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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2014

 

or

 

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

 

For the transition period from _______________ to __________________

 

Commission File Number: 333-166343

 

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.)

     

12thFloor,Building F, Phoenix Plaza, No.A5,

ShuguangXili,

Chaoyang District, Beijing, 100028

People’s Republic of China

  100028
(Address of principal executive offices)   (Zip Code)

 

+86 10 8455 4001 (Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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 ☒     No ☐

 

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

 

Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☒
    (Do not check if a smaller reporting company)

 

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

 

The registrant had 20,596,546 shares of common stock, $0.0001 per share, outstanding at November 21, 2014.

 

 

 

 

 

KIRIN INTERNATIONAL HOLDING, INC.

 

QUARTERLY REPORT ON FORM 10-Q

SEPTEMBER 30, 2014

 

TABLE OF CONTENTS

 

    PAGE
     
PART I FINANCIAL INFORMATION  4
     
Item 1. Financial Statements (Unaudited)  4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  28
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk  41
     
Item 4. Controls and Procedures  41
   
PART II OTHER INFORMATION  42
     
Item 1. Legal Proceedings  42
     
Item 1A. Risk Factors  42
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  42
     
Item 3. Defaults Upon Senior Securities  42
     
Item 4. Mine Safety Disclosures 42 
     
Item 5. Other Information  42
     
Item 6. Exhibits  42
   
SIGNATURES  43

 

2
 

 

SPECIAL NOTE REGARDING VOLUNTARY FILER STATUS

 

Kirin International Holding, Inc. is a “voluntary filer” with the U.S. Securities and Exchange Commission. This means that the Company is not required to file Current and Periodic Reports with the U.S. Securities and Exchange Commission. Furthermore, the Company is not subject to the going private rules and certain tender offer regulations, and the beneficial holders of the Company’s securities do not need to report on acquisitions or depositions of the Company’s securities or their plans regarding their influence and control over the Company. Therefore the Company’s status a voluntary filer reduces investors’ rights to access significant information regarding the Company and its controlling shareholders.

 

The Company’s voluntary filer status may lead to its removal from the over the counter bulletin board, as Rule 6530 of the Financial Industry Regulatory Authority provides that issuers must be required to file reports pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 in order to remain listed.

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements”. 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 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 and Variable Interest Entities.

 

3
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

KIRIN INTERNATIONAL HOLDING, INC.

CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
ASSETS        
         
Cash and cash equivalents  $12,981,134   $23,407,551 
Restricted cash   13,469,418    8,362,905 
Accounts receivable   127,626    231,598 
Notes receivable   600,800    1,418,595 
Revenue in excess of billings   8,405,855    10,059,251 
Prepayments   29,284,413    26,436,726 
Other receivables   35,085,958    16,189,890 
Receivable from a related party   4,837,877    4,247,788 
Short-term loan to related parties   -    12,250,572 
Loan to a related party   41,528,991    33,204,995 
Real estate property completed   888,295    1,427,910 
Real estate properties and land lots under development   187,405,874    176,472,218 
Investments   8,663,364    7,929,422 
Property and equipment, net   6,505,019    4,163,033 
Deferred tax assets   5,467,748    4,676,410 
Total assets  $355,252,372   $330,478,864 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Liabilities          
Accounts payable  $98,324,770   $76,120,010 
Income taxes payable   2,020,890    2,079,681 
Other taxes payable   2,195,934    2,885,586 
Other payables and accrued liabilities   16,825,806    13,743,052 
Customer deposits   89,652,380    87,713,585 
Loans payable   90,968,161    89,466,798 
Total liabilities   299,987,941    272,008,712 
           
Commitments and contingencies          
           
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; 20,596,546  shares issued and outstanding as of September 30, 2014 and December 31, 2013 respectively   2,060    2,060 
Additional paid-in capital   37,149,630    37,149,630 
Statutory reserve   1,403,154    1,403,154 
Retained earnings   7,833,119    10,553,505 
Accumulated other comprehensive income   8,100,437    8,514,860 
Total Kirin International Holding, Inc.’s equity   54,488,400    57,623,209 
           
Non-controlling interest   776,031    846,943 
Total stockholders’ equity   55,264,431    58,470,152 
Total liabilities and stockholders’ equity  $355,252,372   $330,478,864 

 

See notes to the consolidated financial statements

 

Certain of the assets of the VIEs can be used only to settle obligations of the consolidated VIEs. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 3). 

