,606
                    
                    
                    
                    6,246,380Office
      equipment
                    
                    
                    103,919
                    
                    
                    
                    95,556Construction-in-progress
                    
                    
                    -
                    
                    
                    
                    3,369,500Total
                    
                    
                    30,295,572
                    
                    
                    
                    30,087,309Less:
      accumulated depreciation
                    
                    
                    (9,372,560
                    )
                    
                    
                    (7,997,592
                    )Plant
      and equipment, net
                    
                    $
                    20,923,012
                    
                    
                    $
                    22,089,717





Construction-in-progress
represents labor costs, materials, and capitalized interest incurred in
connection with the construction of a new mixer station inside and outside of
the current plant facility in Beijing. No depreciation is provided for
construction-in-progress until it is completed and placed into service. Most
construction-in-progress is related to assembling of portable machinery we
purchased with cash and in general the assembling process can be done in less
than three weeks. Therefore, no interest expense was capitalized as the
capitalized interest was not significant.





Construction
of some of the new portable mixing stations was completed and $3,391,598 was
transferred to fixed assets during the six months ended December 31,
2009.





Depreciation
expense for the three months ended December 31, 2009 and 2008 amounted to
$719,863 and $536,237, respectively. Depreciation expense for the six months
ended December 31, 2009 and 2008 amounted to $1,387,883 and $1,071,362,
respectively. For the six months ended December 31, 2009 and 2008, no material
interest amounts were capitalized.





Note
7 – Prepayments





Prepayments
are comprised of short-term and long-term factory rental prepayments the Company
made and also prepayments for inventory purchases. Short-term prepayments as of
December 31 and June 30, 2009 consisted of the following:





December 31,
                    
                    
                    June 30,2009
                      (Unaudited)
                    
                    
                    2009Prepayments
      for inventories
                    
                    $
                    2,950,265
                    
                    
                    $
                    2,431,401Short
      term prepayments-rent
                    
                    
                    2,559,527
                    
                    
                    
                    1,823,925Others
                    
                    
                    15,000
                    
                    
                    
                    -Total
      prepayments
                    
                    $
                    5,524,792
                    
                    
                    $
                    4,255,326




17




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Long term
prepayments represented prepayment for purchase of equipment and the non-current
portion of the factory rental prepayments the Company made. Prepayment for
purchase of equipment amounted to $4,236,977 and $0 as of December 31 and June
30, 2009, respectively. Long term rental prepayments amounted to $5,210,999 and
$4,794,746 as of December 31 and June 30, 2009, respectively. Rent prepayments
for the next five years ended June 30 amounted to $7,770,526 and consists of the
following:





Years ending December 31,
                    
                    Amount2010
                    
                    $
                    2,559,5272011
                    
                    
                    1,864,7982012
                    
                    
                    1,828,2342013
                    
                    
                    1,196,1982014
                    
                    
                    321,769





Note
8 – Short term loans





Short
term loans represent amounts due to one of the Company’s employee that are due
on demand or within one year. As of December 31 and June 30, 2009, the
outstanding balances on these loans were $146,259 and $4,512,200, respectively,
and these loans consisted of the following:




December 31,
                    
                    
                    June 30,2009
                      (Unaudited)
                    
                    
                    2009Loan
      from Beijing International Trust Co, Ltd. interest rate of 15% per annum,
      due July 15, 2009, guaranteed by Rayland Credit Guarantee Co. Ltd., paid
      off in July 2009
                    
                    $
                    -
                    
                    
                    $
                    4,395,000Loan
      from an employee(s), effective interest rate of 0% per annum, due upon
      demand, unsecured.
                    
                    
                    146,259
                    
                    
                    
                    117,200Total
      short term loans
                    
                    $
                    146,259
                    
                    
                    $
                    4,512,200





Interest
expense on short-term loans for the three months ended December 31, 2009 and
2008 amounted to $0 and $215,975, respectively. Interest expense on short-term
loans for the six months ended December 31, 2009 and 2008 amounted to $23,753
and $443,786, respectively.





Note
9 – Derivative liability





Effective
July 1, 2009, the Company adopted a FASB accounting standard, which defines
determining whether an instrument (or embedded feature) is indexed to an
entity’s own stock.  This accounting standard specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument.  This FASB accounting standard
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the scope exception.





As a
result of adopting this FASB accounting standard, warrants previously treated as
equity pursuant to the derivative treatment exemption are no longer afforded
equity treatment because the warrants have a downward ratchet provision on the
exercise price. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.





As such,
effective July 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in June 2008.  On July 1, 2009,
the Company reclassified from additional paid-in capital, as a cumulative effect
adjustment, $1,965,945 to beginning retained earnings and $3,337,225 to warrant
liabilities to recognize the fair value of such warrants. The fair value of the
warrants was $5,546,523 on December 31, 2009.  Therefore, the
Company recognized a $3,356,796 gain and $3,916,645 loss from the change in fair
value for the three and six months ended December 31, 2009,
respectively.




18




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the
Cox-Ross-Rubinstein (“CRR”) Binomial Model using the following
assumptions:


December 31, 2009
                      
                      
                      July 1, 2009(Unaudited)Annual
      dividend yield
                      
                      
                      -
                      
                      
                      
                      -Expected
      life (years)
                      
                      
                      3.50
                      
                      
                      
                      4.00Risk-free
      interest rate
                      
                      
                      1.92
                      %
                      
                      
                      2.07
                      %Expected
      volatility
                      
                      
                      75
                      %
                      
                      
                      75
                      %





Expected
volatility is based on historical volatility of a similar U.S. public company
due to limited trading history of the Company’s common stock.  The
Company has no reason to believe future volatility over the expected remaining
life of these warrants is likely to differ materially from historical
volatility. The expected life is based on the remaining term of the warrants.
The risk-free interest rate is based on U.S. Treasury securities according to
the remaining term of the warrants. The expected dividend yield was based on the
Company’s current and expected dividend policy.





The
conversion option does not need to be separated from the redeemable convertible
preferred stock and accounted for as derivative liability because it has the
risks and rewards of an equity instrument and clearly and closely related to the
risks and rewards of the redeemable convertible preferred stock, which has been
accounted for as an equity instrument.





The
redeemable convertible preferred stock contains residual equity interest, which
on dissolution and liquidation of the Company, entitle the preferred
stockholders to liquidation value and accumulated dividends, and rank equal with
the common shareholders on an as if converted basis. A host contract is
considered an equity instrument if it encompasses a residual interest in an
entity.





Note
10 – Related party transactions





Other payables –
shareholders





Beginning
in July 2007, Mr. He Weili, a 38.10% shareholder, leased an office space to the
Company at approximately the current fair market value from July 2009 to June
2010 with annual payment of $172,950. For the three months ended December
31, 2009 and 2008, the Company recorded rent expenses from the shareholder in
the amount of approximately $43,000 and $43,000, respectively. For the six
months ended December 31, 2009 and 2008, the Company recorded rent expense from
the shareholder in the amount of approximately $86,000 and $87,000,
respectively. As of December 31 and June 30, 2009, approximately $926 and
$56,046, respectively, remained unpaid, and is included as other payables -
shareholders.





The
Company’s shareholders Mr. Han Xianfu and Mr. He Weili, who have 57.15% and
38.10% indirect ownership interests in BVI-ACM, respectively, together loaned
$750,900 to BVI-ACM on March 12, 2008, for the entity’s cash flow purposes. The
loan is non-interest bearing, unsecured, and is payable in cash on
demand.





Total
other payables - shareholders as of December 31 and June 30, 2009 is as
follows:





December 31,
                    
                    
                    June 30,2009
                      (Unaudited)
                    
                    
                    2009Han
      Xianfu, shareholder
                    
                    $
                    450,550
                    
                    
                    $
                    450,550He
      Weili, shareholder
                    
                    
                    301,276
                    
                    
                    
                    356,396Total
      other payable – shareholder
                    
                    $
                    751,826
                    
                    
                    $
                    806,946





Note
11 – Other receivables





As of
December 31, 2009, other receivables mainly include advances to employees,
monies to another entity, receivables from an insurance company and other
deposits paid.





Monies
advanced to an entity that was in part formerly owned by Mr. He
Weili.  Prior to the reverse acquisition (Note 1), the Company and
this related entity were engaged in joint contracts, business licenses, and
other partnership agreements. Pursuant to the reverse acquisition, the Company
and this related entity began separate operations and the process of obtaining
separate contracts, business licenses, and other partnership agreements were
initiated. To date, the Company and this related entity are finalizing the
aforementioned process of obtaining separate contracts, business licenses, and
agreements.


19





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Due to
the relationship of the two companies, certain monies were exchanged as part of
their joint contracts.  For the six months ended December 31, 2009,
the Company advanced approximately $5,343,299 to this entity, and approximately
$4,586,991 was repaid.  As of December 31, 2009 and June 30, 2009, the
balance of other receivable for related party transaction was approximately
$756,000 and $0, respectively.





As of
June 30, 2009, other receivables consisted of accounts receivables that were
factored to a trust company, employee advances, station advances, and bidding
deposits. For the fiscal year ended June 30, 2009, the Company had a factoring
agreement with a third party unrelated trust company wherein it transferred its
receivables for cash during the fourth quarter of 2009. As of June 30, 2009, the
Company had not collected $3.6 million from the trust company and recorded the
uncollected balances as other receivable. The Company received its remaining
balances in July 2009.





Note
12 – Income taxes





Corporate
income taxes





Companies
established before March 16, 2007, will continue to enjoy tax holiday treatment
approved by the local government for a grace period of either for the next five
years or until the tax holiday term is completed, whichever is sooner. These
companies will pay the standard tax rate when the grace period expires. The
Company had received its tax holiday treatment until December
2007.  During the fourth quarter of the year, the Company has applied
and received the Enterprise High-Tech Certificate. The certificate was awarded
based on the Company's involvement in producing high-tech products, its research
and development, as well as its technical services. As a result of this
certification, the Company's effective income tax rate has been reduced to 15%
from 25%. The new tax rate will be retroactive to January 1, 2009 and will be
effective for three years, through December 31, 2011.





The
Company was granted income tax exemption from January 1, 2003 to December 31,
2007. Beginning on January 1, 2008, the Company and its subsidiaries were
subject to an EIT rate of 25%.  The Company was granted a 10% tax
deduction on 90% of the total sales revenue by the local authority due to the
Company’s utilization of recycled raw materials.  Beginning on January
1, 2009, the Company and its subsidiaries were subject to an EIT rate of
15%.  For the six months ended December 31, 2009 and 2008, the
provision for income taxes amounted to $1,348,627 and $1,575,230,
respectively.





The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended December 31, 2009 and 2008:





December 31,
                          
                          
                          
                          December 31,2009
                            (Unaudited)
                          
                          
                          
                          2008
                            (Unaudited)U.S.
      statutory rates
                          
                          
                          34
                          %
                          
                          
                          
                          34
                          %Foreign
      income not recognized in the U.S.
                          
                          
                          (34
                          )%
                          
                          
                          
                          (34
                          )%China
      income taxes
                          
                          
                          25
                          %
                          
                          
                          
                          25
                          %China
      income tax exemption
                          
                          
                          (10
                          )%
                          
                          
                          
                          -Other
                          
                          
                          (6
                          )%
                          (a)
                          
                          
                          2
                          %
                          (a)Effective
      income tax rates
                          
                          
                          9
                          %
                          
                          
                          
                          27
                          %





(a)The –
(6%) represents expenses (such as change in fair value of warrants in the amount
of $3,356,796 and certain expenses in the amount of $239,217 incurred in the
U.S. entity) incurred by the Company that are not deductible for PRC income tax
for the three months ended December 31, 2009. The 2% represents the expenses
incurred in the U.S entity that were not subjected to PRC income tax for the
three months ended December 31, 2008.


20




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended December 31, 2009 and
2008:


December 31,
                          
                          
                          
                          December 31,2009
                            (Unaudited)
                          
                          
                          
                          2008
                            (Unaudited)U.S.
      statutory rates
                          
                          
                          34
                          %
                          
                          
                          
                          34
                          %Foreign
      income not recognized in the U.S.
                          
                          
                          (34
                          )%
                          
                          
                          
                          (34
                          )%China
      income taxes
                          
                          
                          25
                          %
                          
                          
                          
                          25
                          %China
      income tax exemption
                          
                          
                          (10
                          )%
                          
                          
                          
                          -Other
                          
                          
                          13
                          %
                          (a)
                          
                          
                          3
                          %
                          (a)Effective
      income tax rates
                          
                          
                          28
                          %
                          
                          
                          
                          28
                          %





(a)
            The
      - 13% represents the expenses (such as change in fair value of warrants in
      the amount of $3,916,645 and certain expenses in the amount of $379,400
      incurred in the U.S. entity) incurred by the Company that are not
      deductible for PRC income tax for the six months ended December 31, 2009.
      The 3% represents the expenses incurred in the U.S entity that were not
      subjected to PRC income tax for the six months ended December 31,
      2008.





