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EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - Yangtze River Port & Logistics Ltdf10q0911ex31i_kirin.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - Yangtze River Port & Logistics Ltdf10q0911ex31ii_kirin.htm
EXCEL - IDEA: XBRL DOCUMENT - Yangtze River Port & Logistics LtdFinancial_Report.xls
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - Yangtze River Port & Logistics Ltdf10q0911ex32i_kirin.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

or

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: 333-166343

KIRIN INTERNATIONAL HOLDING, INC.
(Exact name of registrant as specified in its charter)
     
Nevada
 
27-1636887
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
South Building of China Overseas Plaza
No. 8 Guanghua Dongli Road
Chaoyang District, Beijing, 100020
People’s Republic of China
 
N/A
(Address of principal executive offices)
 
(Zip Code)

+86 10 6577 2050
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes   x    No   o
 
Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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  x    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 o
Non-Accelerated Filer o
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    x

There were 20,400,016 shares of the Registrant’s common stock outstanding at November 14, 2011.
 
 
 

 
 
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “anticipate,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about the following subjects:

·  
business strategies;
·  
growth opportunities;
·  
competitive position;
·  
market outlook;
·  
expected financial position;
·  
expected results of operations;
·  
future cash flows;
·  
financing plans;
·  
plans and objectives of management;
·  
tax treatment of the March 2011 acquisition of Kirin China Holding, Ltd.; and
·  
any other statements regarding future growth, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above and discussed under “Risk Factors” included in the Company’s Current Report on Form 8-K dated March 1, 2011, as filed with the Securities and Exchange Commission (the “Commission”) on March 7, 2011, and as amended by Amendment No. 1, Amendment No.2, Amendment No. 3, Amendment No.4 and Amendment No.5 to Current Report on Form 8-K/A, as filed with the Commission on April 28, 2011, June 10, 2011, July 25, 2011, August 26, 2011 and October 4, 2011, respectively, and as may be further amended by the Company from time to time. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 
 

 
 
CERTAIN TERMS USED IN THIS REPORT

In this Report, unless otherwise noted or as the context otherwise requires: “the Company,” “Kirin,” “we,” “us,” and “our” refers to the combined company Kirin International Holding, Inc. and its subsidiaries.

In addition, unless the context otherwise requires and for the purposes of this Report only:

·  
“Ciglarette International” refers to Ciglarette International, Inc., a Nevada company;
·  
“Commission” refers to the Securities and Exchange Commission;
·  
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
·  
“Hebei Zhongding” refers to Hebei Zhongding Real Estate Development Co., Ltd, a PRC company;
·  
“Kirin China” refers to either (i) the pre-Share Exchange Kirin China Holding, Ltd. and its subsidiaries or (ii) post-Share Exchange, the Company’s wholly owned subsidiary;
·  
“Kirin Development” refers to Kirin Huaxia Development Limited, a Hong Kong company;
·  
“Kirin Management” or “PRC Subsidiary” refers to Shijiazhuang Kirin Management Consulting Co., Ltd., a PRC company;
·  
“Operating Companies” refers to Hebei Zhongding and Xingtai Zhongding;
·  
“PRC” refers to the People’s Republic of China;
·  
“Securities Act” refers to the Securities Act of 1933, as amended;
·  
“Share Exchange Agreement” refers to the Share Exchange Agreement among the Company, its principal stockholders and Kirin China and its principal shareholders dated as of March 1, 2011;
·  
“Share Exchange” refers to the closing of the reverse acquisition of Kirin China whereby we acquired all of the issued and outstanding shares of Kirin China in exchange for 18,547,297 shares of our common stock, which resulted in Kirin China becoming a wholly owned subsidiary of the Company; and
·  
“Xingtai Zhongding” refers to Xingtai Zhongding Jiye Real Estate Development Co., Ltd., a PRC Company.

In accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) the Share Exchange was accounted for as a reverse acquisition in which Kirin China was deemed to be the accounting acquirer. Therefore, the financials reported herein are the historical financials of Kirin China.

 
 

 
 
KIRIN INTERNATIONAL HOLDING, INC.

FORM 10-Q QUARTERLY REPORT
SEPTEMBER 30, 2011

TABLE OF CONTENTS

PART 1 FINANCIAL INFORMATION
 PAGE
     
PART I
   
Item 1.
Financial Statements (Unaudited)
 F-1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 1
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 11
Item 4.
Controls and Procedures
 11
   
PART II OTHER INFORMATION
 
     
PART II
   
Item 1.
Legal Proceedings
 12
Item 1A.
Risk Factors
 12
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 12
Item 3.
Defaults Upon Senior Securities
 12
Item 4.
(Removed and Reserved)
 12
Item 5.
Other Information
 12
Item 6.
Exhibits
 12
   
SIGNATURES
 13
 
 
 

 
 
PART I—FINANCIAL INFORMATION

Item 1.
Financial Statements.

KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)
 
TABLE OF CONTENTS

Consolidated Balance Sheets
F-2
   
Consolidated Statements of Income and Comprehensive Income
F-3
   
Consolidated Statements of Cash Flows
F-4
   
Notes to the Consolidated Financial Statements
F-5 to F-23


 
F-1

 
 
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED BALANCE SHEETS

   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
ASSETS
 
             
Cash and cash equivalents
 
$
5,575,876
   
$
6,233,301
 
Restricted cash
   
873,999
     
1,563,027
 
Accounts receivable
   
1,366,803
     
1,626,592
 
Revenue in excess of billings
   
8,107,500
     
22,395,290
 
Prepayments
   
8,232,175
     
2,161,176
 
Other receivables
   
4,441,538
     
3,324,533
 
Receivable from a trust equity owner
   
2,155,644
     
-
 
Due from related parties
   
986,035
     
-
 
Real estate properties and land lots under development
   
176,299,369
     
92,419,336
 
Property and equipment, net
   
309,382
     
230,475
 
Deferred tax assets
   
771,673
     
85,452
 
Total assets
 
$
209,119,994
   
$
130,039,182
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
                 
Liabilities
               
Accounts payable
 
$
32,266,604
   
$
1,266,428
 
Income taxes payable
   
-
     
22,152
 
Other taxes payable
   
3,575,919
     
2,936,728
 
Due to a stockholder
   
-
     
3,840,111
 
Other payables and accrued liabilities
   
7,505,564
     
6,509,337
 
Customer deposits
   
42,887,810
     
22,417,416
 
Financial institution loans
   
41,394,608
     
19,208,083
 
Deferred tax liabilities
   
5,995,507
     
5,389,536
 
Total liabilities
   
133,626,012
     
61,589,791
 
                 
Stockholders’ equity
               
Preferred stock at $0.0001 par value; 100,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Common stock at $0.0001 par value; 500,000,000 shares authorized; 20,400,016 and 18,547,297 shares issued and outstanding on September 30, 2011 and December 31, 2010, respectively
   
2,040
     
1,855
 
Additional paid-in capital
   
36,343,960
     
33,964,995
 
Statutory reserve
   
407,537
     
407,537
 
Retained earnings
   
33,225,033
     
30,849,088
 
Accumulated other comprehensive income
   
5,515,412
     
3,225,916
 
Total stockholders’ equity
   
75,493,982
     
68,449,391
 
Total liabilities and stockholders’ equity
 
$
209,119,994
   
$
130,039,182
 

See notes to the consolidated financial statements.
 
 
 
F-2

 
 
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
   
Nine Months Ended
September 30,
   
Three Months Ended
September 30,
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Revenue from real estate sales, net
 
$
21,116,800
   
$
19,708,958
   
$
10,502,842
   
$
9,872,772
 
Cost of real estate sales
   
15,411,163
     
14,090,638
     
8,094,719
     
6,830,449
 
                                 
Gross profit
   
5,705,637
     
5,618,320
     
2,408,123
     
3,042,323
 
                                 
Operating expenses
                               
Selling expenses
   
1,620,589
     
903,765
     
673,348
     
543,049
 
General and administrative expenses
   
2,107,722
     
888,121
     
849,784
     
323,182
 
Total operating expenses
   
3,728,311
     
1,791,886
     
1,523,132
     
866,231
 
                                 
Income from operations
   
1,977,326
     
3,826,434
     
884,991
     
2,176,092
 
                                 
Other income (expense)
                               
Government grant
   
4,380,565
     
6,346,595
     
2,135,666
     
3,434,999
 
Interest expense, net
   
(2,414,427
)
   
(771,806
)
   
(974,953
)
   
(159,257
)
                                 
Total other income
   
1,966,138
     
5,574,789
     
1,160,713
     
3,275,742
 
                                 
Income before income taxes expense
   
3,943,464
     
9,401,223
     
2,045,704
     
5,451,834
 
                                 
Income taxes expense
   
1,567,519
     
2,900,340
     
762,076
     
1,064,750
 
                                 
Net income
 
$
2,375,945
   
$
6,500,883
   
$
1,283,628
   
$
4,387,084
 
                                 
Other comprehensive income
                               
Foreign currency translation adjustment
   
2,289,496
     
888,353
     
707,494
     
802,740
 
                                 
Comprehensive income
 
$
4,665,441
   
$
7,389,236
   
$
1,991,122
   
$
5,189,824
 
                                 
Basic and diluted earnings per share
 
$
0.12
   
$
0.35
   
$
0.06
   
$
0.24
 
Basic weighted average shares outstanding
   
19,798,131
     
18,547,297
     
20,334,796
     
18,547,297
 
Diluted weighted average shares outstanding
   
19,799,261
     
18,547,297
     
20,338,320
     
18,547,297
 

See notes to the consolidated financial statements.
 