 

4
 

 

KIRIN INTERNATIONAL HOLDING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

 

   Nine Months Ended
September 30,
   Three Months Ended
September 30,
 
   2014   2013   2014   2013 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
Revenue from real estate sales, net  $82,263,479   $102,314,315   $34,621,648   $36,900,545 
Cost of real estate sales   70,402,868    91,164,755    30,593,245    33,641,375 
Gross profit   11,860,611    11,149,560    4,028,403    3,259,170 
                     
Operating expenses                    
Selling expenses   2,794,450    3,248,828    1,129,324    1,054,420 
General and administrative expenses   6,916,512    6,636,340    2,296,674    2,067,302 
                     
Total operating expenses   9,710,962    9,885,168    3,425,998    3,121,722 
                     
Income from operations   2,149,649    1,264,392    602,405    137,448 
                     
Other income (expenses)                    
Investment income   504,548    205,738    -    90,500 
Interest expense, net   (3,852,350)   (6,282,089)   (1,330,173)   (2,400,120)
                     
Total other expenses   (3,347,802)   (6,076,351)   (1,330,173)   (2,309,620)
                     
Loss before income taxes   (1,198,153)   (4,811,959)   (727,768)   (2,172,172)
                     
Income taxes expense (benefit)   1,593,145    (99,906)   709,862    180,217 
                     
Net loss  $(2,791,298)  $(4,712,053)  $(1,437,630)  $(2,352,389)
Less: net loss attributable to non-controlling interest   (70,912)   -    (26,857)   - 
Net loss attributable to stockholder of Kirin International Holding, Inc.  $(2,720,386)  $(4,712,053)  $(1,410,773)  $(2,352,389)
Net loss   (2,791,298)   (4,712,053)   (1,437,630)   (2,352,389)
                     
Other comprehensive income (loss)                    
Foreign currency translation adjustment   (414,423)   1,376,802    13,692    316,431 
Total comprehensive loss   (3,205,721)   (3,335,251)   (1,423,938)   (2,035,958)
Less: other comprehensive loss attributable to non-controlling interest   (70,912)   -    (26,857)   - 
Comprehensive loss attributable to stockholder of Kirin International Holding, Inc.  $(3,134,809)  $(3,335,251)  $(1,397,081)  $(2,035,958)
                     
Basic and diluted loss per share  $(0.14)  $(0.23)  $(0.07)  $(0.11)
Basic and diluted weighted average shares outstanding   20,596,546    20,596,546    20,596,546    20,596,546 

 

See notes to the consolidated financial statements

 

5
 

 

KIRIN INTERNATIONAL HOLDING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine Months Ended
September 30,
 
   2014   2013 
   (Unaudited)   (Unaudited) 
         
Cash flows from operating activities:        
Net loss  $(2,791,298)   (4,712,053)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities          
Depreciation   171,441    82,150 
Deferred tax benefit   (824,016)   (2,752,031)
           
Changes in operating assets and liabilities          
Restricted cash   (5,168,414)   (1,764,200)
Accounts receivable   102,488    1,166,572 
Notes receivable   812,978    - 
Revenue in excess of billings   1,586,253    3,627,391 
Prepayments   (3,030,896)   (14,063,607)
Other receivables   (22,796,351)   (9,216,738)
Receivable from a related party   (619,651)   33,216 
Real estate property completed   530,370    956,106 
Real estate properties and land lots under development   (12,149,045)   7,944,731 
Accounts payable   22,745,416    (2,079,374)
Income taxes payable   (44,644)   935,220 
Other taxes payable   (670,595)   1,101,105 
Other payables and accrued liabilities   6,871,532    1,662,177 
Customer deposits   2,539,525    26,297,637 
           
Net cash provided by (used in) operating activities   (12,734,907)   9,218,302 
           
Cash flows from investing activities:          
Purchases of equipment   (2,945,221)   (3,043,390)
Proceeds from disposal of equipment   427,375    - 
Repayment of loans from a related party   1,138,169    24,109,864 
Loans to a related party   (9,696,731)   (43,584,205)
Short term loan received from related parties   12,178,406    - 
Cash paid for investment   (783,042)   (3,857,578)
           