Taxes
payable consisted of the following:





December 31,
                    
                    
                    June 30,2009
                      (Unaudited)
                    
                    
                    2009Income
      taxes payable
                    
                    $
                    2,700,196
                    
                    
                    $
                    3,039,905Other
      taxes payables
                    
                    
                    27,282
                    
                    
                    
                    8,274Total
      taxes payable
                    
                    $
                    2,727,478
                    
                    
                    $
                    3,048,179





Note
13 – Shareholders’ equity





On June
11, 2008, the Company completed an offering (the “Offering”) on the sale of
875,000 of investment units for a total of $7,000,000, each unit consisting of
one share of the Company’s Series A Convertible Preferred Stock, $0.001 par
value per share, and one (1) five year warrant to purchase two shares of Common
Stock (the “Warrants”). Each preferred share is convertible into four shares of
common stock.  Additionally, each holder is entitled to cumulative
dividends equal to 9% annually, payable in cash, irrespective of the
profitability of the Company.





The
Company received net proceeds of approximately $5,223,291 with $930,000 in an
escrow and after payment of certain fees and expenses.  $497,500 was
paid to Maxim Group LLC (“Maxim”) who served as the placement agent for the
transaction, $9,500 was paid to American Stock Transfer & Trust Company as a
transfer agent fee, $60,000 was paid to the attorney, and $45,000 was paid for a
finance fee for the purchasers in connection with the transaction. These
offering costs approximating $602,500 were charged to additional paid-in
capital. The allocation of the proceeds from the investment to a relative
fair value basis which resulted in the allocation of $5,798,000 to the Series A
Preferred and $1,202,000 to the warrants.





The
following is a summary of our current Redeemable Convertible Preferred Stock
issued and outstanding net of discount:


As of December 31,
                                
                                
                                As of June 30,2009
                                  (Unaudited)
                                
                                
                                2009Numbers
      of Redeemable Convertible Preferred shares outstanding in the beginning of
      the fiscal year
                                
                                
                                851,125
                                
                                
                                
                                875,000Redeemable
      Convertible Preferred shares converted to Common share during the fiscal
      year
                                
                                
                                (301,250
                                )
                                
                                
                                (23,875
                                )Current
      Redeemable Convertible Preferred shares outstanding
                                
                                
                                549,875
                                
                                
                                
                                851,125Per
      share conversion price from Redeemable Convertible Preferred shares to
      Common share
                                
                                $
                                8
                                
                                
                                $
                                8Current
      Redeemable Convertible Preferred outstanding before
    discount
                                
                                $
                                4,399,000
                                
                                
                                $
                                6,809,000Discount
      on Redeemable Convertible Preferred shares outstanding
                                
                                $
                                (167,851
                                )
                                
                                $
                                (567,581
                                )Total
      Current Redeemable Convertible Preferred stocks net of
      discount
                                
                                $
                                4,231,149
                                
                                
                                $
                                6,241,419




21





CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





The
Company also issued to the placement agent a warrant to purchase an aggregate of
245,000 shares of common stock with an exercise price of $2.40 per share with a
term of five years. The warrants are exercisable on a cashless basis, in whole
or in part, at an exercise price equal to $2.40 per share. The Company may call
the warrants for redemption at any time after the warrants become exercisable
(i) at a price of $.01 per warrant; (ii) upon not less than 30 days’ prior
written notice of redemption to each warrant holder; and (iii) if, and only if,
the last sale price of the common stock equals or exceeds $5.00 per share, for
any twenty (20) trading days within a thirty (30) consecutive trading day period
ending on the third business day prior to the notice of redemption to warrant
holders.





The value
of the warrants issued to the placement agent was $169,345 calculated by using
the Cox-Ross-Rubinstein (“CRR”) Binomial Model. The fair value of these warrants
of $169,345 was recognized as offering expense and charged to additional paid-in
capital. The value of the warrants was determined using the CRR Binomial Model
using the following assumptions: volatility 75%; risk-free interest rate of
3.49% of the Investor Warrants, the Placement and Advisory Warrants; dividend
yield of 0%, and expected term of 5 years of the Investor Warrants and the
Placement and Advisory Warrants. The volatility of the Company’s common stock
was estimated by management based on the historical volatility of a similar U.S.
public company due to limited trading history of the Company’s common stock. The
risk-free interest rate was based on the Treasury Constant Maturity Rates
published by the U.S. Federal Reserve for periods applicable to the expected
life of the warrants. The expected dividend yield was based on the Company’s
current and expected dividend policy and the expected term is equal to the
contractual life of the warrants.





Following
is a summary of the status of warrants outstanding:





Outstanding Common Stocks Underlying WarrantsNumber
                      
                      Average Remaining
                        Contractual LifeUS$
                      2.40
                      
                      
                      1,551,250
                      
                      3.45 yearsUS$
                      2.40
                      
                      
                      52,188
                      
                      3.50 yearsTotal
                      
                      
                      1,603,438





Following
is a summary of the warrant activity:





Number of Common
                    stock underlying
                    WarrantsOutstanding
      as of June 30, 2008
                  
                  
                  1,995,000Granted
                  
                  
                  -Forfeited
                  
                  
                  -Exercised
                  
                  
                  -Outstanding
      as of June 30, 2009
                  
                  
                  1,995,000Granted
                  
                  
                  -Forfeited
                  
                  
                  -Exercised
                  
                  
                  (391,562
                  )Outstanding
      as of December 31, 2009 (unaudited)
                  
                  
                  1,603,438





In
connection with the private placement, the Company agreed to file a registration
statement to register the warrants and common stock issuable upon conversion of
the preferred stock and exercise of the warrants, as defined. The registration
statement was declared effective in January 2009. The Company incurred $140,000
penalties for late registration and was paid based on the contract in connection
with the private placement.


22




CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Employee Stock
Options





On May 1,
2008, the Company issued 25,000 common shares to a Company executive, par value
$0.001 for services the executive renders to the Company.  The shares
become fully vested after one year from the date of grant. On July 31 2008, the
executive’s employment with the Company terminated, and the 25,000 shares were
forfeited upon resignation.





On
October 3, 2008, the Company entered into a one-year agreement with one of the
Company’s board of directors. In connection with his services, the Company
issued an aggregate of 50,000 options of the Company’s common stock at an
exercise price of $2.90 per share. The options vest in equal quarterly
installments over the first year of the agreement.





On
December 1, 2008, the Company entered into a three-year agreement with
the Company’s Chief Financial Officer. In connection with his services, the
Company issued a total of 200,000 options of the Company’s common stock
from the option bonus pool. The option bonus pool consists of four equal
tranches of 50,000 options, with the first tranche of 50,000 options carrying an
exercise price of $3.00, the second tranche of 50,000 options carrying an
exercise price of $3.50, the third tranche of 50,000 options carrying an
exercise price of $4.00, and the fourth tranche of 50,000 options carrying an
exercise price of $4.50. A quarter (25%) of each tranche of options will vest at
the end of each twelve-month period of the agreement.





The
Company valued the stock options by the Cox-Ross-Rubinstein (“CRR”) binomial
model with the following assumptions:





Expected
                  
                  
                  Expected
                  
                  
                  Dividend
                  
                  
                  Risk Free
                  
                  
                  Grant DateTerm
                  
                  
                  Volatility
                  
                  
                  Yield
                  
                  
                  Interest Rate
                  
                  
                  Fair
      ValueChief
      Financial Officer
                  
                  
                  6.25
                  
                  
                  
                  75
                  %
                  
                  
                  0
                  %
                  
                  
                  1.16
                  %
                  
                  $
                  3.00Director
                  
                  
                  5.31
                  
                  
                  
                  75
                  %
                  
                  
                  0
                  %
                  
                  
                  1.41
                  %
                  
                  $
                  2.90





The
following is a summary of the option activity:


Number
      of
                              options
                            
                            
                            Intrinsic
      ValueOutstanding
      as of June 30, 2008Granted
                            
                            
                            250,000Forfeited
                            
                            
                            -Exercised
                            
                            
                            -Outstanding
      as of June 30, 2009
                            
                            
                            250,000Granted
                            
                            
                            -Forfeited
                            
                            
                            -Exercised
                            
                            
                            -Outstanding
      as of December 31, 2009 (Unaudited)
                            
                            
                            250,000
                            
                            
                            $
                            350,000





Following
is a summary of the status of options outstanding at December 31,
2009:





Outstanding options
                              
                              
                              Exercisable optionsNumber
                              
                              
                              Average
                              
                              
                              Average
                              
                              
                              Number
                              
                              
                              AverageAverage
                              
                              
                              of
                              
                              
                              remaining
                              
                              
                              Exercise
                              
                              
                              of
                              
                              
                              remainingExercise price
                              
                              
                              options
                              
                              
                              contractual life
                              
                              
                              price
                              
                              
                              options
                              
                              
                              contractual life(years)
                              
                              
                              
                              
                              
                              
                              
                              
                              (years)$
                              2.90
                              
                              
                              
                              50,000
                              
                              
                              
                              8.76
                              
                              
                              $
                              2.90
                              
                              
                              
                              50,000
                              
                              
                              
                              8.76$
                              3.00
                              
                              
                              
                              50,000
                              
                              
                              
                              8.92
                              
                              
                              $
                              3.00
                              
                              
                              
                              50,000
                              
                              
                              
                              8.92$
                              3.50
                              
                              
                              
                              50,000
                              
                              
                              
                              8.92
                              
                              
                              
                              
                              
                              
                              
                              -$
                              4.00
                              
                              
                              
                              50,000
                              
                              
                              
                              8.92
                              
                              
                              
                              
                              
                              
                              
                              -$
                              4.50
                              
                              
                              
                              50,000
                              
                              
                              
                              8.92
                              
                              
                              
                              
                              
                              
                              
                              -$
                              3.58
                              
                              
                              
                              250,000
                              
                              
                              
                              
                              
                              
                              $
                              2.95
                              
                              
                              
                              100,000




23


CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





As of
December 31, 2009, there was approximately $248,439 of total unrecognized
compensation expense related to un-vested share-based compensation arrangements.
That cost is expected to be recognized over a weighted-average period of three
years.





For the
three months ended December 31, 2009 and 2008, the Company recognized
approximately $22,089 and $26,210, respectively, as compensation expenses for
its stock option plan. For the six months ended December 31, 2009 and 2008, the
Company recognized approximately $63,396 and $26,210, respectively, as
compensation expenses for its stock option plan.





Restricted Stock
Awards





On August
15, 2009, the Company issued 10,000 shares of restricted stock to each of its
three board of directors for one year of service. The restricted stocks vest in
equal quarterly installments over the first year of the
agreement.  For the three months ended December 31, 2009, the Company
recognized $38,534 of the restricted stock as compensation expense. For the six
months ended December 31, 2009, the Company recognized approximately $57,382 of
the restricted stock as compensation expense.  As of December 31,
2009, $95,498 of total unrecognized compensation expense was related to the
unvested restricted stock based compensation arrangements.





Note
14 – Contribution receivable





On July
8, 2005, Xin Ao’s board of directors passed a resolution to increase the
registered capital from $3,630,000 (RMB30 million) to $12,100,000 (RMB100
million). The increase in registered capital of $8,470,000 (RMB70 million) was
funded by the undistributed profits as of June 30, 2005. Based on the PRC
government’s regulations, all companies are required to record its capital in
accordance with the business license, and since Xin Ao did not have sufficient
undistributed profits as of June 30, 2005, the unfunded amount has been recorded
as contribution receivable.  Since the capital should be contributed
by the shareholders of the Company, the contribution receivable was recorded as
part of the equity transaction.





Further,
pursuant to BVI-ACM’s establishment of China-ACMH in November 2007, BVI-ACM was
required to pay 15% of $5,000,000 by February 22, 2008, and the remaining
balance by November 22, 2009, in accordance with the laws of the
PRC.





On March
30, 2008, Xin Ao’s board of directors approved to transfer $7,260,000 from
undistributed retained earnings into registered capital of the Company.
Contemporaneously, China-ACMH made a payment of $5,000,000 and BVI-ACM made a
payment of $100 to the Company. On October 9, 2009, the Company has transferred
$1,210,000 (RMB10,000,000) from unrestricted retained earnings to registered
capital. As of December 31, 2009, the Company has zero contribution
receivable.





Note
15 – Reserves and dividends





The laws
and regulations of the PRC require that before a foreign invested enterprise can
legally distribute profits, it must first satisfy all tax liabilities, provide
for losses in previous years, and make allocations, in proportions determined at
the discretion of the board of directors, after the statutory reserves. The
statutory reserves include the surplus reserve fund and the common welfare
fund.