 
 
F-3

 
 
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities:
           
Net  income
 
$
2,375,945
   
$
6,500,883
 
Adjustments to reconcile net income to net cash used in operating activities
               
    Depreciation
   
58,596
     
39,478
 
    Deferred tax (expense) benefit
   
(250,169
)
   
853,494
 
Changes in operating assets and liabilities
               
    Restricted cash
   
728,443
     
143,552
 
    Accounts receivable
   
308,130
 
   
13,431
 
    Revenue in excess of billings
   
14,781,807
     
(6,221,649
)
    Prepayments
   
(5,903,997
)
   
1,501,616
 
    Other receivables
   
(996,465
)
   
(2,212,299
)
    Receivable from an equity owner
   
(2,121,116
)
   
7,521,890
 
    Real estate properties held for sale
   
-
     
593,979
 
    Real estate properties and land lots under development
   
(79,553,387
)
   
(43,367,394
)
    Accounts payable
   
30,462,753
     
2,435,869
 
    Income taxes payable
   
(22,512
)
   
(752,840
)
    Other taxes payable
   
534,162
     
(2,182,337
)
    Other payables and accrued liabilities
   
770,163
     
4,372,744
 
    Customer deposits
   
19,418,923
     
7,058,875
 
                 
Net cash used in operating activities
   
(19,408,724
)
   
(23,700,708
 )
                 
Cash flows from investing activities:
               
Purchases of equipment
   
(128,799
)
   
(85,987
)
                 
Cash flows from financing activities:
               
Proceeds from financial institution loans
   
22,748,197
     
17,188,694
 
Repayment of a financial institution loan
   
(1,537,040
)
   
-
 
Proceeds from common stock and warrants issued
   
3,380,080
     
-
 
Payment for common stock and warrants issuance costs
   
(1,000,931
)
   
-
 
Proceeds from due to a stockholder
   
-
     
17,864,488
 
Repayments of due to a stockholder
   
(3,902,553
)
   
-
 
Payment for due from related parties
   
(970,242
)
   
-
 
Net cash provided by financing activities
   
18,717,511
     
35,053,182
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
162,587
     
315,966
 
Net increase (decrease) in cash and cash equivalents
   
(657,425
)
   
11,582,453
 
                 
Cash and cash equivalents - beginning of the period
   
6,233,301
     
6,807,095
 
                 
Cash and cash equivalents - end of the period
 
$
5,575,876
   
$
18,389,548
 
                 
Supplementary cash flow information
               
Cash paid for income tax
 
$
81,035
   
$
771,806
 
Cash paid for interest expense
 
$
2,440,104
   
$
790,392
 

See notes to the consolidated financial statements.
 
 
 
F-4

 
 
KIRIN INTERNATIONAL HOLDING, INC.
NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS
(UNAUDITED)

Note 1 –
Organization and Summary of Significant Accounting Policies

Organization

Ciglarette, Inc. (the “Company”, or “Ciglarette”) was incorporated on December 23, 2009 under the laws of the State of Nevada.  The Company was a development stage company and has not generated significant revenue since inception. On March 10, 2011, Ciglarette changed its name to Kirin International Holding, Inc.

On March 1, 2011 (the “Closing Date”), the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) by and among (i) the Company, (ii) the Company’s principal stockholder, (iii) Kirin China Holding Limited, a company established under the laws of British Virgin Islands on July 6, 2010 (“Kirin China”), and (iv) the former shareholders of Kirin China, pursuant to which the former shareholders of Kirin China transferred to the Company all of their shares of Kirin China in exchange for the issuance of 18,547,297 shares of the Company’s common stock, which represented 98.4% of the Company’s total shares outstanding immediately following the closing of the transaction (such transaction, the “Share Exchange”).  As a result of the Share Exchange, Kirin China became the Company’s wholly-owned subsidiary.

The Share Exchange has been accounted for as a recapitalization, whereby the Company is deemed to be the accounting acquiree (legal acquirer) and Kirin China is the accounting acquirer (legal acquiree). The financial statements before the date of the Share Exchange are those of Kirin China with the results of the Company being consolidated from the date of the Share Exchange. The equity section and earnings per share has been retroactively restated to reflect the reverse acquisition and no goodwill was recorded.

On the Closing Date, and immediately prior to the Share Exchange, the Company entered into a contribution and assumption agreement (the “Contribution and Assumption Agreement”) with Ciglarette International, Inc., a 80%-owned subsidiary, pursuant to which the Company contributed substantially all of its assets to Ciglarette International, Inc., and Ciglarette International, Inc. assumed all of the Company’s debts and other liabilities (the “Reorganization”). In addition, on the Closing Date, the Company entered into an agreement of sale (the “Agreement of Sale”) with Lisan Rahman, former principal shareholder (“Rahman”), pursuant to which the Company sold to Rahman all of the shares of Ciglarette International, Inc.’s common stock owned by the Company in exchange for the cancellation of 2,500,000 shares of the Company’s common stock owned by Rahman (the “Spin-Out”).  Rahman also waived any and all rights and interests he has, had or may have with respect to such cancelled shares. The Reorganization and Spin-Out were consummated immediately prior to the Share Exchange. The Reorganization was consummated immediately prior to the Spin-Out.

Furthermore, immediately prior to the Share Exchange and immediately following the Spin-Out, 3,094,297 restricted shares of the Company's common stock then outstanding were cancelled and retired.  Kirin China deposited $50,000 into an escrow account which amount was paid to the former owners of the cancelled shares as a result of the Share Exchange having been consummated.  Rahman received approximately $40,396 of such amount for the cancellation of his 2,500,000 shares in connection with the Share Exchange.

On the Closing Date and immediately following the Share Exchange, the Company completed an initial closing of a private offering (the “Offering”) of investment units (each a “Unit” and collectively, the “Units”) each consisting of four (4) shares of common stock, a three-year series A warrant to purchase one (1) share of common stock of the Company at an exercise price of $6.25 per share (the “Series A Warrants”) and a three-year Series B warrant to purchase one (1) share of common stock of the Company at an exercise price of $7.50 per share (the “Series B Warrants” and collectively with the Series A Warrants, the “Investor Warrants”).  An aggregate of 69,000 Units were sold in the Offering for gross proceeds to the Company of $1,380,000.  As a result of the Offering, the Company issued an aggregate of 276,000 shares of its common stock (the “Shares”) and warrants to acquire an aggregate of 138,000 shares of our common stock to the investors in the Offering (the “Purchasers”).

In connection with the Offering, the Company issued 880,000 shares of common stock to Hunter Wise Securities, LLC, the placement agent.

On July 15, 2011, the Company completed the second closing of the Offering.  An aggregate of 100,004 Units were sold in the second closing of the Offering for gross proceeds of $2,000,080.  As a result of the second closing of the Offering, the Company issued an aggregate of 400,016 shares of its Shares and warrants to acquire an aggregate of 200,008 shares of common stock to the investors in the second closing of the Offering.
 
In connection with the initial and the second closing of the Offering, Kirin International Holding, Inc. issued warrants to acquire an aggregate of 54,082 shares of the company’s common stock (the “Agent Warrants”).  The Agent Warrants are exercisable for a period of five years from the original issuance date with an exercise price of $5.00 per share.  The exercise prices of the Agent Warrants are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances.
 
 
 
F-5

 
 
Kirin China owns all of the share capital of Kirin Huaxia Development Limited (“Kirin Development”), a Hong Kong company established on July 27, 2010, which owns all of the share capital of Shijiazhuang Kirin Management Consulting Co., Ltd. (“Kirin Management”), a wholly foreign owned enterprise located in Shijiazhuang City, Hebei Province, the People’s Republic of China (the “PRC” or “China”).

Hebei Zhongding Real Estate Development Co. Ltd., (“Hebei Zhongding”) was incorporated in the name of Xingtai Zhongchao Real Estate Company Limited as a limited liability company under the laws of the PRC on April 7, 2004, and was transformed into a limited liability corporation, changing its name to Hebei Zhongding Real Estate Development Co., Ltd. on July 16, 2007. Hebei Zhongding authorized and issued 45,000,000 shares at Renminbi (RMB) 1 ($0.1207) per share. Share capital of approximately $5,430,517 was fully paid by Jianhe Guo (3%), Jianfei Guo (5%), Li Zhao (5%), Liying Li (2%) and Liping Bi (85%).  Jianhe Guo, Jianfei Guo, Li Zhao, Liying Li and Liping Bi are collectively referred to as “Hebei Zhongding Trustees”.
  
Xingtai Zhongding Jiye Real Estate Development Co., Ltd. (“Xingtai Zhongding”) was established by Xingtai Business Investment Co., Ltd. (“Business Investment”) for a fully paid registered capital of $1,096,187 on August 7, 2008. On March 5, 2009, Xingtai Zhongding increased its registered and paid-in capital to $11,701,936 by contributions in forms of land use rights.  Business Investment is wholly owned by Huaxia Kirin (Beijing) Technology Development Co., Ltd., which is subsequently owned by Jianfeng Guo (8%) and Liping Bi (92%, spouse of Jianfeng Guo).  On December 31, 2009, Business Investment transferred its ownership in Xingtai Zhongding to Jianfeng Guo (51%), Haifeng Liu (41%) and Yuelai Xie (8%).  On June 9, 2010, Haifeng Liu transferred his shareholding in Xingtai Zhongding to Huaxia Kirin (Tianjin) Equity Investment Fund Management Co., Ltd.  Huaxia Kirin (Tianjin) Equity Investment Fund Management Co., Ltd. and Yuelai Xie are collectively referred to as “Xingtai Zhongding Trustees”.

Pursuant to trust agreements entered into between Jianfeng Guo and each of Hebei Zhongding Trustees and Xingtai Zhongding Trustees, Jianfeng Guo is deemed to be the beneficiary owner of all the shares of Hebei Zhongding and Xingtai Zhongding.

On September 3, 2007, Hebei Zhongding established a subsidiary Xingtai Zhongding Construction Project Management Co., Ltd. with 80% direct ownership, and Jianhe Guo owning 20% shares. Pursuant to a trust agreement entered into between Jianhe Guo and Xingtai Zhongding, Xingtai Zhongding is deemed to be the owner of all the shares of Xingtai Zhongding Construction Project Management Co., Ltd.