Net cash provided by (used in) investing activities   318,956    (26,375,309)
           
Cash flows from financing activities:          
Proceeds from financial institution loans   42,274,842    22,502,540 
Repayment of financial institution loans   (40,161,100)   (12,054,932)
Proceeds from non-controlling stockholder   -    270,000 
Net cash provided by financing activities   2,113,742    10,717,608 
           
Effect of exchange rate changes on cash and cash equivalents   (124,208)   470,141 
Net decrease in cash and cash equivalents   (10,426,417)   (5,969,258)
           
Cash and cash equivalents - beginning of the period   23,407,551    24,098,688 
           
Cash and cash equivalents - end of the period  $12,981,134    18,129,430 
           
Supplementary cash flow information          
Cash paid for income tax  $1,338,986    2,014,759 
Cash paid for interest expense  $6,077,980    5,819,940 

 

See notes to the consolidated financial statements

 

6
 

 

KIRIN INTERNATIONAL HOLDING, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Organization and Description of Business

 

Kirin International Holding, Inc. (the “Company”) was incorporated on December 23, 2009 under the laws of the State of Nevada. The Company and its subsidiaries, Variable Interest Entities (“VIEs”) and VIEs’ subsidiaries are engaged in the development and sales of residential and commercial real estate properties, and development of land lots in Xingtai city, Hebei province, People’s Republic of China (“China”, or the “PRC”).

 

As of September 30, 2014, the Company had following wholly-owned entities:

 

   

Place of
Incorporation

  Date of
Incorporation
  Principal
Activities
             
Subsidiaries            
Kirin China Holding Limited (“Kirin China”)   British Virgin Islands     July 6, 2010   Investment holding  
Kirin Huaxia Development Limited (“Kirin Development”)   Hong Kong, China     July 27, 2010   Investment holding  
Shijiazhuang Kirin Management Consulting Co., Ltd. (“Kirin Management”)   Shijiazhuang, Hebei province, China     December 22, 2010   Primary beneficiary of VIEs  
Spectrum International Enterprise, LLC   State of California, United States of America.     January 11, 2013   Property holding  
Brookhollow Lake, LLC   State of California, United States of America.     February 8 , 2013   Property holding  
Greenfield International Corporation   State of California, United States of America     August 12, 2013   Whole sale Agent of Food & Grocery  
Kirin Hopkins Real estate Group, LLC   State of California, United State of America     July 23, 2013   Real estate development  
Newport Property Holding, LLC   State of California United State of America     July 11, 2013   Real estate investment and management  
               
VIEs              
HebeiZhongding Real Estate Development Co., Ltd. (“HebeiZhongding”)   Xingtai, Hebei province, China     July 16, 2007   Real estate development  
XingtaiZhongdingJiye Real Estate Development Co., Ltd.   Xingtai, Hebei province, China     August 7, 2008   Real estate development  
               
Subsidiaries of VIEs              
XingtaiZhongding Construction Project Management Co., Ltd.   Xingtai, Hebei province, China     September 3, 2007   Dormant  
XingtaiZhongding Kirin Real Estate Development Co., Ltd. (formerly known as XingtaiZhongding Business Service Co., Ltd., “Business Service”)   Xingtai, Hebei province, China     July 29, 2008   Real estate development  
Huaxia Kirin (Beijing) Garden Project Co., Ltd.   Beijing, China     January 19, 2010   Garden design and planting  
XingtaiHetai Real Estate Development Co., Ltd.   Xingtai, Hebei province, China     December 6, 2010   Real estate development  
Huaxia Kirin (Beijing) Property Management Co., Ltd.   Beijing, China     December 19, 2011   Property management  
HebeiZhongding Property Service Co., Ltd.   Xingtai, Hebei province, China     December 19, 2011   Property management  

 

In August, 2014, two subsidiaries (Baoding Heda Kirin Real Estate Development Co., Ltd and Baoding Heda Kirin Investment Co., Ltd) were closed.