The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.  As of December 31, 2009, the Company still needs to reserve
$3.5 million to statutory reserve.





The
transfer to this reserve must be made before distribution of any dividends to
the Company’s shareholders. The surplus reserve fund is non-distributable other
than during liquidation and can be used to fund previous years’ losses, if any,
and may be utilized for business expansion or converted into share capital by
issuing new shares to existing shareholders in proportion to their shareholding
or by increasing the par value of the shares currently held by them, provided
that the remaining reserve balance after such issue is not less than 25% of the
registered capital.





The
Chinese government restricts distributions of registered capital and the
additional investment amounts required by foreign invested enterprises. Approval
by the Chinese government must be obtained before distributions of these amounts
can be returned to the shareholders.




24


CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Note
16 – Earnings per share





The
following is a reconciliation of the basic and diluted earnings per share
computation for the three months and six months ended December, 2009 and
2008:





Three
      months ended
                          
                          
                          Six
      months endedDecember
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008(Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)Basic earnings per shareNet
      income available to common shareholders
                          
                          $
                          7,626,246
                          
                          
                          $
                          2,335,966
                          
                          
                          $
                          2,762,445
                          
                          
                          $
                          3,485,709Weighted
      average shares outstanding-Basic
                          
                          
                          12,377,182
                          
                          
                          
                          10,525,000
                          
                          
                          
                          11,681,294
                          
                          
                          
                          10,525,000Earnings
      per share-Basic
                          
                          $
                          0.62
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.24
                          
                          
                          $
                          0.33Diluted
      earnings per shareNet
      income available to common shareholders
                          
                          $
                          7,626,246
                          
                          
                          $
                          2,335,966
                          
                          
                          $
                          2,762,445
                          
                          
                          $
                          3,485,709Add:
      Dividends on preferred stock
                          
                          
                          110,843
                          
                          
                          
                          158,795
                          
                          
                          
                          259,969
                          
                          
                          
                          317,650Add:
      Accretion on preferred stock
                          
                          
                          207,990
                          
                          
                          
                          150,241
                          
                          
                          
                          399,728
                          
                          
                          
                          300,482Net
      income for diluted EPS
                          
                          $
                          7,945,079
                          
                          
                          $
                          2,645,002
                          
                          
                          $
                          3,422,142
                          
                          
                          $
                          4,103,841Weighted
      average shares outstanding-Basic
                          
                          
                          12,377,182
                          
                          
                          
                          10,525,000
                          
                          
                          
                          11,681,294
                          
                          
                          
                          10,525,000Restricted
      stock
                          
                          
                          7,500
                          
                          
                          
                          -
                          
                          
                          
                          7,500
                          
                          
                          
                          -Warrants
      and options
                          
                          
                          1,093,508
                          
                          
                          
                          195,410
                          
                          
                          
                          1,052,507
                          
                          
                          
                          195,410Preferred
      stock
                          
                          
                          2,477,326
                          
                          
                          
                          3,500,000
                          
                          
                          
                          2,883,481
                          
                          
                          
                          3,500,000Weighted
      shares outstanding-Diluted
                          
                          
                          15,955,516
                          
                          
                          
                          14,220,410
                          
                          
                          
                          15,624,782
                          
                          
                          
                          14,220,410Earnings
      per share-Diluted
                          
                          $
                          0.50
                          
                          
                          $
                          0.19
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.29





On June
11, 2008, the Company issued 875,000 shares of preferred stock, each of which
can be converted into four shares of common stock. The convertible preferred
stock is mandatorily redeemable for cash at the end of two years if not yet
converted. As of December 31, 2009, 325,125 of the preferred stock had been
converted into 1,300,500 of common stock. Dividends on the preferred stock and
accretion of the initial discount from the redemption value of the preferred
stock, both of which are charged to retained earnings, are subtracted from net
income to determine net income available to common shareholders for the purposes
of computing basic earnings per share. In calculating diluted earnings per
share, the convertible preferred stock is treated as common stock equivalents on
an as-converted basis. The dividends and accretion on the preferred stock are
added back to the net income available to common shareholders for calculating
diluted earnings per share, as if the preferred stock were converted at the
beginning of the period.  For the six months ended December 31, 2009
and 2008, total dividend and accretion were $659,699 and $618,132,
respectively.  For six months ended December 31, 2009, 292,182
warrants were converted into 300,483 shares of common stock. For the six months
ended December 31, 2009, 1,603,438 warrants at an exercise price of $2.40 per
share were included in the diluted EPS calculation, which under treasury stock
method resulted in an additional 1,008,063 shares of common stocks.





Note
17 – Employee pension





The
Company offers a discretionary pension fund, a defined contribution plan, to
qualified employees. The pension includes two parts: the first to be paid by the
Company is 20% of the employee’s actual salary in the prior year. The other
part, paid by the employee, is 8% of the actual salary. The Company’s
contributions of employment benefits, including pension were approximately
$39,142 and $16,284 for the three months ended December 30, 2009 and 2008,
respectively. The Company’s contributions of employment benefits, including
pension were approximately $56,822 and $33,734 for the six months ended December
30, 2009 and 2008, respectively.





Note
18 – Operating leases





The
Company entered into a lease agreement for a manufacturing plant with an
unrelated party from October 1, 2008 to September 30, 2013 with annual payment
of $197,000.  Further, the Company agreed to lease office space from
the Company’s shareholder, Mr. He Weili, from July 2009 to June 2010 with annual
payment of $172,950, the rent is valued at fair value from the main property
management.


25


CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
Company has four different five-year operating lease agreements as of December
31, 2009.  The lease payments are for four manufacturing plants with
various unrelated parties for a total monthly payment of approximately $214,000.
Certain lease payments have been pre-paid by transferring the Company’s
long-term accounts receivable to the lessors as the Company believes that a
lump-sum pre-payments from an aging receivable in exchange for agreeing to no
increase in the future lease will benefit its future operation.





Total
operating lease expense for the three months ended December 31, 2009 and 2008
was $796,343 and $92,589, respectively. Total operating lease expense for the
six months ended December 31, 2009 and 2008 was $1,391,370 and $185,179,
respectively, and is included in selling, general, and administrative expenses.
Future minimum annual lease expense under non-cancelable operating leases with a
term of one year or more consist of the following:





Years ending June 30,
                  
                  AmountSix
      months remaining in 2010
                  
                  $
                  1,563,3132011
                  
                  
                  2,756,5962012
                  
                  
                  2,756,5962013
                  
                  
                  2,639,5962014
                  
                  
                  633,187





Note
19 — Business Segments





The
Company’s operations are classified into four principal reportable segments that
provide different products or services.  The Company is engaged in the
business of sales of concrete, manufacturing concrete, technical support
services and others, which include mixer rental, sales of materials and
marketing cooperation.  Separate segment is required because each business
unit is subject to different production and technology strategies. Corporate
represents the expenses that are not directly interrelated to the business
units.





For the
three months ended December 31, 2009 (Unaudited):


Sales
      of concrete
                
                
                Manufacturing
                  services
                
                
                Technical
      services
                
                
                Others
                
                
                Corporate
                
                
                TotalNet
      sales
                
                $
                20,316,502
                
                
                $
                3,663,114
                
                
                $
                1,234,760
                
                
                $
                949,936
                
                
                $
                -
                
                
                $
                26,164,312Depreciation
                
                
                (241,139
                )
                
                
                (421,619
                )
                
                
                (1,273
                )
                
                
                (45,124
                )
                
                
                (10,709
                )
                
                
                (719,863
                )Operating
      income
                
                
                1,764,973
                
                
                
                1,581,756
                
                
                
                1,147,274
                
                
                
                614,115
                
                
                
                (1,030,742
                )
                
                
                4,077,376Other
      income (expenses)
                
                
                1,077,857
                
                
                
                216,333
                
                
                
                -
                
                
                
                -
                
                
                
                27,008
                
                
                
                1,321,198Interest
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,524
                
                
                
                1,524Interest
      expenses
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Capital
      expenditure
                
                
                (114,282
                )
                
                
                (48,467
                )
                
                
                -
                
                
                
                -
                
                
                
                (527
                )
                
                
                (163,276
                )





For the
six months ended December 31, 2009 (Unaudited):





Sales of concrete
                
                
                Manufacturing
                  services
                
                
                Technical services
                
                
                Others
                
                
                Corporate
                
                
                TotalNet
      sales
                
                $
                35,203,259
                
                
                $
                6,468,728
                
                
                $
                2,479,655
                
                
                $
                1,493,806
                
                
                $
                -
                
                
                $
                45,645,448Depreciation
                
                
                (531,393
                )
                
                
                (745,240
                )
                
                
                (2,544
                )
                
                
                (90,858
                )
                
                
                (17,848
                )
                
                
                (1,387,883
                )Operating
      income
                
                
                2,193,685
                
                
                
                2,607,338
                
                
                
                2,327,540
                
                
                
                1,107,819
                
                
                
                (1,767,001
                )
                
                
                6,469,381Other
      income (expenses)
                
                
                1,854,061
                
                
                
                379,163
                
                
                
                -
                
                
                
                -
                
                
                
                5,543
                
                
                
                2,238,767Interest
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,021
                
                
                
                3,021Interest
      expenses
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (23,753
                )
                
                
                (23,753
                )Capital
      expenditure
                
                
                (150,431
                )
                
                
                (3,463,262
                )
                
                
                -
                
                
                
                -
                
                
                
                (6,131
                )
                
                
                (3,619,824
                )Total
      assets
                
                
                60,152,105
                
                
                
                11,053,259
                
                
                
                -
                
                
                
                1,641,629
                
                
                
                359,984
                
                
                
                73,206,977




26


CHINA
ADVANCED CONSTRUCTION MATERIALS GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





For the
three months ended December 31, 2008 (Unaudited):





Sales
      of
                    concrete
                  
                  
                  Manufacturing
                    services
                  
                  
                  Technical
                    services
                  
                  
                  Others
                  
                  
                  Corporate
                  
                  
                  TotalNet
      sales
                  
                  $
                  7,969,878
                  
                  
                  $
                  2,070,996
                  
                  
                  $
                  423,330
                  
                  
                  $
                  363,997
                  
                  
                  $
                  -
                  
                  
                  $
                  10,828,201Depreciation
                  
                  
                  (407,068
                  )
                  
                  
                  (82,263
                  )
                  
                  
                  (1,269
                  )
                  
                  
                  (45,637
                  )
                  
                  
                  -
                  
                  
                  
                  (536,237
                  )Operating
      income
                  
                  
                  1,882,823
                  
                  
                  
                  1,250,909
                  
                  
                  
                  388,601
                  
                  
                  
                  306,907
                  
                  
                  
                  (485,803
                  )
                  
                  
                  3,343,437Other
      income (expenses)
                  
                  
                  392,872
                  
                  
                  
                  124,260
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  517,132Interest
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,406
                  
                  
                  
                  2,406Interest
      expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (217,570
                  )
                  
                  
                  (217,570
                  )Capital
      expenditure
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12,599
                  )
                  
                  
                  (12,599
                  )





For the
six months ended December 31, 2008 (Unaudited):





Sales of
                    concrete
                  
                  
                  Manufacturing
                    services
                  
                  
                  Technical
                    services
                  
                  
                  Others
                  
                  
                  Corporate
                  
                  
                  TotalNet
      sales
                  
                  $
                  9,837,565
                  
                  
                  $
                  3,996,539
                  
                  
                  $
                  1,040,127
                  
                  
                  $
                  1,090,716
                  
                  
                  $
                  -
                  
                  
                  $
                  15,964,947Depreciation
                  
                  
                  (824,362
                  )
                  
                  
                  (137,509
                  )
                  
                  
                  (2,547
                  )
                  
                  
                  (106,944
                  )
                  
                  
                  -
                  
                  
                  
                  (1,071,362
                  )Operating
      income
                  
                  
                  2,152,189
                  
                  
                  
                  2,640,052
                  
                  
                  
                  924,942
                  
                  
                  
                  695,920
                  
                  
                  
                  (1,038,361
                  )
                  
                  
                  5,374,742Other
      income (expenses)
                  
                  
                  507,041
                  
                  
                  
                  239,792
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  746,833Interest
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,840
                  
                  
                  
                  3,840Interest
      expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (446,344
                  )
                  
                  
                  (446,344
                  )Capital
      expenditure
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (31,666
                  )
                  
                  
                  (31,666
                  )Total
      assets
                  
                  
                  18,205,559
                  
                  
                  
                  18,769,519
                  
                  
                  
                  -
                  
                  
                  
                  6,402,393
                  
                  
                  
                  55,808
                  
                  
                  
                  43,433,279





Note
20 – Commitments and contingencies





Litigation





From time
to time, the Company is a party to various legal actions arising in the ordinary
course of business.  The Company’s management does not expect the legal
matters involving the Company would have a material impact on the Company’s
consolidated financial position or results of operations.