Xingtai Zhongding Business Service Co., Ltd. (“Business Service”) was established as a limited liability corporation on July 29, 2008 in the name of Xingtai Zhongding Business Service Corporation Limited with authorized 6,000,000 shares at RMB1 per share. Share capital was fully paid up by Jianfeng Guo and other 10 individuals (“Other Initial Sponsors”).  Business Service subsequently transformed into a limited liability company, and changed to its current name. Pursuant to trust agreement between Jianfeng Guo and Other Initial Sponsors, Jianfeng Guo is deemed to be the sole beneficiary owner of all the shares of Business Service.  On July 1, 2009, Xingtai Zhongding acquired 100% of the equity interests of Business Service, from its predecessor equity holders for a purchase price of RMB 6,000,000 (approximately $876,000).  The acquisition is a business combination under common control; therefore the acquisition was accounted for using pooling-of-interest method. The acquired business and net assets were recorded at book value as if the business and the net assets have been owned by the Company from the earliest comparative period presented, the operations are combined from the earliest date. In 2011, Business Service changed its name to Xingtai Zhongding Kirin Real Estate Development Co., Ltd.

On December 24, 2009, January 19, 2010 and December 6, 2010, Xingtai Zhongding established wholly-owned subsidiaries Huaxia Kirin (Beijing) Property Management Co., Ltd., Huaxia Kirin (Beijing) Garden Project Co., Ltd., and Xingtai Hetai Real Estate Development Co., Ltd., respectively.

Iwamatsu Reien, a Japanese citizen, holds 100% of the shares of Prolific Lion Limited, Valiant Power Limited and Solid Wise Limited, each of which were incorporated in the British Virgin Islands (each a “BVI Company” and collectively the “BVI Companies”) and which respectively own 82%, 9% and 9% of the shares of Kirin China. On November 22, 2010, Iwamatsu Reien entered into Call Option Agreements (collectively, the “Call Option Agreements”) with each of Jianfeng Guo, Longlin Hu and Xiangju Mu (collectively, the “Purchasers”) pursuant to which Jianfeng Guo is entitled to purchase up to 100% shares of Prolific Lion Limited, Honglin Hu is entitled to purchase up to 100% shares of Valiant Power Limited and Xiangju Mu is entitled to purchase up to 100% of the shares of Solid Wise Limited, each at a price of $0.0001 per share for a period of five years upon satisfaction of certain conditions. Specifically, (i) if Hebei Zhongding and Xingtai Zhongding (collectively, the “Operating Companies”), and their respective subsidiaries achieved net income of $1 million as calculated and audited in accordance with U.S. GAAP for the fiscal year ended December 31, 2009, each Purchaser will be entitled to purchase 40% of the outstanding shares of the applicable BVI Company; (ii) if the Operating Companies and their respective subsidiaries achieve net income of $2 million as calculated in accordance with U.S. GAAP for the fiscal year ended December 31, 2010, each purchaser will be entitled to purchase 30% of the outstanding shares of the applicable BVI Company; (iii) if the Operating Companies and their respective subsidiaries achieve net income of $3 million in accordance with U.S. GAAP for the fiscal year ended December 31, 2011, each Purchaser will be entitled to purchase up to 30% of the remaining outstanding shares of the applicable BVI Company. In addition, the Operating Companies and their respective subsidiaries achieves net income of $3 million in fiscal year 2010, each Purchaser shall have the right to purchase all shares of the applicable BVI Company at consideration of $1.00 and the third condition shall be deemed as having been met. As of August 15, 2011, none of Jianfeng Guo, Longlin Hu or Xiangju Mu exercised this option.

Also pursuant to Call Option Agreement between Iwamatsu Reien and Jianfeng Guo, Jianfeng Guo has been irrevocably granted the exclusive voting rights with respect to the shares of Prolific Lion Limited held by Iwamatsu Reien.  Accordingly, Jianfeng Guo may be deemed to beneficially own the Kirin China’s common stock owned by Prolific Lion Limited. Furthermore, Jianfeng Guo is empowered to appoint directors of Kirin China through Resolution of Shareholders, who manage the business and affairs of Kirin China, pursuant to the Memorandum and Articles of Association of Kirin China, and thereby effectively controls Kirin China, which subsequently controls Kirin Management through its ownership of Kirin Development.
 
 
 
F-6

 
 
Variable Interest Entities
 
To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through the variable interest entities (“VIEs”). On December 22, 2010, a series of contractual arrangements (the “VIE Agreements”) were entered between Kirin Management and each of Operating Companies and their respective shareholders. As a result of the VIE Agreements, Kirin Management has the power to direct the VIEs’ activities that most significantly impact the VIEs’ economic performance and the obligation to absorb the VIEs’ losses that could be significant to the VIEs and the right to receive benefits from the VIEs that could be significant to the VIEs.  Therefore Kirin Management is deemed to have a controlling financial interest in the VIEs, is considered the primary beneficiary of and consolidates with the VIEs.

The VIE Agreements are summarized below:

Entrusted Management Agreement Pursuant to the Entrusted Management Agreement between Kirin Management, the Operating Companies and the shareholders of the Operating Companies, the Operating Companies and their shareholders agreed to entrust the business operations of the Operating Companies and its management to Kirin Management until Kirin Management acquires all of the assets or equity of the Operating Companies. Kirin Management has the full and exclusive right to manage and control all cash flow and assets of the Operating Companies and to control and administrate the financial affairs and daily operation of the Operating Companies. In turn, Kirin Management is entitled to the Operating Companies’ earnings before tax as a management fee, and will be obligated to pay all Operating Companies’ debts to the extent the Operating Companies are not able to pay such debt.

Shareholders’ Voting Proxy Agreement Pursuant to the Shareholders’ Voting Proxy Agreement between Kirin Management and the shareholders of the Operating Companies, the Operating Companies’ shareholders irrevocably and exclusively appointed the board of directors of Kirin Management as their proxy to vote on all matters that require the approval of the Operating Companies shareholders.

Exclusive Option Agreement Under the Exclusive Option Agreement between Kirin Management, the Operating Companies and the shareholders of the Operating Companies, the Operating Companies shareholders granted to Kirin Management an irrevocable exclusive purchase option to purchase all or part of the shares or assets of the Operating Companies to the extent that such purchase does not violate any PRC law or regulations then in effect. Kirin Management and the Operating Companies shareholders shall enter into further agreements based on the circumstances of the exercise of the option, including price. The exercise price shall be refunded to Kirin Management or the Operating Companies at no consideration in a manner decided by Kirin Management, in its reasonable discretion.

The above mentioned agreements do not have a term therefore according to PRC Contract Law is agreement with unlimited term. These agreements also provided that except for the execution of mutual written agreement providing the termination, a party cannot terminate the unilaterally. Therefore, the agreement shall be regarded as bindingly and effective with a unlimited term before parties sign new agreements to terminate. These agreements are governed by the PRC laws and regulations. PRC laws and regulations concerning the validity of the VIE Agreements are uncertain, as many of these laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement by the PRC government may involve substantial uncertainty. Further, these VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration proceedings pursuant to PRC laws. If Hebei Zhongding or Xingtai Zhongding or their respective stockholders fail to perform their obligations under the VIE Agreements, the Company may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, and there is a risk that the Company may be unable to obtain these remedies. Therefore the VIE Agreements may not be as effective in providing control over Hebei Zhongding and Xingtai Zhongding as direct ownership. Because the Company relies on Hebei Zhongding and Xingtai Zhongding for revenue, any termination of or disruption to these VIE Agreements could detrimentally affect the business of the Company.
 
 
 
F-7

 
 
The Company’s revenues are earned by Kirin Management. However, PRC regulations restrict the ability of the PRC subsidiary to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividend by the PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Kirin Management is also required under PRC laws and regulations to allocate at least 10% of the annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in such fund reaches 50% of its registered capital. Kirin Management cannot distribute the profits or pay dividends out of China before it sets aside such statutory fund unless the amounts in such fund reaches 50% of its registered capital. Kirin Management has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Although the statutory reserves can be used to, among other things, increase the registered capital and eliminate future losses in excess of retained earnings of Kirin Management, these reserves are not distributable as cash dividends. These statutory reserves may only be applied to the development of Kirin Management; consequently funds distributable up the corporate structure made available by Kirin Management may be limited. Kirin Management have the discretion to allocate a portion of their after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Since the statutory reserves and the staff welfare and bonus funds cannot be distributed to the shareholder except in the event of liquidation, allocation of the statutory reserves and the staff welfare and bonus funds will limit the funds available to Kirin Management that are distributable up the corporate chain.

In addition, the PRC Income Tax Law also imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprise without any establishment or place within China or if the received dividends have no connection with such foreign investors’ establishment or place within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

Summary information regarding consolidated VIEs is as follows:

   
September 30,
2011
(Unaudited)
   
December 31,
2010
 
 
ASSETS
             
Cash and cash equivalents
 
$
3,822,899
   
$
6,233,301
 
Restricted cash
   
873,999
     
1,563,027
 
Accounts receivable
   
 1,366,803
     
1,626,592
 
Revenue in excess of billings
   
 8,107,500
     
22,395,290
 
Prepayments
   
8,232,174
     
2,161,176
 
Other receivables
   
4,150,632
     
3,324,533
 
Receivable from a trust equity owner
   
2,155,644
     
-
 
Due from related parties
   
986,035
         
Real estate properties and land lots under development
   
176,299,369
     
92,419,336
 
Property and equipment, net
   
309,382
     
230,475
 
Deferred tax assets
   
771,673
     
85,452
 
   Total assets
 
$
207,076,110
   
$
130,039,182
 
                 
LIABILITIES
                 
Accounts payable
 
$
32,266,604
   
$
1,266,428
 
Income taxes payable
   
-
     
22,152
 
Other taxes payable
   
3,575,919
     
2,936,728
 
Due to a stockholder
   
-
     
3,840,111
 
Other payables and accrued liabilities
   
7,505,564
     
6,509,337
 
Customer deposits
   
42,887,810
     
22,417,416
 
Financial institution loans
   
41,394,608
     
19,208,083
 
Deferred tax liabilities
   
5,995,507
     
5,389,536
 
   Total liabilities
 
$
133,626,012
   
$
61,589,791
 

All of the assets of the consolidated VIEs can be used only to settle obligations of the VIEs and none of the liabilities of the consolidated VIEs are recourse to the general credit of the Company.
 