 

7
 

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements for the three months and nine months ended September 30, 2014 and 2013 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations.  Accordingly, the reader of this Form 10-Q is referred to Kirin International Holding, Inc. (“the Company”) Form 10-K for the year ended December 31, 2013 for further information.  In the opinion of management of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for fair presentation and to ensure that the consolidated financial statements are not misleading.  The results of operations for the three month and nine months periods ended September 30, 2014 are not necessarily indicative of the operating results for the year.  The consolidated balance sheets as of September 30, 2014 and December 31, 2013, and the consolidated statements of operations and comprehensive income (loss) for the three months and nine months periods ended September 30, 2014 and 2013, the consolidated statements of cash flows for the nine months periods ended September 30, 2014 and 2013 include those of the Company, its subsidiaries and VIEs, and subsidiaries of VIEs. All material intercompany transactions and balances have been eliminated in consolidation. 

 

Reclassifications

 

Certain amounts in the September 30, 2013 condensed consolidated financial statement have been reclassified to conform to the September 30, 2014 presentation.

 

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 percentage-of-completion of properties under construction and related revenue and costs recognized, allowance for doubtful accounts, recoverability of deferred tax assets, and the assessment of impairment of long-lived assets. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

 

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.

 

  Level 3 inputs are unobservable inputs for the asset or liability.

 

8
 

 

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.

 

Reporting Currency and Foreign Currency Translation

 

The functional currency of the Company, Kirin China, Kirin Development and Kirin Management is the United States dollar (“US$”). The functional currency of the Company’s VIEs and subsidiaries of VIEs in the PRC is Renminbi (“RMB”). The Company’s reporting currency is US$. The assets and liabilities of the Company’s VIEs and subsidiaries of 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 operations and comprehensive income (loss) in accordance with ASC 220. 

 

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 and properties where the construction period is twelve months or less is recognized by the full accrual method when (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 for  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.

 

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 a 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 that pieces of construction completed by contractors have met 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 transactions are recognized in the period in which the losses are identified.

 

9
 

 

Except for the down payment, the remaining contract price can be settled by several installments or financed by mortgage.  The Company requires customers to pay a 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 the application for the mortgage loan has been filed and the Company reasonably believes the mortgage will be approved.  The Company provides guarantees for mortgage loans from financial institutions to customers (see “Restricted cash”).  Such guarantees expire when customers have obtained a House Ownership Certificate for 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 the 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. 

 

A project’s revenue and cost estimates have an inherent nature of uncertainty throughout its multiple-year development period.  Factors that potentially affect a project’s total revenue and cost estimates (including a salable unit’s allocated cost), include, but are not limited to: (1) changes in government’s land-use planning, building density, plot ratio and other quotas; which lead to changes of total gross floor area available for sale and per-unit cost estimate; (2) the Company’s voluntary modification of design to enhance attractiveness and competiveness of an on-going project; (3) fluctuation of commodity prices and government-regulated labor cost rates; (4) contractors’ request to renegotiate consideration of fixed-price agreements, for which the Company’s preference of complete the discussion early to avoid unfavorable impact on construction progress; (5) unforeseeable geological and engineering difficulties causing modifications of a project’s construction plan; (6) government agencies’ compliance inspections in the late stage of the construction, which may lead to modification of design; (7) major prospective property buyers’ request to alter specifications of the property to be delivered; and (8) contractors’ claims throughout the construction period.

 

The Company enters into non-cancellable, fixed-price pre-sale contracts with homebuyers.  Under certain circumstances, for example, changes in floor size or floor plan of a property due to legal compliance requirements, or change of deliverable standards upon request of major customers, we may agree to revise the pre-sale contract price to match conditions of the properties to be delivered to customers.  Furthermore, the Company is subject to a penalty payable to homebuyers in the event the property is delivered later than the date specified in the pre-sale contracts, and usually such penalty constitutes only an insignificant amount compared to the contract value.  These adjustments to contract price are recorded as a reduction of revenue in the current period on a cumulative catch-up basis.