Following
is the summary of the current litigation:





Beijing
Xin’Ao Concrete Co., Ltd vs. Beijing Boda Guosheng Investment Co., Ltd. (Beijing
District Court, PRC)





In August
2006, Xin Ao filed a lawsuit against Beijing Boda Guosheng Investment Co., Ltd
(“Boda”) seeking specific performance of Boda’s obligations under the sales
contract to pay approximately $275,380 (RMB 2,000,000) for the cement supplied
by Xin Ao between March 2005 and June 2005 and compensatory damages of
approximately $23,500 (RMB 171,000) to cover the interest incurred on the unpaid
balance. The Court ruled against Boda and ordered Boda to pay the amounts
requested by Xin Ao; however, Boda appealed the court’s rulings. In November
2007, the Appeals Court upheld the original verdict and again ordered Boda to
pay all the damages. Management does not believe that the ultimate outcome of
this case will have a material adverse effect on the Company’s consolidated
financial position or results of operations. As of December 31, 2009, the
Company has factored this amount to an unrelated third party trust company and
the trust company has received the payment from Boda.





Yunwei
Zhang vs. Beijing Xin’Ao Concrete Co., Ltd. (Beijing District Court,
PRC)





In May
2006, an action against Xin Ao and Beijing Shangdi Xinda Company was filed by
Yunwei Zhang (“Shangdi”) in Beijing District Court seeking payment of
approximately $112,000 (RMB 814,000) for damages caused by Qingbao Zhang, a
contracted driver of Xin Ao and an employee of Zhangbei County Labor Service
Co., Ltd. The vehicle involved in the accident is owned by Beijing Shangdi
Xingda Company who leased to Xin Ao who subsequently leased the vehicle to
Zhangbei County Labor Service Company. On June 16, 2008, the Court ruled against
Xin Ao and Shangdi to pay the damages incurred to Yunwei Zhang in the accident.
Xin Ao is responsible for approximately $39,000 (approximately RMB 273,000) for
the damages, and as of December 31, 2009, the Company has paid the final payment
approximately $35,000. The remaining $4,000 will be paid by Beijing Shangdi
Xingda Company.





Note
21 – Subsequent Events





The
Company evaluated subsequent events through the time of filing this Quarterly
Report on Form 10-Q on February 9, 2010, no significant events
occurred subsequent to the balance sheet date but prior to the filing of this
report that would have a material impact on our Consolidated Financial
Statements.


27





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





This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,”
“project,” “target,” “optimistic,” “intend,” “aim,” “will” or similar
expressions are intended to identify forward-looking statements. Such statements
include, among others, those concerning our expected financial performance and
strategic and operational plans, as well as all assumptions, expectations,
predictions, intentions or beliefs about future events. These statements are
based on the beliefs of our management as well as assumptions made by and
information currently available to us and reflect our current view concerning
future events. As such, they are subject to risks and uncertainties that could
cause our results to differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among many
others: our significant operating losses; our limited operating history;
uncertainty of capital resources; the speculative nature of our business; our
ability to successfully implement new strategies; present and possible future
governmental regulations; operating hazards; competition; the loss of key
personnel; any of the factors in the “Risk Factors” section of the Company’s
Annual Report on Form 10-K; other risks identified in this Report; and any
statements of assumptions underlying any of the foregoing. You should also
carefully review other reports that we file with the SEC. The Company assumes no
obligation and does not intend to update these forward-looking statements,
except as required by law.





All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements. The Company assumes no obligation and does
not intend to update these forward-looking statements, except as required by
law. When used in this report, the terms “China ACM”, “Company”, “we”, “our”,
and “us” refer to China Advanced Construction Materials Group, Inc. (a Delaware
corporation) and its wholly-owned subsidiaries Xin Ao Construction Materials,
Inc. and Beijing Ao Hang Construction Materials Technology Co., Ltd., as well as
Beijing Xin Ao Concrete Co., Ltd., the Company’s variable interest
entity.





Use
of Non-GAAP Financial Measures





The
Company makes reference to Non-GAAP financial measures in portions of
“Management’s Discussion of Financial Condition and Results of Operations”.
Management believes that investors may find it useful to review our financial
results that exclude the non-cash expense of 3,916,645 for the six month ended
December 31, 2009 and the non-cash income of $3,356,796 for the three month
ended December 31, 2009 on change in fair value of warrant, shown in the below
chart, due to the adoption of a Financial Accounting Standards Board’s
(“FASB”) ASC 815 (EITF 07-05) accounting standard as discussed in
the section “Derivative Liability” below.





Management
believes that these Non-GAAP financial measures are useful to investors in that
they provide supplemental information to possibly better understand the
underlying business trends and operating performance of the Company. The Company
uses these Non-GAAP financial measures to evaluate operating performance.
However, Non-GAAP financial measures should not be considered as an alternative
to net income or any other performance measures derived in accordance with
GAAP.


28





Three
      Months Ended
                    
                    
                    Six
      Months EndedDecember
      31
                    
                    
                    December
      312009
                    
                    
                    2008
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Increase
                      (Decrease)Net
      Income (Loss) –GAAP
                    
                    $
                    7,945,081
                    
                    
                    $
                    2,645,002
                    
                    
                    $
                    5,300,079
                    
                    
                    $
                    3,422,144
                    
                    
                    $
                    4,103,841
                    
                    
                    $
                    (681,697
                    )Substract:Dividends
      and accretion on redeemable convertible preferred stock
                    
                    $
                    318,835
                    
                    
                    $
                    309,036
                    
                    
                    $
                    9,799
                    
                    
                    $
                    659,699
                    
                    
                    $
                    618,132
                    
                    
                    $
                    41,567Net
      Income available to Common shareholders -GAAP
                    
                    $
                    7,626,246
                    
                    
                    $
                    2,335,966
                    
                    
                    $
                    5,290,280
                    
                    
                    $
                    2,762,445
                    
                    
                    $
                    3,485,709
                    
                    
                    $
                    (723,264
                    )Add
      Back (Substract):Change
      in fair value of warrants
                    
                    $
                    (3,356,796
                    )(a)
                    
                    $
                    -
                    
                    
                    $
                    (3,356,796
                    )
                    
                    $
                    3,916,645
                    (a)
                    
                    $
                    -
                    
                    
                    $
                    3,916,645Adjusted
      Net Income available to Common shareholders -non-GAAP
                    
                    $
                    4,269,450
                    
                    
                    $
                    2,335,966
                    
                    
                    $
                    1,933,484
                    
                    
                    $
                    6,679,090
                    
                    
                    $
                    3,485,709
                    
                    
                    $
                    3,193,381Basic
      earning per share - GAAP
                    
                    $
                    0.62
                    
                    
                    $
                    0.22
                    
                    
                    $
                    0.40
                    
                    
                    $
                    0.24
                    
                    
                    $
                    0.33
                    
                    
                    $
                    (0.09
                    )Add
      back (Substract):Change
      in fair value of warrant
                    
                    $
                    (0.27
                    )
                    
                    $
                    -
                    
                    
                    $
                    (0.27
                    )
                    
                    $
                    0.34
                    
                    
                    $
                    -
                    
                    
                    $
                    0.34Adjusted
      basic earning per share non-GAAP
                    
                    $
                    0.35
                    
                    
                    $
                    0.22
                    
                    
                    $
                    0.13
                    
                    
                    $
                    0.58
                    
                    
                    $
                    0.33
                    
                    
                    $
                    0.25Diluted
      earning per share-GAAP
                    
                    $
                    0.50
                    
                    
                    $
                    0.19
                    
                    
                    $
                    0.31
                    
                    
                    $
                    0.22
                    
                    
                    $
                    0.29
                    
                    
                    $
                    (0.07
                    )Add
      back (Substract):Change
      in fair value of warrant
                    
                    $
                    (0.21
                    )
                    
                    $
                    -
                    
                    
                    $
                    (0.21
                    )
                    
                    $
                    0.25
                    
                    
                    $
                    -
                    
                    
                    $
                    0.25Adjusted
      diluted earning per share non-GAAP
                    
                    $
                    0.29
                    
                    
                    $
                    0.19
                    
                    
                    $
                    0.10
                    
                    
                    $
                    0.47
                    
                    
                    $
                    0.29
                    
                    
                    $
                    0.18Weighted
      average number of shares - GAAPBasic
                    
                    
                    12,377,182
                    
                    
                    
                    10,525,000
                    
                    
                    
                    -
                    
                    
                    
                    11,681,294
                    
                    
                    
                    10,525,000
                    
                    
                    
                    -Diluted
                    
                    
                    15,955,516
                    
                    
                    
                    14,220,410
                    
                    
                    
                    -
                    
                    
                    
                    15,624,782
                    
                    
                    
                    14,220,410
                    
                    
                    
                    -Weighted
      average number of shares - non GAAPBasic
                    
                    
                    12,377,182
                    
                    
                    
                    10,525,000
                    
                    
                    
                    -
                    
                    
                    
                    11,681,294
                    
                    
                    
                    10,525,000
                    
                    
                    
                    -Diluted
                    
                    
                    15,955,516
                    
                    
                    
                    14,220,410
                    
                    
                    
                    -
                    
                    
                    
                    15,624,782
                    
                    
                    
                    14,220,410
                    
                    
                    
                    -





(a)
The Company adopted the provisions of a FASB accounting standard, ASC
815 (EITF 07-05), which provides standards with respect to determining
whether an instrument (or embedded feature) is indexed to an entity’s own stock.
As a result of adopting this accounting standard, warrants previously treated as
equity pursuant to the derivative treatment exemption are no longer afforded
equity treatment because the warrants have a downward ratchet provision on the
exercise price. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired. Effective July 1, 2009, the Company
reclassified the fair value of these warrants from equity to liability, as if
these warrants were treated as a derivative liability since their issuance in
June 2008.  The Company recognized a $3,916,645 loss from the change
in fair value for the six months ended December 31, 2009 and a $3,356,796
income from the change in fair value for the three months ended December
31, 2009.


29





Overview





China
Advanced Construction Materials Group, Inc. (“China ACM”) is a holding company
whose primary business operations are conducted through our wholly-owned
subsidiaries BVI-ACM and China-ACMH. BVI-ACM engages in the production of
advanced construction materials for large scale commercial, residential, and
infrastructure developments. The Company is primarily focused on producing
and supplying a wide range of advanced ready-mix concrete materials for highly
technical, large scale, and environmentally-friendly construction projects.
BVI-ACM owns 100% of the issued and outstanding capital stock of China-ACMH, a
company incorporated under the laws of China. On November 28, 2007, China-ACMH
entered into a series of contractual agreements with Beijing Xin Ao Concrete Co.
Ltd. (“Xin Ao”), a company incorporated under the laws of China, and its two
shareholders pursuant to which China-ACMH effectively takes over management of
the business activities of Xin Ao and has the right to appoint all executives
and senior management and the members of the board of directors of Xin Ao. The
contractual arrangements are comprised of a series of agreements, including an
Exclusive Technical Consulting and Services Agreement and an Operating
Agreement, through which China-ACMH has the right to advise, consult, manage and
operate Xin Ao for an annual fee in the amount of Xin Ao’s yearly net profits
after tax. In addition, Xin Ao’s Shareholders have pledged their rights, titles
and equity interest in Xin Ao as security for China-ACMH to collect technical
consulting and services fees provided to China-ACMH through an Equity Pledge
Agreement. In order to further reinforce China-ACMH’s rights to control and
operate Xin Ao, Xin Ao’s shareholders have granted China-ACMH the exclusive
right and option to acquire all of their equity interests in Xin Ao through an
Option Agreement. As all of the companies are under common control, this has
been accounted for as a reorganization of entities and the financial statements
have been prepared as if the reorganization had occurred retroactively. The
Company has consolidated Xin Ao’s operating results, assets and liabilities
within its financial statements.





BVI-ACM,
through China-ACMH, operates and controls Xin Ao through the contractual
arrangements mentioned above. BVI-ACM used the contractual arrangements to
acquire control of Xin Ao, instead of using a complete acquisition of Xin Ao’s
assets or equity to make Xin Ao a wholly-owned subsidiary of BVI-ACM because (i)
new PRC laws governing share exchanges with foreign entities, which became
effective on September 8, 2006, make the consequences of such acquisitions
uncertain and (ii) other than by share exchange transactions, PRC law requires
Xin Ao to be acquired for cash and BVI-ACM was not able to raise sufficient
funds to pay the full appraised value for Xin Ao’s assets or shares as required
under PRC law.