For the three months ended September 30, 2011 and 2010, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes sales of approximately $10,503,000 and $9,873,000, respectively, cost of sales of approximately $8,095,000 and $6,830,000, respectively, operating expenses of approximately $1,378,000 and $866,000, respectively, and net income of approximately $1,413,000 and $4,387,000, respectively.

For the nine months ended September 30, 2011 and 2010, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes sales of approximately $21,117,000 and $19,709,000, respectively, cost of sales of approximately $15,411,000 and $14,091,000, respectively, operating expenses of approximately $3,307,000 and $1,792,000, respectively, and net income of approximately $2,711,000 and $6,501,000, respectively.
 
 
 
F-8

 
 
Nature of operations

The Company is engaged in the development and sales of residential and commercial real estate properties, and development of land lots in Xingtai city, Hebei province, China.

Change in reporting entity and basis of presentation

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Form 8-K/A filed on October 4, 2011.

The consolidated financial statements include the financial statements of the Company and its subsidiaries and VIEs. All significant inter-company transactions and balances have been eliminated in consolidation.

The consolidated interim financial information as of September 30, 2011 and for the three and nine-month periods ended September 30, 2011 and 2010 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have not been included.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of September 30, 2011, its consolidated results of operations and cash flows for the three and nine-month periods ended September 30, 2011 and 2010, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods
 
The reverse acquisition described in “Organization” was treated as recapitalization of the Company. As such, Kirin China is the continuing entity for financial reporting purposes. In a reverse acquisition the historical shareholders’ equity of the accounting acquirer prior to the merger is retroactively reclassified (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any difference in par value of the registrant’s and the accounting acquirer’s stock by an offset in paid in capital. Therefore, the consolidated financial statements have been prepared as if Kirin China had always been the reporting company and then on the reverse acquisition date, had changed its name and reorganized its capital stock.
 
Use of Estimates

The preparation of the consolidated 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 disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include determination of percentage-of-completion of properties under construction and related revenue and costs recognized, allowance for doubtful accounts, and the valuation of deferred tax assets and liabilities.

Fair Value of Financial Instruments

The Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements.  ASC Subtopic 820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.

ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

ASC Subtopic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
 
 
 
F-9

 

Level 3 inputs are unobservable inputs for the asset or liability.
 
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company did not have any nonfinancial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010.

Reporting Currency and Foreign Currency Translation

The Company’s functional currency is the United States dollar (“US$”). The functional currency of the Company’s subsidiary and VIEs in the PRC is Renminbi (“RMB”). The Company’s reporting currency is US$. The assets and liabilities of the Company’s subsidiary and VIEs in China are translated at the exchange rate on the balance sheet dates, stockholders’ equity is translated at the historical rates and the revenues and expenses are translated at the weighted average exchange rates for the periods. The resulting translation adjustments are reported under accumulated other comprehensive income in the consolidated statements of income and comprehensive income in accordance with ASC 220, Comprehensive Income.

Since July 2005, the RMB is no longer pegged to the US$. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the US$ in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. PRC exchange control regulations may also restrict the Company’s ability to convert RMB into foreign currencies.
  
Revenue Recognition

Real estate sales are reported in accordance with the provisions of ASC 360-20, Property, Plant and Equipment, Real Estate Sales.

Revenue from the sales of completed properties where the construction period is twelve months or less is recognized by the full accrual method when (a) the amount of the profit is determinable; and (b) the earnings process is virtually complete.  Specifically, the Company recognizes profit on real estate sales by the full accrual method when all of the following criteria are met: (a) sale is consummated; (b) the buyer’s initial and continuing involvements are adequate to demonstrate a commitment to pay for the property; (c) the receivable is not subject to future subordination; (d) the company has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property.  A sale is not considered consummated until (a) the parties are bound by the terms of a contract or agreement, (b) all consideration has been exchanged, (c) any permanent financing of which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed. Fair value of buyer’s payments to be received in future periods pursuant to sales contract is classified under accounts receivable. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.

The Company adopts the percentage-of-completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than twelve months at that date.

Revenue and profit from the sale of development properties where the construction period is more than twelve months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met: (a) construction is beyond a preliminary stage; (b) the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit; (c) sufficient units have already been sold to assure that the entire property will not revert to rental property; (d) sales prices are collectible and (e) aggregate sales proceeds and costs can be reasonably estimated.  If any of these criteria are not met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.

Under the percentage of completion method, revenues from units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of completion and applying that ratio to the contracted sales amounts.  The Company uses cost-to-cost method to measure the ratio of completion.  Qualified construction quality supervision firms are engaged by the Company, as required by relevant laws and regulations in the PRC, to determine pieces of construction completed by contractors can meet predetermined quality and safety standards, and are eligible to be counted towards costs. Cost of sales is recognized by multiplying the ratio by the total budgeted costs. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of amounts received from customers is classified under revenue in excess of billings. Amounts received from customers in excess of revenue recognized to date are classified under customer deposits.  Any losses incurred or identified on real estate transaction are recognized in the period in which the transaction occurs.
 
 
 
F-10

 
 
Except for the down payment, the rest of contract price can be settled by several installments or financed by mortgage.  The Company requires customers to pay non-refundable cash down payment equivalent to no less than 20% of the contract price upon the execution of sale or pre-sale contracts prior to recognizing revenue under either full-accrual method or percentage-of-completion method.  The cash down payment collected from customers subordinates to no claims.  If buyer’s purchase is financed by mortgage the Company does not recognize revenue until application for mortgage loan has been filed and the Company reasonably believes the mortgage can be approved.  The Company provides guarantees for mortgage loans from financial institutions to customers (see “Restricted cash”).  Such guarantees expire when customers have obtained House Ownership Certificate of their purchased properties and the mortgage has been registered in favor of the financial institutions. Because guarantees of mortgage do not cover any portion of non-refundable cash down payment received by the Company from customers, the Company does not consider guarantees when determining recognizing revenues under either full-accrual method or percentage-of-completion method.

Real Estate Capitalization and Cost Allocation

Properties under development or held for sale consist of residential and commercial units under construction and units completed. Properties under development or held for sale are stated at cost or estimated net realizable value, whichever is lower. Costs include costs of land use rights, direct development costs, interest on indebtedness, construction overhead and indirect project costs. The Company acquires land use rights with lease terms ranging from 40 to 70 years through government-organized auctions, private sale transactions or capital contribution from shareholders. Land use rights are divided and transferred to customers after the Company delivers properties. The Company capitalizes payments for obtaining the land use rights allocates to specific units within a project based on units’ gross floor area. Costs of land use rights for the purpose of property development are not amortized. Other costs are allocated to units within a project based on the ratio of the sales value of units to the estimated total sales value.

Government Grant

Government grant relating to real estate projects developed by the Company are recognized as other income when the Company have complied with the conditions attached to the grant and the grant’s collection is reasonably assured.
 
During the year ended December 31, 2008, Xingtai Zhongding was entitled to a government grant of approximately $22,981,000 relating to Kirin County project to subsidize modernization of the neighborhood where the real estate project situated, and control of property price volatility. The Company believes the government’s demands associated with the grant are gradually fulfilled as the construction and pre-sale of Kirin County make progress, and accordingly recognizes grant income at the percentage of construction completed during the year of the total grant amount. For the nine months ended September 30, 2011 and 2010, the Company recognized $4,380,565 and $6,346,595 grant income. For the three months ended September 30, 2011 and 2010, the Company recognized $2,135,666 and $3,434,999 grant income. The local government has arranged a lump sum payment of the grant to Business Investment, a trust equity owner on behalf of Jianfeng Guo, prior to the grant’s conditions being met out of financial consideration because it lacked managing staff and concerned that the funds would be re-assigned or invalidated without an immediate recipient. Pursuant to the arrangement, Business Investment provides this grant money to Xingtai Zhongding in proportion to the percentage of the project completed as a measure to ensure that the project satisfies the grant’s guidelines. The grant does not have refund conditions and the Company believes government will not revoke the grant or claw back cash remitted to the escrow account unless the construction and sale of Kirin County project is cancelled by the Company. As at September 30, 2011, the Company didn’t receive any request from government demanding revocation and/or partial refund of the grant previously given, and the Company expects no development relating to the Kirin County project will cause government to request the grant’s refund in next twelve months.

Capitalization of Interest
 
In accordance with ASC 360, Property, Plant and Equipment, interest incurred during construction is capitalized to properties under construction. No interest costs were capitalized for the nine months ended September 30, 2011 and 2010.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains majority of its bank accounts in the PRC. All PRC bank balances are denominated in RMB. Cash includes cash on hand and demand deposits in accounts maintained with state-owned and commercial financial institutions within the PRC.  China does not have a deposit insurance system; however, the credit risk on bank balances are limited because the Company conducts transactions and deposits balances with several state-owned banks with high credit ratings assigned by international credit rating agencies.
 
 
 
F-11

 
 
Restricted Cash

There are two important timings for mortgage business of PRC banks: (1) Execution of mortgage agreement: PRC banks grant mortgage loans to home purchasers and will credit the full amount to the Company account once the bank and the purchaser enter into mortgage agreement, which generally will be before the completion of the construction of projects.  (2) Issuance of House Ownership Certificate to the purchasers. At the time of execution of mortgage agreement, there are no House Ownership Certificate therefore the purchaser has no legal right to the house and therefore they cannot mortgage the house to banks. Banks will ask the developer to provide guarantee to the loan instead. When the House Ownership Certificate is issued, banks will release the guarantee ability of the developer and mortgage the house in question.  If the condominiums are not completed and the new homebuyers have no House Ownership Certificate, to secure the loan, as a common practice in China, the banks will release only 95% loan to the Company and will require that the Company open a separate account with the bank and deposit and freeze the remaining 5% of the mortgage amount to further secure the bank’s interests before the mortgage of the house with House Ownership Certificate. Because bank requires the freeze of the 5% deposit, the amount therein shall be classified on the balance sheet as restricted cash. Interest earned on the restricted cash is credited to the Company’s normal bank account. The bank will release the restricted cash after homebuyers have obtained the House Ownership Certificate and mortgage the house to bank. Total restricted cash amounted to $873,999 and $1,563,027 as of September 30, 2011 and December 31, 2010, respectively. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts.