 

With regard to a project’s cost estimate, the Company’s in-house cost estimators work in collaboration with a committee also comprising the Company’s engineers, project managers, financial professionals, and senior management staff, to prepare at least two versions of the cost estimate.  The first version is a Preliminary Cost Estimate, prepared in schematic design stage, which is before commencement of excavation and recognition of revenue.  Preliminary Cost Estimate utilizes top-down approach. It projects major cost components at higher level using a project’s planned parameters (e.g., building density, by-category gross floor area) and standard per-unit cost from past experience (e.g., concrete cost, measured at US$ per square meter).  Preliminary Cost Estimate is intrinsically less accurate; it heavily relies on the Company’s historical information accumulated in the development of similar types of construction in similar municipal region.  The second version is Detailed Cost Estimate, prepared after receiving construction documents from the architect.  Ideally Detailed Cost Estimate can be available before commencement of excavation and recognition of revenue; however, in order to suit the pre-sale progress and to maximize flexibility, construction documents are provided in several batches as the construction processes.  It is likely that a project’s Detailed Cost Estimate is finalized only in late stage of the construction.  Detailed Cost Estimate utilizes bottom-up approach.  Based on construction documents and assisted by the Company’s computerized Building Information Modeling system, Detailed Cost Estimate is able to sum up cost at element level of a real estate property, taking into consideration of quantitative consumption and on-going rate of materials, labor, machinery and overheads. For the purpose of preparing the Company’s consolidated financial statements, a project’s cost estimate is reviewed by in-house cost estimators at each year-end and adjusted for material developments in the interval.  Changes in estimates of a project’s revenue and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a project’s percentage of completion. When a project’s total cost estimate to be incurred exceeds total estimated revenue to be earned, a provision for the entire loss on the project is recorded in the period the loss is determined. In addition to our existing monthly detailed cost estimate upon receiving construction data from the architects, we have hired additional competent professionals to ensure early identification of variances from prior estimated project revenue and cost, to reduce the likelihood of significant changes to the estimates.

 

10
 

 

Real Estate Capitalization and Cost Allocation

 

Real estate property completed and Real estate properties and land lots under development consist of residential and commercial units under construction and units completed. Properties under development or completed 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 contributions 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, and 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 grants related to real estate projects developed by the Company are recognized as other income when the Company has complied with the conditions attached to the grant and the grant’s collection is reasonably assured.

 

In 2008, Xingtai Zhongding was entitled to a government grant of RMB 160,000,000 (approximately $22,981,000, translated at historical exchange rate) related to Kirin County project to subsidize the modernization of the neighborhood where the real estate project is 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 three months and nine months ended September 30, 2014 and 2013, the Company did not recognize any grant income, respectively.  All government grants related to Kirin County have been recognized as of December 31, 2012 as the construction of Kirin County completed during the year.  The local government has arranged a lump sum payment of the grant to Xingtai Jiye Business Investment Co., Ltd. (“Business Investment”), a related party of the Company, 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, 2014, 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 development. For the nine months ended September 30, 2014 and the year ended December 31, 2013, $130,328 and $326,259 were capitalized as properties under development, respectively.

 

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 the majority of its bank accounts in the PRC. 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 is limited because the Company conducts transactions and deposits balances with several state-owned banks with high credit ratings assigned by international credit rating agencies.

 

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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 $13,469,418 and $8,362,905 as at September 30, 2014 and December 31, 2013, 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.

 

Investments

 

Investments in securities of private companies the Company does not have a controlling interest in and is unable to exercise significant influence over are accounted for using cost method of accounting. The Company evaluates at each period end whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investments. If a decline in fair value is determined to be other than temporary, an impairment loss is recognized to reduce an investment’s cost to its fair value.

 

Property and Equipment, Net

 

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

 

  Estimated Useful Lives
Fixtures, furniture and office equipment 5 years
Property in US 39 years

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. 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, VIEs and subsidiaries of 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. 

 

12
 

 

Unrecognized tax benefits represent the difference the benefits recognized for the financial statement purposes and tax positions taken or expected to be taken in a tax return.

 

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.

 

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 borrowing 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.

 

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.  The Company had losses, therefore, exclude all dilutive securities in the calculation for the three months and nine months ended September 30, 2014.