During
the six months ended December 31, 2009, we, together with our subsidiaries,
supported materials, services and our high speed railway projects through our
network of eight ready-mixed concrete plants throughout Beijing and thirteen
portable concrete plants located in various provinces throughout China. We own
one concrete plant and its related equipment, and we lease four additional
plants.  In addition, we have technical and preferred procurement
agreements with three independently owned concrete mixture stations, pursuant to
which we are paid by percentages of cost savings for technical support provided
to clients and of sales price for projects we refer to other stations due to the
geographical location of our owned and leased plants. Our manufacturing
services are used primarily for our national high speed railway projects; almost
all of our general contract contractors on the high speed railway projects
supply the needed raw materials, which results in higher gross margins for us
and reduces our upfront capital investments needed to purchase raw
materials.  We also produce ready-mix concrete at portable plants,
which can be dismantled and moved to new sites for new projects. Our management
believes that we have the ability to capture a greater share of the Beijing
market and further expand our footprint in China via expanding relationships and
networking, signing new contracts, and continually developing market-leading
innovative and eco-friendly ready-mix concrete products.  Based on
reports from the National Development and Reform Commission, or NDRC, we
anticipate that our market share will further expand due to the announced $586
billion infrastructure stimulus packages by the Chinese government in 2008,
which will focus primary on transportation related projects such as railway,
highway, and transportation related infrastructure.





Principal
Factors Affecting Our Financial Performance





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





Large Scale Contractor
Relationships. We have contracts with major construction contractors
which are constructing key infrastructure, commercial and residential projects.
Our sales efforts focus on large-scale projects and large customers which place
large recurring orders and present less credit risks to us. For the three months
and six months ended December 31, 2009, the Company does not have customer over
10% of sales. For the three months ended December 31, 2008, two customers
accounted for approximately 24.7% of the Company’s sales and 25.6% of the
Company’s account receivables as of December 31, 2008. For the six months ended
December 31, 2008, three customers accounted for approximately 21% of the
Company’s sales and 39% of the Company’s account receivable as of December 31,
2008.





Experienced Management.
Management’s technical knowledge and business relationships gives us the ability
to secure major infrastructure projects, which provides us with leverage to
acquire less sophisticated operators, increase production volumes, and implement
quality standards and environmentally sensitive policies.





Innovation Efforts. We strive
to produce the most technically and scientifically advanced products for our
customers and maintain close relationships with Tsinghua University, Xi’an
University of Architecture and Technology and Beijing Dongfangjianyu
Institute of Concrete Science & Technology which assist us with our
research and development activities. During our 5 year agreement with the
parties, we have realized an advantage over many of our competitors by gaining
access to a wide array of resources and knowledge.  At present, no
payments have been made by us under the agreement.


30





PRC
Taxation





Our
subsidiary, China-ACMH and its VIE, Xin Ao are governed by the Income Tax Law of
the People’s Republic of China concerning Foreign Investment Enterprises, or
FIEs, and Foreign Enterprises and various local income tax laws (the Income Tax
Laws).





Xin Ao
has been using recycled raw materials in its production since its inception
which entitled us to an income tax exemption from January 1, 2003 through
December 31, 2007 and an income tax reduction from 25% to 15% from January 1,
2009 through December 31, 2011 as granted by the State Administration of
Taxation, PRC. The renewal certificate was awarded based on the company's
involvement in producing high-tech products, its research and development, as
well as its technical services.





On March
16, 2007, the National People’s Congress of the PRC passed the new enterprise
income tax law, or EIT Law, which took effect as of January 1, 2008. Under the
new EIT Law, an enterprise established outside of the PRC with “de facto
management bodies” within the PRC is considered a resident enterprise and will
normally be subject to the enterprise income tax at the rate of 25% on its
global income. The new EIT Law, however, does not define the term “de facto
management bodies.” If the PRC tax authorities subsequently determine that we
should be classified as a resident enterprise, then our global income will be
subject to PRC income tax at a tax rate of 25.0%. In addition, under the new EIT
Law, dividends from our PRC subsidiaries to us will be subject to
a withholding tax. The rate of the withholding tax has not yet been
finalized, pending promulgation of implementing regulations. Furthermore, the
ultimate tax rate will be determined by treaty between the PRC and the tax
residence of the holder of the PRC subsidiary. The new EIT Law imposes a unified
income tax rate of 25% on all domestic-invested enterprises and FIEs, such as
our PRC operating subsidiaries, unless they qualify under certain limited
exceptions, but the EIT Law permits companies to continue to enjoy their
existing preferential tax treatments until such treatments expire in accordance
with their current terms. Because the Company’s operating subsidiary, Xin Ao’s
use of recycled raw materials in its production since its inception entitled the
Company to an income tax exemption from January 1, 2003, through to December 31,
2007 and an income tax reduction from 25% to 15% from January 1, 2009 to
December 31, 2011 as granted by the State Administration of Taxation of the PRC.
The income tax exemption granted to the Company was eliminated after December
31, 2007.  Beginning January 1, 2008, the new Chinese EIT law replaced
the existing laws for Domestic Enterprises, or DES, and FIEs. Effective January
1, 2009, the China-ACM new reduced EIT rate of 15% replaced the existing rates
of 25% currently applicable to both DES and FIEs.





Derivative
Liability





Effective
July 1, 2009, the Company became subject to a FASB accounting standard, ASC 815
  (EITF 07-05), which determines whether an instrument (or embedded
feature) is indexed to an entity’s own stock.  This accounting
standard specifies that a contract which would otherwise meet the definition of
a derivative but is both (a) indexed to the Company’s own stock and (b)
classified as stockholders’ equity in the statement of financial position would
not be considered a derivative financial instrument.  This accounting
standard provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the scope exception.





As such,
warrants previously treated as equity pursuant to the derivative treatment
exemption are no longer afforded equity treatment because the warrants have a
downward ratchet provision on the exercise price. As a result, the warrants are
not considered indexed to the Company’s own stock, and, as such, all future
changes in the fair value of these warrants will be recognized as earnings until
such time as the warrants are exercised or expire.





The
conversion option does not need to be separated from the redeemable convertible
preferred stock and accounted for as derivative liability because it contains a
residual equity interest, which on dissolution and liquidation of the Company,
entitle the preferred stockholders to liquidation value and accumulated
dividends, and rank equal with the common shareholders on an as if converted
basis.  A FASB accounting standard provides that if the instrument has
a residual equity interest, it “should” be considered to be an equity instrument
and if the preferred stock is considered to be an equity instrument, then the
embedded conversion option would not be separated because its risks and rewards
are clearly and closely related to that of redeemable convertible preferred
stock.





Results
of Operations





Comparison
of the three months Ended December 31, 2009 and 2008





The
following table sets forth key components of our results of operations for the
three months ended December 31, 2009 and 2008, in US dollars:


31





Three
      Months EndedDecember
      31,2009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  Increase
                    (decrease)
                  
                  
                  Percentage
                    Increase
                    (decrease)Total
      revenue
                  
                  $
                  26,164,312
                  
                  
                  $
                  10,828,201
                  
                  
                  $
                  15,336,111
                  
                  
                  
                  141.6
                  %Total
      cost of revenue
                  
                  
                  20,929,686
                  
                  
                  
                  6,872,393
                  
                  
                  
                  14,057,293
                  
                  
                  
                  204.5
                  %Gross
      profit
                  
                  
                  5,234,626
                  
                  
                  
                  3,955,808
                  
                  
                  
                  1,278,818
                  
                  
                  
                  32.3
                  %Selling,
      general and administrative (expenses) Credit
                  
                  
                  (1,157,250
                  )
                  
                  
                  (612,371
                  )
                  
                  
                  (544,879
                  )
                  
                  
                  89.0
                  %Other
      (expense) income, net
                  
                  
                  4,679,518
                  
                  
                  
                  301,968
                  
                  
                  
                  4,377,550
                  
                  
                  
                  1449.7
                  %Income
      (Loss) before provision for income taxes
                  
                  
                  8,756,894
                  
                  
                  
                  3,645,405
                  
                  
                  
                  5,111,489
                  
                  
                  
                  140.2
                  %Income
      taxes (expense) credit
                  
                  
                  (811,813
                  )
                  
                  
                  (1,000,403
                  )
                  
                  
                  188,590
                  
                  
                  
                  (18.9
                  )%Net
      income (Loss)
                  
                  
                  7,945,081
                  
                  
                  
                  2,645,002
                  
                  
                  
                  5,300,079
                  
                  
                  
                  200.4
                  %Dividends
      and accretion on redeemable preferred
                  
                  
                  318,835
                  
                  
                  
                  309,036
                  
                  
                  
                  9,799
                  
                  
                  
                  3.2
                  %Net
      income (Loss) available to Common shareholders
                  
                  $
                  7,626,246
                  
                  
                  $
                  2,335,966
                  
                  
                  $
                  5,290,280
                  
                  
                  
                  226.5
                  %





Revenue.
Our revenue is generated from sales of our advanced ready-mix concrete products,
manufacturing services, technical consulting services, mixer rental, marketing
cooperation, and sales of raw material. For the three months ended December 31,
2009, we generated revenue of $26,164,312 compared to $10,828,201 during the
same period of 2008, an increase of $15,336,111 or 141.6%. We increased our
production volumes in and outside of Beijing in the second quarter this fiscal
year compared to the same period last year.  As a result, our concrete
sales revenue increased by $12,346,624, despite a decrease in unit sale price,
compared to the same period last year. During the quarter ended December 31,
2009, we continued to supply concrete products to thirteen railway projects
throughout China through our portable plants, specifically the projects located
in Jiangsu Province, Hebei Province, Guangxi Province, Zhejiang Province,
Guangdong Province, Henan Province, Liaoning Province, and Beijing. These
thirteen projects contributed $3,663,114 to our total revenue for the quarter
ended December 31, 2009, compared to $2,070,996 in revenue from three projects
we worked on during the same quarter in 2008. The increase in revenues
attributable to our manufacture services was principally due to additional
portable plants we began operating during the fiscal quarter compared to the
same quarter in 2008. For these railway projects, the general contractors
generally supplied their own raw materials while we provided manufacturing and
transportation services. In addition, revenue generated through our technical
consulting services was $1,234,760 during the three months ended December 31,
2009, an increase of $811,430 or 191.7% compared to the same fiscal quarter in
2008. During the three month period ended December 31, 2009, we also rented our
mixer trucks to mixture stations which generated mixer rental revenues of
$416,770, an increase of $77,003 or 22.7%, generated marketing cooperation
revenue of $247,796 and sold raw materials for $285,370 to an independent third
party. We did not engage in the selling of raw materials during the same fiscal
quarter last year. We anticipate our overall sales revenue will continue to grow
due to the Chinese government’s announcement of a 4 trillion Yuan (USD$586
billion) stimulus package in November 2008 as well as the Chinese government’s
railroad project plans, which are expected to cost a total of $730 billion
through 2020. We anticipate that we will be a direct beneficiary of
transportation and infrastructure build-out from China’s stimulus package. In
addition, we plan to continue expanding our business into new geographical
markets by leveraging our strong relationships with major contractors throughout
China.





Cost of
Sales. Cost of
Sales, which consists of direct labor, rentals, depreciation, other overhead and
raw materials, including inbound freight charges, was $20,929,686 for the
quarter ended December 31, 2009, as compared to $6,872,393 for the quarter ended
December 31, 2008, an increase of $14,057,293, or 204.5%.  The increase of
cost of revenue was due to overall increase in production from our five fixed
concrete plants in the Beijing area and increased production on manufacturing
and technical services as well as other services compared to the same period in
2008. The increase in cost of sales was also due to increases in crude oil
prices which increased the costs of raw materials and transportation during this
quarter compared to the same quarter last year. The cost of sales on concrete
increased $12,459,399 this fiscal quarter compared to the same quarter last
year.  Such increase was due to an increase in our concrete production
as a result of additional plants we added during this fiscal quarter, as well as
the increase in crude oil prices as indicated above as compared to the same
period last year. Cost of sales with respect to our manufacturing services
increased $1,267,766 during the fiscal quarter ended December 31, 2009, as
compared to the same quarter last year.  Such increase was due to the
increase in total operational capacity and a decrease in the utilization
rate for the two new portable plants we added to our operations, as well as an
increase in transportation costs. Our production and utilization rate started
picking up during the quarter as the celebration of National Day of PRC came to
an end in the beginning of October. However, we are uncertain whether the crude
oil prices will maintain at the current level in the near future.