Income Taxes

The Company follows ASC 740, Income Taxes, which require the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Subsidiaries and VIEs of the Company located in China are governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are generally subject to tax at a new statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
 
According to the Income Tax Laws of the PRC for real estate developers, income tax of the Company is calculated by project. When all units of a project are sold, tax authorities will assess the tax due on the project and issue a tax due notification to the Company. The Company has to pay the tax by the due date on the notification. If the Company does not pay the tax by the due date, the tax authorities will charge the Company interest. The Company includes any interest and penalties in general and administrative expenses.

Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and it prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosures and transitions.

The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the PRC government. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current PRC government officials.

Land Appreciation Tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures, including borrowings costs and all property development expenditures. LAT is prepaid at 1% to 2% of the pre-sales proceeds each year as required by the local tax authorities, and is settled generally after the construction of the real estate project is completed and majority of the units are sold.  The Company provides LAT as expensed when the related revenue is recognized based on estimate of the full amount of applicable LAT for the real estate projects in accordance with the requirements set forth in the relevant PRC laws and regulations.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only components of comprehensive income during the nine months ended September 30, 2011 and 2010 were net income and the foreign currency translation adjustment.

 
 
F-12

 

Earnings Per Share
 
The Company reports earnings per share in accordance with ASC 260, “Earnings Per Share.” ASC 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common 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 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.
 
Advertising Expenses

Advertising costs are expensed as incurred, or the first time the advertising takes place, in accordance with ASC 720-35, Advertising Costs. For the nine months ended September 30, 2011 and 2010, the Company recorded an advertising expense of $842,553 and $318,509, respectively.  For the three months ended September 30, 2011 and 2010, the Company recorded an advertising expense of $384,845 and $61,318, respectively.

Property Warranty

The Company provides customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts. The warranty period varies from two to five years, depending on different property components the warranty covers.
 
The Company constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company withholds up to 5% of the contract total payment from contractors for periods of two to five years. These amounts are included in liabilities, and are only paid to the extent that there have been no warranty claims against the Company relating to the work performed or materials supplied by the contractors.  As at September 30, 2011 and December 31, 2010, the Company retained $288,630 and $169,500 contract payment to contractors, and the Company didn’t experience any incidences where the withheld amounts were less than the amounts the Company had to pay for the defects of properties.  The Company didn’t provide any warranty reserve.  For the nine months ended September 30, 2011 and 2010, the Company incurred $nil and $nil incidental costs in addition to the amount retained from contractors.

Impairment Losses
 
Completed lots are reported in the balance sheet at the lower of their carrying amount or fair value less costs to sell. Land to be developed or under development is assessed for impairment when management believes that events or changes in circumstances indicate that its carrying amount may not be recoverable. Based on this assessment, property that is considered impaired is written down to its fair value. Impairment losses are recognized through a charge to expense. No impairment of completed lots or land was recognized for the nine months ended September 30, 2011 and 2010.

Distribution of Earnings and Reserve Funds

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions from its subsidiaries established in China.  The earnings reflected in the consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s subsidiaries, and PRC legal restrictions permit payments of dividends out of PRC subsidiaries’ statutory accumulated after-tax profits.

In accordance with the PRC Company Law, the subsidiaries of the Company established in China are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory reserves until such reserves reach 50% of the registered capital or paid-in capital of the subsidiaries. Subject to certain restrictions set out in the PRC Company Law, the statutory reserves may be distributed to stockholders or owners in the form of share bonus issues to increase share capital, provided that the remaining balance after the capitalization is not less than 25% of the registered capital.  These reserves are not distributable as cash dividends.

Seasonality

The Company typically experience seasonal variations in quarterly operating results and capital requirements.  Historically, unfavorable weather conditions for construction and interruptions of labors caused by Lunar New Year in the first quarter of a calendar year slow the construction progress of the Company’s real estate projects, reduce the operating income and demand for working capital.  The construction progress returns to normal in the second, third and fourth quarters of a year.  We expect this seasonal pattern to continue.
 
 
 
F-13

 
 
Recently Issued Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is not expected to have a material impact on the consolidated financial statements upon adoption.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company intends to conform to the new presentation required in this ASU beginning with its Form 10-Q for the three months ended March 31, 2012.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment” (ASU 2011-08), to simplify how entities test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-09, “Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan”, which is not expected to have no impact on the consolidated financial statements upon adoption.

Note 2 –
Accounts Receivable

   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
             
Receivable from sales of condominium units
 
$
484,239
   
$
567,879
 
Receivable from sales of land use rights
   
882,564
     
1,058,713
 
                 
   
$
1,366,803
   
$
1,626,592
 
  
Accounts receivable consists of balances due from customers for the sales of land use rights and completed condominium units in accordance with full accrual method. After customers made sufficient down payment, the Company recognizes related revenue. These receivable balances are unsecured, bear no interest and are due within 365 days from the date of the sales in accordance with sales contract.
 
Note 3 –
Revenue in Excess of Billings

Revenue in excess of billings represents the amount revenue recognized for certain residential and commercial units in Kirin County project in accordance with percentage-of-completion method over the cumulative payments received from respective customers.  Pursuant to sales contracts, customers are required to pay a minimum 20% of the full contract amount as a down payment, and pay the remaining balances before delivery of the properties by the Company, which is expected to be within next twelve months.
 
 
 
F-14

 

Note 4 –
Prepayments

Prepayments consisted of the following:

   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
             
Advances to suppliers and contractors
 
$
2,280,407
   
$
587,685
 
Financing service fees charged as prepaid interests
   
898,854
     
1,109,642
 
Prepaid stock subscription
   
3,124,121
     
-
 
Excessive business tax and LAT liabilities
   
1,928,793
     
463,849
 
                 
   
$
8,232,175
   
$
2,161,176
 
 
Pursuant to financing service contracts entered into between the Company, Xingtai Chengjiao Rural Credit Cooperative Union Association, and Industrial and Commercial Bank of China, Xingtai Branch, the Company paid service fees for the origination of several long-term loans before they were released to the Company. The financing service fees are regarded as prepaid loan interest and amortized over the respective terms of the loans.

In June 2011, the Company agreed to become an investor of Hebei Xingtai Rural Commercial Bank Co., Ltd. (“Xingtai RC Bank”)  The Company prepaid $3,124,121 (RMB20,000,000) to purchase 16,000,000 shares, or 6.96% of Xingtai RC Bank’s common stock.  The establishment of Xingtai RC Bank will be based on restructured business of Xingtai Chengjiao Rural Credit Cooperative Union Association, which provides several loans to the Company (see Note 12), and is subject to the approval by China banking regulatory agencies.

Business tax and LAT are payable each year at 5% and 1% - 2% of customer deposits received. The Company recognizes sales-related business tax and LAT in the income statement to the extent that they are proportionate to the revenue recognized each period.  Any excessive amounts of business and LAT liabilities recognized at period-end pursuant to tax laws and regulations over the amounts recognized in the income statement are capitalized in prepayments and will be expensed in subsequent periods.

Note 5 –
Other Receivables

The components of other receivables were as follows:

   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
             
Working capital borrowed by contractors
 
$
1,362,841
   
$
1,503,503
 
Working capital borrowed by Kong Village Relocation Program (Note 6)
   
2,186,885
     
1,512,447
 
Others
   
891,812
     
308,583
 
                 
   
$
4,441,538
   
$
3,324,533
 
 
Working capital borrowings by contractors and Kong Village Relocation Program are unsecured, bear no interest and become payable before the completion of the related construction and program. There was no allowance for doubtful accounts as at September 30, 2011 and December 31, 2010.
 
 
 
F-15

 
 
Note 6 –
Real Estate Properties and Land Lots under Development

The components of real estate properties and land lots under development were as follows:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Kirin County
           
       Costs of land use rights
 
$
10,406,470
   
$
9,810,506
 
       Other development costs
   
8,013,491
     
9,035,334
 
No. 79 Courtyard
               
       Costs of land use rights
   
91,608,048
     
58,449,748
 
       Other development costs
   
4,949,560
     
2,398,952
 
Kirin Bay
               
       Costs of land use rights
   
55,455,578
     
12,724,796
 
       Other development costs
   
5,866,222
     
-
 
                 
   
$
176,299,369
   
$
92,419,336
 

As at September 30, 2011, the Company has obtained certificates representing titles of the land use rights used for the development of Kirin County, No. 79 Courtyard and Kirin Bay projects.  The Company did not have land use rights not assigned to a real estate development project.

Part of Company’s real estate held for development and land lots under development were pledged as collateral for financial institution loans (Note 12).
 
Kong Village Relocation Program

Pursuant to incentive policies issued by Xingtai local government encouraging modernization of villages situated in urban vicinity, the Company participated in Kong Village Relocation Program in which the Company constructs a real property and transfers to local government at no costs, and reimburses costs incurred by local government compensating villagers and zoning and developing vacated land lots.  In exchange for the financing, the Company will be invited to bid for vacated land parcels for residential and commercial use at public auction at market price, and majority of the proceeds received by local government will be refunded to the Company. The Company capitalizes all expenditures attributable to Kong Village Relocation Program under land lots under development.  Land use rights will be auctioned in 2011.  The Company expects to secure land use rights through the auditions and will use acquired land use rights for the development of Kirin Bay project. In July 2011 the Company obtained the certificate of land use rights relating to part of land of Kirin Bay project through the aforementioned public auction.
 
 
 
F-16

 
 
Note 7 –
Accounts Payable

   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
             
Payables in relation to acquisitions of land use rights
 
$
30,235,767
   
$
-
 
Construction contractors
   
2,030,837
     
1,266,428
 
                 
   
$
32,266,604
   
$
1,266,428
 
 
In March 2011, the Company entered into a supplementary agreement with Huada Mining Co., Ltd. in relation to the acquisition of land use rights for the development of No. 79 Courtyard project. The Company agreed to increase the land use rights’ purchase price in the original contract, to compensate Huada Mining Co., Ltd. for its inability to realize the appreciation of the transferred land use rights during the substantially prolonged contract closing period of three years. The Company has unconditionally received the title of the land use rights in 2010 before the commencement of the supplementary agreement negotiation.  The payment is divided into several installments and the last installment is due in December 2011.  Unpaid balance bears no interest.  In accordance with the supplementary agreement, the Company and Huada Mining Co., Ltd. will not pursue any adjustments of the land use rights’ transfer price.

In May 2011, the Company entered into an agreement with Xingtai Kong Village Real Properties Co., Ltd., a company controlled by Kong Village Committee.  The Company agreed to pay $22,649,880 to compensate additional costs incurred by Kong Village Committee for the Kong Village Relocation Program.  The payment will be made in several installments and the last installment is due in November 2011.  An interest of 10% per annum is accrued for unpaid balance.  The Company capitalized the additional consideration in the costs land lots under development.

Note 8 –
Other Payables and Accrued Liabilities

The components of other payables and accrued liabilities were as follows:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Unrecognized tax benefit (Note 10(2))
 
$
5,572,651
   
$
4,318,008
 
Utility deposits from customers
   
1,748,965
     
913,196
 
Contract and bidding deposits
   
-
     
906,561
 
Others
   
183,948
     
371,572
 
                 
   
$
7,505,564
   
$
6,509,337
 

Note 9 –
Customer Deposits

Customer deposits consist of amounts received from customers relating to the sale of residential and commercial units. In the PRC, customers generally obtain financing for the purchase of their residential unit prior to the completion of the project. The lending institutions will provide the funds to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized. As of September 30, 2011 and December 31, 2010, the Company received $42,887,810 and $22,417,416 deposits from customers, respectively.
 
Note 10 –
Income Taxes

(1)  Corporate income tax

The Company is incorporated in the State of Nevada in the U.S., and is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax. Kirin China is incorporated in the British Virgin Islands.  Under the current laws of the British Virgin Islands, Kirin China is not subject to tax on income or capital gains.  In addition, no British Virgin Islands withholding tax is imposed upon payments of dividends by Kirin China. Kirin Development is incorporated in Hong Kong.  Kirin Development did not earn any income that was derived in Hong Kong for the period from its date of incorporation to September 30, 2011 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

The Company’s subsidiary and VIEs in China are subject to PRC Enterprise Income Tax (EIT) on taxable income. According to PRC tax laws and regulations, China subsidiary and VIEs are subject to EIT with the tax rate 25% since January 1, 2008, except that deemed profit method is applied to Xingtai Zhongding Construction Project Management Co., Ltd., which local tax authorities levy income tax based on deemed profit of 8% of revenue. A withholding income tax rate of 5% is applied if Kirin Management, the wholly-owned foreign enterprise, distributes dividends to its immediate holding company, Kirin Development. The Company has not recorded tax provision for U.S. tax purposes as they have no assessable profits arising in or derived from the United States and intends to permanently reinvest accumulated earnings in the PRC operations in the foreseeable future.
 
 
 
F-17

 
 
Income tax expenses for the nine months ended September 30, 2011 and 2010 are summarized as follows:

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
Current
           
    EIT expense
 
$
                   -
   
$
     217,837
 
    Unrecognized tax uncertainty benefit
   
        1,095,141
     
   1,469,119
 
    LAT expense
   
           722,547
     
     359,890
 
Deferred tax (benefit) expense
   
          (250,169
)
   
     853,494
 
                 
   
$
1,567,519
   
$
2,900,340
 

Income tax expenses for the three months ended September 30, 2011 and 2010 are summarized as follows:

   
Three Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
Current
           
    EIT expense
 
$
-
   
$
217,837
 
    Unrecognized tax uncertainty benefit
   
533,916
     
741,220
 
    LAT expense
   
371,711
     
(643,022
Deferred tax (benefit) expense
   
(143,551
)
   
748,715
 
                 
   
$
762,076
   
$
1,064,750
 
 
 
 
F-18

 
 
A reconciliation between taxes computed at the PRC statutory rate of 25% and the Company’s effective tax rate for the nine months ended September 30, 2011 and 2010 is as follows:

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
EIT at the PRC statutory rate of 25%
 
$
985,866
   
$
2,350,306
 
LAT expense
   
722,547
     
359,890
 
EIT benefit of LAT
   
(180,637
)
   
(89,972
)
Others
   
39,743
     
280,116
 
                 
   
$
1,567,519
   
$
2,900,340
 

(2)  Liability for unrecognized tax benefit
 
A reconciliation of the beginning and ending amount of liability associated with unrecognized tax benefit for the nine months ended September 30, 2011 and the year ended December 31, 2010 is as follows:
  
   
Nine Months Ended September 30,
2011
   
Year Ended December 31,
2010
 
   
(Unaudited)
       
             
Unrecognized tax benefit, as the beginning of the period or year
 
$
4,318,008
   
$
1,872,111
 
Increase due to government grant earned
   
1,095,141
     
2,323,422
 
Movement in current year due to foreign exchange rate fluctuation
   
159,502
     
122,475
 
                 
Unrecognized tax benefit, as the end of the period or year
 
$
5,572,651
   
$
4,318,008
 
 
The liability for unrecognized tax benefit is related to the government grant earned by the Company for the development of Kirin County project.  Because the grant is given by local government which received proceeds of the related land use rights through public auction, it is prevailing practice that the entities receive such grants do not include earned grant in taxable income. The Company believes that the possibility exists for local or higher tax authorities re-evaluate this tax position and reverse current practice. The unrecognized tax benefit, if ultimately recognized, will impact the effective tax rate. The Company did not accrue potential penalties and interest related to the unrecognized tax befit on the basis that tax authorities would unlikely levy penalties and interest. The Company does not expect changes in unrecognized tax benefit as of September 30, 2011 to be material in the next twelve months.

In accordance with PRC tax administration law and regulations, tax authorities generally have up to five years to claw back underpaid tax plus penalties and interests.  In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation.  Accordingly, the Company’s PRC subsidiary and VIEs tax years from 2006 to 2010 remains subject to examination by tax authorities.
 
 
 
F-19

 
 
(3)  Deferred tax
 
The tax effects of temporary differences that give rise to the following approximate deferred tax assets and liabilities as of September 30, 2011 and December 31, 2010 are presented below.

   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
             
Deferred tax assets
           
    Operating loss carry forward
 
$
1,469,929
   
$
418,116
 
    Excess of interest expense
   
774,937
     
188,576
 
    Excess of advertising expense
   
60,990
     
49,229
 
                 
    Offsetting with deferred tax liabilities
   
(1,534,183
)
   
(570,469
)
                 
Net deferred tax assets
 
$
771,673
   
$
85,452
 
                 
Deferred tax liability
               
    Revenue recognized based on percentage-of-completion
 
$
7,529,690
   
$
5,960,005
 
    Offsetting with deferred tax assets
   
(1,534,183
)
   
(570,469
)
                 
Net deferred tax liabilities
 
$
5,995,507
   
$
5,389,536
 
 
Note 11 –
Other Taxes Payable

Other taxes payable consisted of the following:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Business tax and related urban construction tax and education surcharge
 
$
1,292,431
   
$
2,905,065
 
LAT
   
2,283,488
     
31,663
 
                 
   
$
3,575,919
   
$
2,936,728
 
 
 
 
F-20

 
 
Note 12 –
Financial Institution Loans

Financial institution loans as of September 30, 2011 and December 31, 2010 consisted of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
             
Loans from Industrial and Commercial Bank of China, Xingtai Yejin Branch (“ICBC 2010 Loans”)
               
Due September 8, 2012, at 7.79% per annum
 
$
2,655,503
   
$
2,571,162
 
Due December 8, 2012, at 7.79% per annum
   
7,810,303
     
7,562,237
 
Due March 8, 2013, at 7.79% per annum
   
3,436,533
     
3,327,384
 
Due March 8, 2013, at 7.79% per annum
   
4,373,770
     
4,234,852
 
     
18,276,109
     
17,695,635
 
                 
Loans from Industrial and Commercial Bank of China, Xingtai Yejin Branch (“ICBC 2011 Loans”)
           
-
 
Due March 3, 2012, at 10.24% per annum
   
1,562,061
     
-
 
Due June 3, 2012, at 9.635% per annum
   
4,686,182
     
-
 
Due September 3, 2012, at 9.635% per annum
   
2,030,679
     
-
 
     
8,278,922
         
                 
Loans from Association of Xingtai Chengjiao Rural Credit Cooperative Union Association (“Credit Union 2009 Loan”)
               
Due June 25, 2011, at 10.26% per annum
   
-
     
1,512,448
 
     
-
     
1,512,448
 
                 
Loans from Association of Xingtai Chengjiao Rural Credit Cooperative Union Association (“Credit Union 2011 Loan”)
               
Due June 18, 2012, at 12.62% per annum
   
2,343,091
     
-
 
             
-
 
                 
Syndicated loans arranged by Xingtai Chengjiao Rural Credit Cooperative Union Association (“Syndicated Loans”)
           
-
 
Due December 5, 2012, at 10.58% per annum
   
10,465,807
     
-
 
Due December 6, 2012, at 10.58% per annum
   
2,030,679
     
-
 
     
12,496,486
     
-
 
                 
   
$
41,394,608
   
$
19,208,083
 
 
The loans’ terms are between two to three years and are all denominated in RMB.