Gross
Profit. Our gross profit is equal to the difference between our revenue
and cost of sales. Gross profit was $5,234,626 for the fiscal quarter ended
December 31, 2009, as compared to $3,955,808 for the quarter ended December 31,
2008. Our gross profit for sales of concrete was $1,863,206, or 9.2%, for the
quarter ended December 31, 2009, compared to $1,975,981, or 24.8%, for the same
period last year, a decrease of $112,775. The decrease in gross margin with
respect to sales of concrete was primarily due to the increase in costs of raw
materials and transportation as a result of the increase in the price of crude
oil, as well as the low utilization rate from newly leased plants and traffic
restrictions during the National Day of the PRC. Our gross margin with
respect to our sales of concrete improved during the quarter compared to the
prior quarter of this fiscal year as our traditional concrete production
continues to increase and our utilization rate improves, which favorably impacts
our gross margins.  Our gross profit with respect to our manufacturing
services was $1,599,468, or 43.7%, for the quarter ended December 31, 2009, an
increase of $324,352 from the same period in 2008. Such increase was principally
due to increased production resulting from the addition of portable plants,
which was offset by an increase of fixed costs incurred as a result of the
addition of such portable plants before they commenced production as well as the
increase in costs of transportation this quarter compared to the same period
last year.  Our gross margin with respect to technical services was
$1,153,244, or 93.4%, for the quarter ended December 31, 2009, compared to
$393,549, or 93%, for the same quarter last year, an increase of
$759,695.  Our gross margins with respect to mixer rentals, marketing
cooperation and sales of materials were $371,646, $200,735, and $46,327,
respectively; and their margin rates were 89.2%, 81.0%, and 16.2%, respectively
during the quarter ended December 31, 2009.  We plan to continue
expanding our manufacturing and technical services, which produce the highest
gross profits among our revenue sectors.


32





Selling, General
and Administrative Expenses. Selling, general and administrative expenses
consist of sales commissions, advertising and marketing costs, office rent and
expenses, costs associated with staff and support personnel who manage our
business activities, and professional and legal fees paid to third parties. We
incurred selling, general and administrative expenses of $1,157,250 for the
quarter ended December 31, 2009, an increase of $544,879, or 89.0%, as compared
to $612,371 for the quarter ended December 31, 2008. The increase was
principally due to an increase in salary and benefit expenses, and professional
and consulting expenses resulting from our overall production expansion during
the quarter, offset by bad debt allowance adjustments compared to the same
quarter last year.





Other Income
(Expense), net. Our other income (expense) consists of valued added tax
exemption from the PRC government, interest income (expense), change in fair
value of warrants, and other non-operating income (expense). We incurred net
other income of $4,679,518 for the quarter ended December 31, 2009, as compared
to net other income of $301,968 for the quarter ended December 31, 2008, an
increase of $4,377,550. The increase in net other income was primarily due to a
decrease in other non-operating expenses and a non-cash gain due to changes
in the fair value of our outstanding warrant of $3,356,796, which was a
result of the adoption of the accounting standard aforementioned in July 1,
2009, which requires us to record financial instruments such as warrants as
derivative liabilities and a non-cash charge to income statement at fair market
value (See Note 2, under Financial Instruments). We also experienced an increase
in other subsidy income of $721,088 during the three months ended December 31,
2009, as compared to the same period of 2008.Due to the fact that we
use recycled raw materials to manufacture our products, the State Administration
of Taxation granted us VAT tax exemption from August 2005 to August 2009, and
thereafter a two year extension on the VAT tax exemption from August 2009 to
August 2011. The VAT tax collected during the aforementioned period from our
customers is retained by the Company and recorded as other subsidy income. In
addition, we had no interest expenses for the quarter ended December 31, 2009,
as compared to $217,570 for the quarter ended December 31, 2008, a decrease of
$217,570.





Provision for
Income Taxes. Provision for income taxes amounted to $811,813 and
$1,000,403 for the quarters ended December 31, 2009 and 2008, respectively. We
have used recycled raw materials in our concrete production since our inception,
which entitled us to an income tax exemption from January 1, 2003 through
December 31, 2007, and an income tax rate reduction from January 1, 2009 to
December 31, 2011, as granted by the State Administration of Taxation, PRC. From
January 1, 2008 through December 31, 2008, we were subject to a 25% income tax
rate. Since January 1, 2009, we have been subject to a 15% income tax
rate.  Accordingly, our total income taxes incurred for the fiscal
quarter ended December 31, 2009 comprised of a 15% income tax rate compared to a
25% income tax rate for the same quarter last year. The new tax rate was granted
to the Company in June 2009, and the provision for income taxes provision was
retro-actively applied to the beginning of the calendar year 2009 in the fourth
quarter ended June 30, 2009. In the past, XinAo has paid the corporate income
tax on behalf of China-ACMH, and there could be a potential liability for
additional taxes for China-ACMH, though at present the Company is unable to
determine the extent of any such liability, if any.





Net (Loss)
Income. We
recognized net income of $7,945,081 for the quarter ended December 31, 2009, as
compared to net income of $2,645,002 for the same quarter in 2008, an increase
of $5,300,079. Such increase in net income was attributable to an increase in
our plant production in the Beijing area, higher gross profits on our thirteen
railway projects, technical services, and rental income from mixing trucks, all
of which was offset by an increase in selling, general, and administrative
expense as well as a non-cash gain of $3,356,796 related to changes in the fair
value of our outstanding warrant. As discussed above, we adopted an accounting
standard in July 1, 2009, and the warrants issued in connection with our June
11, 2008 private placement were re-classed from equity to derivative warrant
liabilities and marked to fair market value.  Our management believes
that our profits should increase during the next 12 months as we continue to
expand into service sectors that generate higher gross margins and because we
are a direct beneficiary of Chinese government’s stimulus package on
infrastructure projects. We also plan to lease or build new plants in order to
increase our accessibility to construction sites located in Beijing, expand into
other geographical areas, as well as vertically integrate our operations across
the supply chain, which we believe will lower our costs and provide greater
profitability.





Excluding
the affect from non-cash gain related to changes in fair market of warrants, our
net income would be $4,588,285 for the three months ended December 31, 2009, as
compared to net income of $2,645,002 for the same period in 2008, during which
we did not incur the same non-cash gain.  See the section “Use of
Non-GAAP Financial Measures” above for a discussion regarding the presentation
of net income excluding non-cash gain (loss).





Dividends and
accretion on redeemable preferred stock.  The increase in
dividends and accretion on redeemable convertible preferred stock of $9,799,
compared to the quarter ended December 31, 2008, was due to our redeemable
preferred stock offering in June 2008.  It included preferred dividend
expense of $110,843 and $158,795 for the quarter ended December 31, 2009 and
2008, respectively; and accretion of a discount on the preferred stock of
$207,992 and $150,241 for the quarter ended December 31, 2009 and 2008,
respectively.


33





Comparison
of the six months Ended December 31, 2009 and 2008





The
following table sets forth key components of our results of operations for the
six months ended December 31, 2009 and 2008, in US dollars:





Six
      Months EndedDecember
      31,2009
                                            
                                            
                                            2008(Unaudited)
                                            
                                            
                                            (Unaudited)
                                            
                                            
                                            Increase
                                              (decrease)
                                            
                                            
                                            Percentage
                                              Increase
                                              (decrease)Total
      revenue
                                            
                                            $
                                            45,645,448
                                            
                                            
                                            $
                                            15,964,947
                                            
                                            
                                            $
                                            29,680,501
                                            
                                            
                                            
                                            185.9
                                            %Total
      cost of revenue
                                            
                                            
                                            37,123,786
                                            
                                            
                                            
                                            9,320,725
                                            
                                            
                                            
                                            27,803,061
                                            
                                            
                                            
                                            298.3
                                            %Gross
      profit
                                            
                                            
                                            8,521,662
                                            
                                            
                                            
                                            6,644,222
                                            
                                            
                                            
                                            1,877,440
                                            
                                            
                                            
                                            28.3
                                            %Selling,
      general and administrative (expenses) Credit
                                            
                                            
                                            (2,052,281
                                            )
                                            
                                            
                                            (1,269,480
                                            )
                                            
                                            
                                            (782,801
                                            )
                                            
                                            
                                            61.7
                                            %Other
      (expense) income, net
                                            
                                            
                                            (1,698,610
                                            )
                                            
                                            
                                            304,329
                                            
                                            
                                            
                                            (2,002,939
                                            )
                                            
                                            
                                            (658.1
                                            )%Income
      (Loss) before provision for income taxes
                                            
                                            
                                            4,770,771
                                            
                                            
                                            
                                            5,679,071
                                            
                                            
                                            
                                            (908,300
                                            )
                                            
                                            
                                            (16.0
                                            )%Income
      taxes (expense) credit
                                            
                                            
                                            (1,348,627
                                            )
                                            
                                            
                                            (1,575,230
                                            )
                                            
                                            
                                            226,603
                                            
                                            
                                            
                                            (14.4
                                            )%Net
      income (Loss)
                                            
                                            
                                            3,422,144
                                            
                                            
                                            
                                            4,103,841
                                            
                                            
                                            
                                            (681,697
                                            )
                                            
                                            
                                            (16.6
                                            )%Dividends
      and accretion on redeemable preferred
                                            
                                            
                                            659,699
                                            
                                            
                                            
                                            618,132
                                            
                                            
                                            
                                            41,567
                                            
                                            
                                            
                                            6.7
                                            %Net
      income (Loss) available to Common shareholders
                                            
                                            $
                                            2,762,445
                                            
                                            
                                            $
                                            3,485,709
                                            
                                            
                                            $
                                            (723,264
                                            )
                                            
                                            
                                            (20.7
                                            )%





Revenue.
Our revenue is generated from sales of our advanced ready-mix concrete products,
manufacturing services, technical consulting services, mixer rental, marketing
cooperation, and sales of raw material. For the six months ended December 31,
2009, we generated revenue of $45,645,448 compared to $15,964,947 during the
same period of 2008, an increase of $29,680,501, or 185.9%. We increased our
production volumes by adding five additional fixed concrete plants in the
Beijing area during this fiscal year compared to the same period last
year.  As a result, our revenue from sales of concrete increased by
$25,365,694, despite a decrease in unit sale price, compared to the same period
last year. During the six months ended in December 31, 2009, we continued to
supply concrete products to thirteen railway projects throughout China through
our portable plants, specifically the projects located in Jiangsu Province,
Hebei Province, Guangxi Province, Zhejiang Province, Guangdong Province, Henan
Province, Liaoning Province, and Beijing. These thirteen projects contributed
$6,468,728 to our total revenue for the six months ended December 31, 2009,
compared to $3,996,539 in revenue from the three projects we worked on during
the same period in 2008. The revenue increase with respect to our manufacturing
services was principally due to the addition of four portable plants during this
fiscal year as compared to the same period last year. For our railway projects,
the general contractors generally supplied their own raw materials while we
provided manufacturing and transportation services. In addition, revenues
generated from our technical consulting services was $2,479,655 during the six
months ended in December 31, 2009, an increase of $1,439,528, or 138.4%,
compared to the same period in 2008. During the six month period ended December
31, 2009, we also generated $247,796 in revenue from marketing cooperation, an
increase of $153,661, or 163.2%, rented our mixer trucks to mixture stations
which generated mixer rental revenues of $960,640, a decrease of $35,941, or
3.6%, and sold raw materials for $285,370 to an independent third party which we
did not have such activities for the same period last year. We anticipate our
overall sales revenue will continue to grow due to the Chinese government’s
announcement of a 4 trillion Yuan (USD$586 billion) stimulus package in November
2008 as well as the Chinese government’s railroad project plans which are
expected to cost a total of $730 billion through 2020. We anticipate that we
will be a direct beneficiary of transportation and infrastructure build-out from
China’s stimulus package. In addition, we plan to continue expanding our
business into new geographical markets by leveraging our strong relationships
with major contractors throughout China.


34


Cost of
Sales. Cost of
Sales, which consists of direct labor, rentals, depreciation, other overhead and
raw materials, including inbound freight charges, was $37,123,786 for the six
months ended December 31, 2009, as compared to $9,320,725 for the six months
ended December 31, 2008, an increase of  $27,803,061, or
298.3%.  During the fiscal quarter prior to the celebration of
National Day of the People's Republic of China in Beijing, our primary area of
operation, all construction surrounding the city was halted and delayed due to
severe restrictions on traffic controls. The increase on our cost of revenue was
due to overall increase in production from five fixed concrete plants in the
Beijing area, and increased production due to our manufacturing and technical
services, as well as other services compared to the same period in 2008. The
increase in our cost of sales was also due to increases in crude oil prices,
which increased the costs of raw materials and transportation during the six
months ended in December 31, 2009. The cost of sales with respect to concrete
sales increased $27,803,061 during the first six months of this fiscal year as
compared to the same period last year.  Such increase was due to an
increase in our concrete production in the Beijing area as a result of the
addition of five new plants during the first six months of this fiscal year, as
well as the increase in crude oil prices as indicated above. Although our
production volume increased during the six months ended December 31, 2009, our
overall plant utilization rate was down, primarily due to severe traffic and
construction restrictions in Beijing in anticipation of the National Day of the
PRC and the increase in the price of crude oil. Cost of sales with respect to
our manufacturing service increased $2,527,725 during the six months ended
December 31, 2009, as compared to the same period last year.  Such
increase was due to an increase in total operational capacity and a
decrease in utilization rate for our new portable plants, as well as an increase
in transportation costs.