Credit Union 2009 Loan, Credit Union 2011 Loan, and Syndicated Loans are fixed interest loans.  ICBC 2010 Loans and ICBC 2011 Loans are floating rate loans whose rates are set at 10% above 1-to-3 year base borrowing rate stipulated by the People’s Bank of China at the date of each drawdown, and are subject to revision every 12 months.  The Company also paid financing service fees for ICBC 2010 Loans, ICBC 2011 Loans and Syndicated Loans.  The financing service fees were paid prior to financial institution releasing loans to the Company as prepaid interests, and have been included in the determination of respective loans’ effective interest rates.

As of September 30, 2011 and December 31, 2010, the Company’s financial institution loans balances were secured by the Company’s real estate held for development with carrying value of $68,092,735 and $22,595,270, respectively.

Pursuant to covenants of the ICBC 2010 Loans, Xingtai Zhongding is required, among other things, to make no distributions to its equity holders before the loans are fully repaid, and to obtain the lender’s consent for any decrease in registered capital, transfer of material assets or shares of Xingtai Zhongding, and certain other activities which may adversely affect Xingtai Zhongding’s ability to repay the loan.  As of September 30, 2011, Xingtai Zhongding was in compliance with the applicable terms of all of ICBC Loans’ covenants.

Note 13 –
Stockholders’ Equity

On March 1, 2011, the Company completed the first closing of the Offering on sales of 69,000 Units for a total of $1,380,000, each consisting of 4 shares of common stock, a three-year Series A Warrant and a three-year Series B Warrant to purchase 1 share of common stock of the Company at an exercise price of $6.25 per share and $7.50 per share, respectively, subject to possible standard anti-dilutive adjustments.The Company received net proceeds from the issuance of the Units of $498,085 after payment of $881,915 of offering costs, which were charged to additional paid-in capital.
 
 
 
F-21

 

On July 15, 2011, the Company completed the second closing of the Offering.  An aggregate of 100,004 Units were sold in the second closing of the Offering for gross proceeds of $2,000,080.  As a result of the second closing of the Offering, Kirin International Holding, Inc. issued an aggregate of 400,016 shares of its Shares and warrants to acquire an aggregate of 200,008 shares of common stock to the investors in the second closing of the Offering.The Company received net proceeds from the issuance of the Units of $1,553,556 after payment of $446,524 of offering costs, which were charged to additional paid-in capital.
 
In connection with the initial and the second closing of the Offering, Kirin International Holding, Inc. issued warrants to acquire an aggregate of 54,082 shares of the company’s common stock (the “Agent Warrants”).  The Agent Warrants are exercisable for a period of five years from the original issuance date with an exercise price of $5.00 per share.  The exercise prices of the Agent Warrants are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances.
 
Note 14 –
Revenue

The Company’s revenue recognized under different methods for the nine months ended September 30, 2011 and 2010 were as follows:

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
Percentage-of-Completion method
               
Kirin County
 
$
21,116,800
   
 $
18,781,699
 
Full accrual method
               
Wancheng New World
   
-
     
927,259
 
                 
   
$
21,116,800
   
$
19,708,958
 

The Company’s revenue recognized under different methods for the three months ended September 30, 2011 and 2010 were as follows:

   
Three Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
Percentage-of-Completion method
               
Kirin County
 
$
10,502,842
   
 $
9,728,117
 
Full accrual method
               
Wancheng New World
   
-
     
144,655
 
                 
   
$
10,502,842
   
$
9,872,772
 

Note 15 –
Earnings per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares comprise shares issuable upon the exercise of Series A Warrants, Series B Warrants and Agent Warrants, using the treasury stock method. The reconciliation of the numerators and denominators of the basic and diluted EPS computations for income from continuing operations is shown as follows:
 
 
 
F-22

 

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
 Net income
 
$
2,375,945
   
$
6,500,883
 
Basic earnings per share
 
$
0.12
   
$
0.35
 
Basic weighted average shares outstanding
   
19,798,131
     
18,547,297
 
Diluted earnings per share
 
$
0.12
   
$
0.35
 
Diluted weighted average shares outstanding
   
19,799,261
     
18,547,297
 

   
Three Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
             
 Net income
 
$
1,283,628
   
$
4,387,084
 
Basic earnings per share
 
$
0.06
   
$
0.24
 
Basic weighted average shares outstanding
   
20,334,796
     
18,547,297
 
Diluted earnings per share
 
$
0.06
   
$
0.24
 
Diluted weighted average shares outstanding
   
20,338,320
     
18,547,297
 
 
Series A Warrants and Series B Warrants to acquire 138,000 shares of common stock were not included in the computation of diluted EPS because the effect would have been anti-dilutive.  Agent Warrants to acquire 54,082 shares of common stock had a dilutive effect for the nine and three months ended September 30, 2011, and incremental shares of 1,130 shares and 3,524 shares had been included in the calculation of diluted weighted average shares outstanding for the nine and three months ended September 30, 2011, respectively.  These warrants were still outstanding as of September30, 2011.
 
Note 16 –
Related Party Transactions and Balances
 
In 2008, a VIE of the Company, Xingtai Zhongding, was entitled to a government grant of $22,981,000.  Cash representing the grant has been transmitted to an escrow account held by Business Investment, a trust equity owner of Xingtai Zhongding, and was available for Xingtai Zhongding’s drawdown in accordance with the construction progress of Kirin County project.  For the nine months ended September 30, 2011 and 2010, the Company was entitled to a drawdown of $4,380,565 and $6,346,595 earned government grant from Business Investment. As at September30, 2011 and December 31, 2010, accumulated earned government grant of $19,941,213 and $16,844,938 was used to repay working capital provided by Jianfeng Guo, the controlling beneficiary owner of the Company (see below), and $2,155,644 and $nil was available for future drawdown.

Jianfeng Guo, through various affiliate companies and individuals, provided working capital to and/or withdrew fund from the Company from time to time. At each quarter and year end, affiliate companies and individuals which have receivable balances from and/or payable balances to the Company on Jianfeng Guo’s behalf, reassigned their balances to Jianfeng Guo pursuant to existing arrangements, as recited by multi-party agreements entered into between Jianfeng Guo, related affiliate companies and individuals, and the Company. As at September 30, 2011,the Company had receivables from related parties of $986,035, representing balances not assigned to Jianfeng Guo.  As at December 31, 2010, the Company had a payable balance to Jianfeng Guo of $3,840,111. These balances were unsecured, interest-free and did not have a specific repayment date.

Note1 7 –
Subsequent Events

Management has considered all events occurring through the date of consolidated financial statements have been issued, and has determined that there are no such events that are material to the consolidated financial statements, or all such material events have been fully disclosed.

 
F-23

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

The following discussion and analysis of the results of operations and financial condition for the nine months ended September 30, 2011 and 2010 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors.  See “Cautionary Note Regarding Forward Looking Statements.”

Overview

We are a private real estate development company focused on residential and commercial real estate development in “tier-three” cities in the PRC.  Our projects are currently concentrated in Xingtai City, Hebei Province.

We have completed our Ming Shi Hua Ting and Wancheng New World projects in Xingtai City. Our current projects include Kirin County, Kirin Bay and No.79 Courtyard, which call for the development of more than 7,000 homes over the next five years. We intend to expand into the Bohai Sea Surrounding Area, comprised of Beijing, Tianjin, Hebei Province, Liaoning Province and Shandong Province, and begin additional projects in the next three to five years.

We focus on middle-income customers in tier-three cities and strive to offer affordable homes. We believe that we are able to keep up with growth due to: (i) our experience in developing real estate projects; (ii) our experienced management team; (iii) our expertise in conducting real estate sales; (iv) our reputation in the local markets we serve; and (v) our strong working relationship with local government.

Recent Developments

·  
On March 1, 2011, we acquired all of the outstanding equity interests in Kirin China in exchange for shares of our common stock pursuant to a share exchange agreement between us, our former principal stockholder, Kirin China and the former principal shareholders of Kirin China (the “Share Exchange”).  As a result of the Share Exchange, Kirin China became our wholly-owned subsidiary and the former shareholders of Kirin China became our controlling stockholders.  The acquisition was accounted for as a recapitalization effected by a share exchange, wherein Kirin China is considered the acquirer for accounting and financial reporting purposes.  In connection with the Share Exchange, we spun out our prior operations to our former principal stockholder.  As a result of the Share Exchange, we are now a holding company, which, through certain contractual arrangements with the Operating Companies in the PRC, engages in the development and operation of real estate in the PRC.  On March 10, 2011, we changed our name to “Kirin International Holding, Inc.”

·  
On March 1, 2011 we completed an initial closing of our offering (the “Offering”) of units (the “Units”), each Unit consisting of four shares of our common stock, a Series A warrant and a Series B warrant. An aggregate of 69,000 Units were sold in the first closing of the Offering for gross proceeds to the Company of $1,380,000.  The Company issued an aggregate of 276,000 shares of its common stock, Series A warrants to purchase an aggregate of 69,000 shares of its common stock and Series B warrants to purchase an aggregate of 69,000 shares of its common stock to the investors in the first closing. The exercise prices with respect to the Series A warrants and the Series B warrants are $6.25 and $7.50, respectively, subject to adjustment.

·  
On July 15, 2011, we completed a second closing under the Offering pursuant to which we sold an aggregate of 100,004 Units for gross proceeds to the Company of $2,000,080.  The Company issued an aggregate of 400,016 shares of its common stock, Series A warrants to purchase an aggregate of 100,004 shares of its common stock and Series B warrants to purchase an aggregate of 100,004 shares of its common stock to the investors in the second closing. The exercise prices with respect to the Series A warrants and the Series B warrants are $6.25 and $7.50, respectively, subject to adjustment.

·  
The Offering expired on September 30, 2011.  During the Offering period the Company sold an aggregate of 169,004 Units for gross proceeds to the Company of $3,380,080.  The Company issued an aggregate of 676,016 shares of its common stock, Series A warrants to purchase an aggregate of 169,004 shares of its common stock and Series B warrants to purchase an aggregate of 169,004 shares of its common stock to the investors in the Offering. The exercise prices with respect to the Series A warrants and the Series B warrants are $6.25 and $7.50, respectively, subject to adjustment.
 