Gross
Profit. Our gross profit is equal to the difference between our revenue
and cost of sales. Gross profit was $8,521,662 for the six months ended December
31, 2009, as compared to $6,644,222 for the six months ended December 31, 2008.
The gross profit for sale of concrete was $2,413,247, or 6.9%, for the six
months ended December 31, 2009, compared to $2,283,361, or 23.2%, for the same
period last year, an increase of $129,886. The decrease in gross margin
percentage with respect to our sales of concrete this fiscal quarter compared to
the same period last year was primarily due to the increase in costs of raw
materials and transportation as a result of the increase in the price of crude
oil, as well as the low utilization rate from our newly leased plants and
traffic restrictions due to the National Day of the PRC as discussed
above.  Gross profit with respect to our manufacturing services was
$2,647,915, or 40.9%, for the fiscal year ended December 31, 2009, a decrease of
$55,536. Such decrease was principally due to fixed costs incurred on our new
portable plants before they commenced production during the period, as well as
the increase in costs of transportation.  Gross margin with respect to
our technical services was $2,343,656, or 94.5%, for the six months ended
December 31, 2009, compared to $942,444, or 90.6%, for the same period last
year, an increase of $1,401,212.  Gross margins with respect to our
mixer rentals, marketing cooperation and sales of materials were 90.5%, 81.0%,
and 16.2% respectively during the six months ended December 31,
2009.  We plan to continue expanding our manufacturing and technical
services, which produce the highest gross profits among our revenue
sectors.





Selling, General
and Administrative Expenses. Selling, general and administrative expenses
consist of sales commissions, advertising and marketing costs, office rent and
expenses, costs associated with staff and support personnel who manage our
business activities, and professional and legal fees paid to third parties. We
incurred selling, general and administrative expenses of $2,052,281 for the six
months ended December 31, 2009, an increase of $782,801, or 61.7%, as compared
to $1,269,480 for the six months ended December 31, 2008. The increase was
principally due to an increase in salary and benefit expenses, lease expenses,
and professional and consulting expenses resulting from our overall production
expansion this quarter, offset by bad debt allowance adjustments compared to the
same period last year.





Other Income
(Expense), net. Our other income (expenses) consists of a valued added
tax exemption from the PRC government, interest income (expense), changes in
fair value of warrants, and other non-operating income (expense). We incurred
net other expenses of $1,698,610 for the six months ended December 31, 2009, as
compared to net other income of $304,329 for the six months ended December 31,
2008, a decrease of $2,002,939. The decrease in net other income was primarily
due to a non-cash loss due to changes in the fair value of our outstanding
warrants of $3,916,645, which was a result of the adoption of the aforementioned
accounting standard in July 1, 2009, which requires us to record financial
instruments such as warrants as derivative liabilities and a non-cash charge to
income statement at fair market value (See Note 2, Financial Instruments). We
also experienced an increase in other subsidy income of $1,420,266 during the
six months ended December 31, 2009, as compared to the same period of 2008. In
addition, we had interest expenses of $23,753 for the six months ended December
31, 2009, as compared to $446,344 for the six months ended December 31, 2008, a
decrease of $422,591. The decrease of interest expense was primarily due to the
repayment of a short-term loan in July 2009.





Provision for
Income Taxes. Provision for income taxes amounted to $1,348,627 and
$1,575,230 for the six months ended December 31, 2009 and 2008, respectively. We
have used recycled raw materials in our concrete production since our inception,
which entitled us to an income tax exemption from January 1, 2003 through
December 31, 2007 and an income tax rate reduction from January 1, 2009 to
December 31, 2011 as granted by the State Administration of Taxation, PRC. From
January 1, 2008 through December 31, 2008, we were subject to a 25% income tax
rate.  Since and as of January 1, 2009, we have been subject to a 15%
income tax rate.  Accordingly, our total income taxes incurred during
the fiscal quarter ended December 31, 2009, comprised of a 15% income tax rate
compared to a 25% income tax rate for the same quarter last year. The new tax
rate was granted to the Company in June 2009 and the provision for income taxes
provision was retro-actively applied to the beginning of calendar year 2009
during the fourth quarter ended June 30, 2009. We paid $1,682,537 in corporate
income taxes during the six months ended December 31, 2009.  In the
past, XinAo has paid the corporate income tax on behalf of China-ACMH, and there
could be a potential liability for additional taxes for China-ACMH, though at
present the Company is unable to determine the extent of any such liability, if
any




35




Net (Loss)
Income. We
recognized net income of $3,422,144 for the six months ended December 31, 2009,
as compared to net income of $4,103,841 for the same period in 2008, a decrease
of $681,697. Such decrease in net income was attributable to an increase in
subsidy income, a decrease in interest expense, an increase in our plant
production in the Beijing area, higher gross profits on our thirteen railway
projects, technical services, marketing cooperation, sales of raw material and
rental income from mixing trucks, all of which was offset by an increase in
selling, general, and administrative expenses as well as a non-cash loss of
$3,916,645 related to changes in the fair value of our outstanding warrants. As
discussed above, we adopted an accounting standard on July 1, 2009, and the
warrants issued in connection with our June 11, 2008 private placement were
re-classed from equity to derivative warrant liabilities and marked to fair
market value.  Our management believes that our profits should
increase during the next 12 months as we continue to expand into service sectors
that generate higher gross margins and because we are a direct beneficiary of
Chinese government’s stimulus package on infrastructure projects. We also plan
to lease or build new plants in order to increase our accessibility to
construction sites located in Beijing, expand into other geographical areas, as
well as vertically integrate our operations across the supply chain, which
should lower our costs and provide greater profitability





Excluding
the affect from the non-cash loss related to changes in the fair market value of
warrants, our net income would be $7,338,789 for the six months ended December
31, 2009, as compared to net income of $4,103,841 for the same period in 2008,
during which we did not incur the same non-cash loss.  See the section
“Use of Non-GAAP Financial Measures” above for a discussion regarding the
presentation of net income excluding non-cash expense.





Dividends and
accretion on redeemable preferred stock.  The increase in
dividends and accretion on redeemable convertible preferred stock of $41,567
compared to the six months ended December 31, 2008, was due to our redeemable
preferred stock offering in June 2008.  It included preferred dividend
expense of $259,969 and $317,650 for the six months ended December 31, 2009 and
2008, respectively and accretion of discount on the preferred stock of $399,728
and $300,482 for the period ended December 31, 2009 and 2008,
respectively.





Liquidity
and Capital Resources




As of
December 31, 2009, we had cash and cash equivalents of $1,696,339, and
restricted cash of $260,863. The following table provides detailed information
about our net cash flow for financial statement periods presented in this Form
10-Q:





Summary
      of Cash Flow StatementsFor
      the Six Months Ended December 31,(Unaudited)
                        
                        
                        (Unaudited)2009
                        
                        
                        2008Net
      cash (used in) provided by operating activities
                        
                        $
                        1,055,871
                        
                        
                        $
                        1,063,412Net
      cash provided by (used in)  investing activities
                        
                        
                        (260,835
                        )
                        
                        
                        (31,666
                        )Net
      cash provided by (used in) financing activities
                        
                        
                        (2,726,172
                        )
                        
                        
                        275,412Effect
      of foreign currency translation on cash and cash
    equivalents
                        
                        
                        (7,330
                        )
                        
                        
                        7,525Net
      (decrease) increase in cash and cash equivalent
                        
                        $
                        (1,938,466
                        )
                        
                        $
                        1,314,683





Principal
demands for liquidity are for construction or acquisition of concrete mixture
stations, purchases of concrete mixers and pump trucks, working capital and
general corporate purposes.





Comparison
of the Six Months Ended December 31, 2009 and 2008





Net Cash Provided
by Operating Activities. Net cash provided by operating activities
totaled $1,055,871 for the six months ended December 31, 2009, as compared to
net cash provided in operating activities of $1,063,412 for the six months ended
December 31, 2008. The decrease in net cash provided by operating activities was
primarily due to an increase of accounts receivable and prepayment, which were
partially offset by an increase of accounts payable and payment of income tax
during the six month ended December 31, 2009. We expect our cash flow from
operating activities to improve as the construction industry in Beijing
increases its activity following the PRC National Day holiday, and we strengthen
our efforts to negotiate more favorable terms with our suppliers and
customers.




Net Cash Used In
Investing Activities.  Net cash used in investing activities was
$260,835 for the six month ended December 31, 2009, as compared to $31,666 for
the six month ended December 31, 2008. The cash was principally used to purchase
new production equipment and office equipment during the six months ended
December 31, 2009.


36





Net Cash Provided
by/used in Financing Activities. Net cash used in financing activities
totaled $2,726,172 for the six months ended December 31, 2009, as compared to
net cash provided by financing activities of $275,412 for the six months ended
December 31, 2008. The decrease in cash used by financing activities was due to
a short-term loan payoff of $4,502,287 (RMB 30 million) to Beijing International
Trust & Investment Co., offset by proceeds of our July 2009 common stock
offering and warrant exercised of $1,883,342, compared to proceeds of short term
loans of $7,354,278 and payments of short term loans of $6,749,544 in the same
quarter last year. The net proceeds from the common stock offering will be used
for purchasing plant equipment, concrete mixers and pump trucks, working capital
and general corporate purposes.





Cash.   As of December
31, 2009, we had cash of $1,696,339 as compared to $3,225,178 as of December 31,
2008. This decrease is due primarily to a decrease in accounts receivable and a
short-term loan payoff of $4,502,287 (RMB 30 million) to Beijing International
Trust & Investment Co., which was partially offset by cash received from
common stock offering and warrant exercised.





We
believe that we can meet our liquidity and capital requirements for our ongoing
operations from a variety of sources. However, we will need to raise
additional capital in order to undertake out current plans for
expansion.





Loan
Facilities





We had a
total of $146,259 and $4,512,200 outstanding on loans and credit facilities as
of December 31, 2009 and June 30, 2009, respectively. During the six months
ended December 31, 2009, we paid $4,502,287 towards our June 30, 2009
outstanding loans.





Interest
expense on short-term loans for the three months ended December 31, 2009 and
2008 amounted to $0 and $217,570, respectively. Interest expense on short-term
loans for the six months ended December 31, 2009 and 2008 amounted to $23,753
and $446,344, respectively.





Seasonality




Our
manufacturing operations are primarily located in northeastern China, which is
extremely cold during the winter months. During such time, we are able to
manufacture our advanced ready-mix concrete materials, however many construction
projects operate on an abbreviated work schedule, if at all.




Critical
Accounting Policies and Estimates




The
accompanying consolidated financial statements include the financial statements
of China ACM and its wholly owned subsidiaries, BVI-ACM, China-ACMH and its
variable interest entity Xin Ao. All significant inter-company transactions and
balances have been eliminated in consolidation. China ACM, its subsidiaries and
Xin Ao, together are referred to as the Company. In accordance with an
accounting standard regarding the consolidation of variable interest entities,
or VIEs, are generally entities that lack sufficient equity to finance their
activities without additional financial support from other parties or whose
equity holders lack adequate decision making ability. All VIEs with which the
Company is involved must be evaluated to determine the primary beneficiary of
the risks and rewards of the VIE. The primary beneficiary is required to
consolidate the VIE for financial reporting purposes. In connection with the
adoption of this accounting standard the Company concludes that Xin Ao is a
VIE and China ACM is the primary beneficiary. Under the transition rules, the
financial statements of Xin Ao are then consolidated into the Company’s
consolidated financial statements.





Our
management's discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.





While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included, we believe that the following
accounting policies are the most critical to aid you in fully understanding and
evaluating this management discussion and analysis:




Revenue
Recognition





The
Company recognizes revenue in accordance with accounting standards issued by the
FASB, which specifies that revenue is realized or realizable and earned when
four criteria are met:


37





Ÿ
            Persuasive evidence of an
      arrangement exists (the Company considers its sales contracts and
      technical service agreements to be pervasive evidence of an
      arrangement);





Ÿ
            Delivery has occurred or services
      have been rendered;





Ÿ
            The seller’s price to the buyer
      is fixed or determinable;
and





Ÿ
            Collectability of payment is
      reasonably assured.