 
1

 
 
Third Quarter Financial Performance Highlights

The following summarizes certain key financial information for the third quarter ended by September 30, 2011.
 
·  
Total sales were approximately $10.5 million for the quarter ended September 30, 2011, an increase of $0.6 million, or 6.4%, from $9.9 million for the same period last year.
·  
Gross profit was $2.4 million for the quarter ended September 30, 2011 as compared to $3.0 million for the same period last year. Gross margin was 22.9% for the quarter ended September 30, 2011 as compared to 30.8% for the same period last year.
·  
Net income was $1.3 million for the quarter ended September 30, 2011, a decrease of $3.1 million, or approximately 70.7%, from $4.4 million for the same period of last year.

Factors Affecting our Operating Results

Growth of China’s Economy. We operate and derive all of our revenue from sales in China. Economic conditions in China, therefore, affect our operations, including the demand for our properties and the availability and prices of our raw materials among other expenses. China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 9.0% in 2008, 9.1% in 2009 and 10.3% in 2010. China is expected to experience continued growth in all areas of investment and consumption. However, if the Chinese economy were to become significantly affected by a negative stimulus, China’s growth rate would likely to decline and our revenue could decline.

Government Regulations. Our business and results of operations are subject to PRC government policies and regulations regarding the following:

·  
Land Use Right — According to the Land Administration Law of the PRC and Interim Regulations of the People’s Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas, individuals and companies are permitted to acquire rights to use urban land or land use rights for specific purposes, including residential, industrial and commercial purposes. We acquire land use rights from local governments and/or other entities for development of residential and commercial real estate projects.

·  
Land Development — According to the Urban Real Estate Development and Operation Administration Regulation, the Urban Real Estate Development and Operation Administration Rules of Hebei Province promulgated by the government of the Hebei Province, and the Real Estate Development Enterprise Qualification Administration Regulation, a real estate development enterprise shall obtain a Real Estate Development Enterprise Qualification Certificate. We obtained such certificates and seek to ensure that each phase of our projects complies with our certificates.

·  
Project Financing — According to the Land Administration Law and the Property Law of the PRC, the land use rights, houses and the buildings in process of construction may be pledged and mortgaged. From time to time, we pledge and mortgage our land use rights and real properties to lenders in order to obtain project financing.

·  
Property Sales and Transfers — For each project we develop, pursuant to the Commodity Houses Sale Administration Regulation, effective of June 1, 2001, we are required to obtain permits before commencing sales or presales of such project. Local governments act on the region’s interests by helping private companies streamline such projects and often coordinating with regional housing developers to allow for preliminary presales while Pre-Sales Permits are being processed. For the Company, the local government in Xingtai has recognized the financial cost we assumed in administering the resident removal process and offered us permission to collect non-refundable deposits. This is a local practice enacted by the Xingtai local government to encourage project development. By collecting deposits from certain buyers, we can offer a contractually fixed price to our buyer and ensure them a preference in housing selection.  We may not obtain such approval in other cities if we expand beyond Xingtai.
 
Interest Rate and Inflation Challenges. We are subject to market risks due to fluctuations in interest rates and refinancing of mid-term debt. Higher interest rates may also affect our revenues, gross profits and our ability to raise and service debt and to finance our developments.

According to the National Bureau of Statistics of China, China’s national inflation rate was 5.0% in 2008, (0.7) % in 2009 and 3.3% in 2010. Inflation could result in increases in the price of raw materials and labor costs.  We do not believe that inflation or deflation has affected our business materially as of the date of this Report.
 
 
2

 
 
Acquisitions of Land Use Rights and Associated Costs. We acquire land for development through the governmental auction process and by obtaining land use rights from third parties through negotiation, acquisition of entities, co-development or other joint venture arrangements.

Our ability to secure sufficient financing for land use rights acquisitions and property development depends on internal cash flows in addition to lenders’ perceptions of our credit reliability, market conditions in the capital markets, investors’ perception of our securities, the PRC economy and the PRC government regulations that affect the availability and cost of financing real estate companies or property purchasers.
 
Results of Operations

Comparison of Three Months Ended September 30, 2011 and September 30, 2010

   
Three Months Ended September 30,
 
   
2011
   
2010
 
         
% of
Revenue
         
% of
Revenue
 
Revenue from real estate sales, net
  $ 10,502,842       100 %   $ 9,872,772       100 %
Cost of real estate sales
    8,094,719       77 %     6,830,449       69 %
Gross profit
    2,408,123       23 %     3,042,323       31 %
Selling expenses
    673,348       6 %     543,049       6 %
Operating and administrative expenses
    849,784       8 %     323,182       3 %
Income from operations
    884,991       8 %     2,176,092       22 %
Government grant
    2,135,666       20 %     3,434,999       35 %
Interest expense
    (974,953 )     -9 %     (159,257 )     -2 %
Total other income
    1,160,713       11 %     3,275,742       33 %
Income before income taxes expense
    2,045,704       19 %     5,451,834       55 %
Income taxes expense
    762,076       7 %     1,064,750       11 %
Net income
    1,283,628       12 %     4,387,084       44 %

Our net income for the three months ended September 30, 2011 was $1,283,628, a decrease of 70.7% or $3,103,456, from $4,387,084 for the three months ended September 30, 2010.  This decrease was mainly due to an overall increase in operating expenses, interest expense, and decline in gross margin. Kirin County contributed revenue of $10,502,842 for the three months ended September 30, 2011 and $9,728,117 for the same period in 2010.  Kirin County’s percentage-of-completion rose from 71.2% as of December 31, 2010 to 89.2% as of September 30, 2011 compared with an increase of 26.2% during the same period in 2010.

Revenues and Gross Profit

   
Three Months Ended September 30,
 
   
2011
   
2010
 
         
% of
Revenue
         
% of
Revenue
 
Revenue from real estate, net
  $ 10,502,842       100 %   $ 9,872,772       100 %
  -Kirin County
    10,502,842       100 %     9,728,117       99 %
  -Wancheng New World
    -       -       144,655       1 %
Cost of real estate sales
    8,094,719       77 %     6,830,449       69 %
  -Kirin County
    8,094,719       77 %     6,751,351       68 %
  -Wancheng New World
    -       -       79,098       1 %
Gross profit
    2,408,123       23 %     3,042,323       31 %
  -Kirin County
    2,408,123       23 %     2,976,766       30 %
  -Wancheng New World
    -       -       65,557       1 %
Profit margin
    23 %             31 %        
  -Kirin County
    23 %             31 %        
  -Wancheng New World
    0 %             45 %        

Under the percentage-of-completion method, the percentage of completed construction at a point in time is multiplied by total value of contracts signed up to that same point. The difference between these figures from different periods reflects the revenue generated during that time frame from the relevant project.
 
 
3

 
 
Cost of Real Estate Sales.  Cost of real estate sales consist of land use rights costs, construction and installation costs.  Our costs of real estate sales for the three months ended September 30, 2011 were $8,094,719, an increase of $1,264,270, or approximately 18.5%, compared to $6,830,449 for the three months ended September 30, 2010.  Our total cost of real estate sales increased proportionally in relation to new contracts signed and percentage-of-completion of our Kirin County project during the three months ended September 30, 2011.

Gross Profit.  Gross profit for the three months ended September 30, 2011 was $2,408,123, or 23%, compared to $3,042,323, or 31%, for the three months ended September 30, 2010.  Commercial units generate higher profits than residential units. We derived more profit from sales and construction of residential units in the three month ended September 2011, which led to a decrease of gross profit.
 
The following tables set forth the aggregate Gross Floor Area (GFA) and the related revenue recognized by project for the three months ended September 30, 2011 and 2010:
 
         
Percentage of completion
for the Three Months ended September 30
   
Percentage of completion
as of September 30
   
GFA Sold for the Three Months ended September 30,
   
GFA Sold as of September 30,
 
   
Total GFA
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
   
Sq. Meters
   
%
   
%
   
%
   
%
   
Sq. Meters
   
Sq. Meters
   
Sq. Meters
   
Sq. Meters
 
Kirin County
   
192,817
     
8.6%
     
13.7%
     
89.2%
     
58.2%
     
8,121
     
4,439
     
157,024
     
125,047
 
Wancheng New World
   
54,829
     
-
     
-
     
100%
     
100%
     
-
     
223
     
54,829
     
54,829
 
Total
   
247,646
   
8.6%
   
13.7%
                 
8,121
     
4,662
     
211,853
     
179,876
 

 
Value of Signed Contracts for the Three Months ended September 30,
 
Value of Signed Contracts as of September 30,
 
Revenue recognized for the
Three Months ended September 30,
 
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
 
Kirin County
 
$
5,022,957
   
$
5,880,281
   
$
102,235,295
   
$
68,633,547
   
$
10,502,842
     
100%
%
 
$
9,728,117
     
99%
 
Wancheng New World
   
-
     
142,672
     
28,998,255
     
28,330,277
     
-
     
-
     
144,655
     
1%
 
Total
   
5,022,957
     
6,022,953
     
131,233,550
     
96,963,824
     
10,502,842
     
100%
%
   
9,872,772
     
100%
 

The value of newly signed sales contracts totaled $5,022,957 for the three months ended September 30, 2011 compared to $6,022,953 for the three months ended September 30, 2010. Our GFA sales were 8,121 square meters for Kirin County for the three months ended September 30, 2011 compared to 4,439 square meters for Kirin County and 223 square meters for Wancheng New World in the same period of 2010.  The value of newly signed sales contracts declined because there are fewer homes in our Kirin County project available for sale to our customers.  Kirin County’s percentage-of-completion was 8.6% for the three months ended September 30, 2011 which represents a decrease from 13.7% in the same 2010 period, mainly due to the construction has shifted to exterior decoration, which is time consuming and yields lower percentage-of-completion in a specific period of time.
 
 
4

 
 
The following table sets forth the consolidated square meters sold and average selling price per square meter by each project for the three months ended September 30, 2011 and 2010:

   
Three Months Ended September 30,
 
   
2011