The
Company sells its concrete products and provides concrete manufacturing services
mainly to major construction companies. Sales agreements are signed with each
customer. The agreements list all terms and conditions with the exception of
delivery date and quantity, which are evidenced separately in purchase orders.
The purchase price of products is fixed in the agreement and customers are not
permitted to renegotiate after the contracts have been signed. The agreements
include a cancellation clause if the Company breaches the contract terms
specified in the agreement. The Company does not sell products to customers on a
consignment basis. There is no right of return after the product has been
injected into the location specified by the contract and accepted by the
customer. The Company recognizes revenue when the goods are accepted by the
customer and title has passed.





Sales
revenue represents the invoiced value of goods, net of a value-added tax , or
VAT. All of the Company’s concrete products that are sold in the PRC are subject
to a Chinese value-added tax at the rate of 6% of the gross sales
price.





Due to
the fact that the Company uses recycled raw materials to manufacture its
products, the State Administration of Taxation has granted the Company VAT tax
exemption from August 2005 through to August 2011. The VAT tax collected from
the Company’s customers is kept by the Company and recorded as Other Subsidy
Income.





The
Company also provides technical consulting services to and enters strategic
cooperation including market sharing and equipment rental with other
independently owned concrete companies. The Company signs a Technical Service
Agreement or Strategic Cooperation Agreement with each client, which specifies
all terms and conditions including prices to be charged. Once concrete products
are produced by clients and supplied to builders referred by the Company or cost
savings are realized by use of technical solutions provided by the Company, the
agreements consider the Company has rendered its service. The Company recognizes
revenue and invoices client monthly for technical service and marketing
cooperation on a per-cubic-meter basis and for equipment rental on a per-mixer
truck basis.





Financial
instruments





The
accounting standards regarding fair value of financial instruments and related
fair value measurements define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement, and enhance disclosure
requirements for fair value measures.





The three
levels are defined as follows:





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





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





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





Marketable
securities, warrant liabilities, receivables and current liabilities qualify as
financial instruments. Marketable securities were determined using
Level 1, which are carried on the consolidated balance sheets at fair value,
with fair values determined by the financial institution who sold the
securities. The carrying amounts reported in the consolidated balance sheets for
receivables and current liabilities are reasonable estimates of fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rates of
interest.





As
required by a FASB accounting standard, financial assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.  The fair value of the
warrants was determined using the CRR Binomial Model, as level 2 inputs, and
recorded the change in earnings. As a result, the derivative liability is
carried on the balance sheet at its fair value.





The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of December 31, 2009 (unaudited).


38





Carrying Value at
                          December 31, 2009
                        
                        
                        Fair Value Measurement at
                          December 31, 2009(Unaudited)
                        
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Marketable
      securities
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Derivative
      liability - warrants
                        
                        $
                        5,546,523
                        
                        
                        $
                        -
                        
                        
                        $
                        5,546,523
                        
                        
                        $
                        -





Other
than the marketable securities and derivative liability - warrants carried at
fair value, the Company did not identify any other assets and liabilities that
are required to be presented on the consolidated balance sheet at fair value in
accordance with the FASB accounting standard.





Accounts
receivable





During
the normal course of business, the Company extends unsecured credit to its
customers. Management reviews its accounts receivable each reporting period to
determine if the allowance for doubtful accounts is adequate. An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
probable. The Company’s reserves are consistent with its historical experience
and considered adequate by management.





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





Chinese Income
Taxes





The
Company and its subsidiaries are governed by the income tax laws of the PRC
concerning Foreign Investment Enterprises, or FIEs, and Foreign Enterprises and
various local income tax laws, or the Income Tax Laws.





Xin Ao’s
use of recycled raw materials in its production since its inception entitled the
Company to an income tax exemption from January 1, 2003, through to December 31,
2007 and an income tax reduction from 25% to 15% from January 1, 2009 to
December 31, 2012  as granted by the State Administration of Taxation
of the PRC. The income tax exemption granted to the Company was eliminated after
December 31, 2007.  Beginning January 1, 2008, the new Chinese
Enterprise Income Tax, or EIT, law replaced the existing laws for Domestic
Enterprises, or DES, and FIEs. Effective January 1, 2009, the new reduced EIT
rate of 15% replaced the existing rates of 25% currently applicable to both DES
and FIEs.





PRC laws
require that before a FIE can legally distribute profits to its shareholders, it
must satisfy all tax liabilities, provide for losses in previous years, and make
allocations in proportions made at the discretion of the board of directors,
after the statutory reserve. The statutory reserve includes the surplus reserve
fund, the common welfare fund, and represents restricted retained
earnings.





The
Company adopted accounting policies in accordance to U.S. GAAP with regard to
provisions, reserves, inventory valuation method, and depreciation that are
consistent with requirements under Chinese income tax laws. Therefore, there
were no significant deferred tax assets or liabilities during the six months
ended December 31, 2009 and 2008.





The
Company classifies interest and penalties assessed due to underpayment of income
taxes as interest expense and other expenses, respectively. The Company incurred
no such expenses for the six months ended December 31, 2009 and
2008.





Value added
tax





Enterprises
or individuals, who sell commodities, engage in repair and maintenance, or
import and export goods in the PRC are subject to a value added tax. The
standard VAT rate is 6% of gross sales for the Company’s industry. A credit is
available whereby VAT paid on the purchases of raw materials used in the
production of the Company’s finished products can be used to offset the VAT due
on sales of finished products. Due to the fact that the Company uses recycled
raw materials to manufacture its products, the State Administration of Taxation
has granted the Company VAT exemption from August 2005 through to August 2009
and a two year tax (VAT) credit extension from August 2009 through August
2011.





Recently
Issued Accounting Pronouncements





In
January 2009, the FASB issued an accounting standard which amended the
impairment model by removing its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the “market
participant” view to a holder’s estimate of whether there has been a “probable”
adverse change in estimated cash flows allows companies to apply reasonable
judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of this accounting standard did not have a material
impact on the Company’s consolidated financial statements because all of the
investments in debt securities are classified as trading
securities.


39





In April
2009, the FASB issued authoritative guidance related to the determination of
fair value when the volume and level of activity for an asset or liability has
significantly decreased, the identification of transactions that are not
orderly, the recognition and presentation of other-than-temporary impairments,
and the disclosure of the fair value of financial instruments on an interim
basis. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements.





In April
2009, the FASB issued an accounting standard to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard provides increased disclosure
about the credit and noncredit components of impaired debt securities that are
not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This standard became effective
for interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial statements.





In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.





In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the
rationale for why that date was selected. The standard is effective for
interim and annual periods ending after June 15, 2009, and accordingly, the
Company adopted this Standard during the second quarter of 2009. The standard
requires that public entities evaluate subsequent events through the date
that the financial statements are issued.





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity, or QSPE. This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed the
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.





In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable
interest entities, or VIEs. The elimination of the concept of a QSPE, as
discussed above, removes the exception from applying the consolidation guidance
within this accounting standard. Further, this accounting standard requires
a company to perform a qualitative analysis when determining whether or not it
must consolidate a VIE. It also requires a company to continuously reassess
whether it must consolidate a VIE. Additionally, it requires enhanced
disclosures about a company’s involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how its involvement
with VIEs impacts the company’s financial statements. Finally, a company will be
required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This accounting standard is effective
for financial statements issued for fiscal years beginning after November 15,
2009.  The Company has not completed their assessment of the
impact that this pronouncement will have on the Company’s financial condition,
results of operations or cash flows.





In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards CodificationTM, or Codification, as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is
effective for the Company in the third quarter of 2009, and accordingly,
the Company’s Quarterly Report on Form 10-Q for the quarter ending September 30,
2009 and all current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.


40





In August
2009, the FASB issued an Accounting Standards Update, or ASU, regarding
measuring liabilities at fair value. This ASU provides additional guidance
clarifying the measurement of liabilities at fair value in circumstances in
which a quoted price in an active market for the identical liability is not
available; under those circumstances, a reporting entity is required to measure
fair value using one or more of valuation techniques, as defined. This ASU is
effective for the first reporting period, including interim periods, beginning
after the issuance of this ASU. The adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements.





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of
a convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.





In
October 2009, the FASB issued new standards that revised the guidance for
revenue recognition with multiple deliverables. These new standards impact the
determination of when the individual deliverables included in a multiple-element
arrangement may be treated as separate units of accounting. Additionally, these
new standards modify the manner in which the transaction consideration is
allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. The guidance is
effective for revenue arrangements entered into for fiscal years beginning on or
after June 15, 2010.  The Company does not expect the adoption will
have a material impact on its consolidated financial statements.





Decreases
in Ownership of a Subsidiary – a Scope Clarification





In
January 2010, the FASB issued an accounting standard update to address the
accounting and reporting for Decreases in ownership of a subsidiary. This
amendment to Topic 810 clarifies, but does not change, the scope of current US
GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and
removes the potential conflict between guidance in that Subtopic and asset
derecognition and gain or loss recognition guidance that may exist in other US
GAAP. An entity will be required to follow the amended guidance beginning in the
period that it first adopts FAS 160 (now included in Subtopic 810-10). For those
entities that have already adopted FAS 160, the amendments are effective at the
beginning of the first interim or annual reporting period ending on or after
December 15, 2009. The amendments should be applied retrospectively to the first
period that an entity adopted FAS 160. The Company does not expect the
provisions of ASU 2010-02 to have a material effect on the financial position,
results of operations, or cash flows of the Company.





Distributions
to Shareholders with Components of Stock and Cash





In
January 2010, the FASB issued an accounting standard update to address the
accounting for distributions to shareholders with components of stock and cash
(A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic
505 clarifies the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a limit on the amount of cash that
will be distributed is not a stock dividend for purposes of applying Topics 505
and 260 for interim and annual periods ending on or after December 15, 2009, and
should be applied on a retrospective basis. The Company does not expect the
provisions of ASU 2010-01 to have a material effect on the financial position,
results of operations, or cash flows of the Company.





Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
stockholders.





ITEM
3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.





Not
Applicable.





ITEM
4(T).   CONTROLS AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures.





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities Exchange Act of
1934   , as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our principal executive officer (our
president) and our principal accounting and financial officer (our chief
financial officer) to allow for timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and
procedures.


41





Our
management does not expect that our disclosure controls or our internal controls
over financial reporting will prevent all error and fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, but no
absolute, assurance that the objectives of a control system are met. Further,
any control system reflects limitations on resources, and the benefits of a
control system must be considered relative to its costs. These limitations also
include the realities that judgments in decision-making can be faulty and
that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of a control. A
design of a control system is also based upon certain assumptions about
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
may not be detected.




As of
December 31, 2009, the quarterly period covered by this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and our principal
accounting and financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the foregoing, our
president and our chief financial officer concluded that our disclosure controls
and procedures were not effective as of December 31, 2009 or during the entire
period covered by this report.




Changes
in Internal Control over Financial Reporting.




During
the fiscal quarter ended December 31, 2009, there were no changes in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


42


PART
II





OTHER
INFORMATION





ITEM
1.     LEGAL PROCEEDINGS





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating
results.





ITEM
1A.     RISK FACTORS





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended June 30, 2009, which
could materially affect our business, financial condition or future results. The
risks described in our Annual Report on Form 10-K are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition or future results.





ITEM
2.     UNREGISTERED SALES OF EQUITY SECURITIES OR USE
OF PROCEEDS





There
were no unregistered sales of equity securities during the fiscal quarter ended
December 31, 2009.





ITEM
3.     DEFAULTS UPON SENIOR SECURITIES





There
were no defaults upon senior securities during the fiscal quarter ended December
31, 2009.





ITEM
4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





No
matters were submitted to a vote of our security holders during the fiscal
quarter ended December 31, 2009.





ITEM
5.     OTHER INFORMATION





Not
applicable.





ITEM
6.     EXHIBITS





The
following exhibits are filed with this report, except those indicated as having
previously been filed with the SEC and are incorporated by reference to another
report, registration statement or form. As to any shareholder of record
requesting a copy of this report, we will furnish any exhibit indicated in the
list below as filed with this report upon payment to us of our expenses in
furnishing the information.





Exhibit No.
                
                Description14.1
                
                Code
      of Ethics (incorporated by reference to the Company’s Current Report on
      Form 8-K filed on October 9, 2009)31.1
                
                Certifications
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                
                Certifications
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                
                Certifications
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                
                Certifications
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




43




SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Date: February
      9, 2010
                CHINA ADVANCED CONSTRUCTION
                  MATERIALS GROUP, INC.By:
                /s/
      Xianfu HanXianfu
      Han, Chief Executive Officer(Principal
      Executive Officer)By:
                /s/ Chin
      HsiaoChin
      Hsiao, Chief Financial Officer(Principal
      Financial Officer and Principal
                  Accounting
      Officer)


44