 

Advertising Expenses

 

Advertising costs are expensed as incurred. For the three months ended September 30, 2014 and 2013, the Company recorded an advertising expense of $791,467 and $668,035, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded an advertising expense of $1,789,192 and $1,886,130, 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 proven 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, 2014 and December 31, 2013, the Company retained $113,921 and $140,661 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 as prospective expenditure amount on property warranty by the Company is insignificant.  For the three months and nine months ended September 30, 2014 and 2013, the Company didn’t incur incidental costs in addition to the amount retained from contractors.

 

13
 

 

Impairment Losses

 

Completed real estate properties and land 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, a property that is considered impaired is written down to its fair value less costs to sell. Impairment losses are recognized through a charge to expense. No impairment of completed real estate properties or land lots was recognized for the three months and nine months ended September 30, 2014 and 2013.

 

Stock-Based Compensation

 

The Company adopted ASC 718 Stock Compensation.  Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period.  The fair value estimate is based on the share price and other pertinent factors.  The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company used a mix of historical data and future assumptions to estimate pre-vesting forfeitures and to record stock-based compensation expense only for those awards that are expected to vest.

 

Recently Issued Accounting Pronouncements

 

The Company does not believe recently issued but not yet effective accounting standards from ASU 2014-01 to ASU 2014-17, if currently adopted, would have a material effect of the consolidated financial position, results of operation and cash flows.

 

Note 3 – Variable Interest Entities

 

VIE Agreements were entered into 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.  

 

14
 

 

Summary information regarding consolidated VIEs is as follows:

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
ASSETS        
         
Cash and cash equivalents  $11,734,691   $19,219,581 
Restricted cash   13,469,418    8,362,905 
Accounts receivable   127,626    231,598 
Notes receivable   -    817,795 
Revenue in excess of billings   8,405,855    10,059,251 
Prepayments   29,284,413    26,436,726 
Other receivables   44,292,253    23,763,798 
Receivable from a related party   4,837,877    4,247,788 
Short-term loan to related parties   -    12,250,572 
Loan to a related party   41,528,991    33,204,995 
Real estate property completed   888,295    1,427,910 
Real estate properties and land lots under development   187,405,874    176,472,218 
Investments   7,147,498    7,196,598 
Property and equipment, net   597,146    654,998 
Deferred tax assets   5,467,748    4,676,410 
Total assets  $355,187,685   $329,023,143 
           
Accounts payable  $98,324,770   $76,120,010 
Income taxes payable   2,020,890    2,079,681 
Other taxes payable   2,195,934    2,885,487 
Other payables and accrued liabilities   15,773,691    12,558,258 
Customer deposits   89,639,787    87,700,992 
Loans payable   90,968,161    89,466,798 
Total liabilities  $298,923,233   $270,811,226 

  

For the nine months ended September 30, 2014 and 2013, the financial performance of VIEs reported in the consolidated statements of operations and comprehensive loss includes sales of approximately $82,260,000 and $102,300,000, respectively, cost of sales of approximately $70,400,000 and $91,200,000, respectively, operating expenses of approximately $8,370,000 and $9,100,000, respectively, and net loss of approximately $1,560,000 and $4,000,000, respectively.

 

Note 4 – Accounts Receivable

 

Accounts receivable consists of property management fee receivable and balances due from completed properties in accordance with full accrual method, under which the Company recognizes related revenue after customers have made sufficient down payment.

 

As at September 30, 2014, accounts receivable due from complete properties represents revenue in excess of billings balances of Kirin County project as the construction is completed and related condominium units are available for delivery to customers.

 

Receivables from sales of condominium units are collateralized by underlying properties’ Ownership Certificates and bear no interest.

  

Note 5 – Notes receivable

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Receivable from Bank acceptance notes due from related party  $-   $817,795 
Receivable from individual (Promissory note)   600,000    600,000 
Other   800    800 
   $600,800   $1,418,595 

 

The Promissory note with original principle amount of $600,000 will be due on August 16, 2016, at the rate of 3% per annum.

 

15
 

 

Note 6 – Revenue in Excess of Billings

 

Revenue in excess of billings represents the amount revenue recognized for certain residential and commercial units in commercial building of Kirin County, No.79 Courtyard and Kirin Bay projects in accordance with the 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 the next 12 to 24 months, depending on construction progress of related real estate properties. As of September 30, 2014 and December 31, 2013, revenue in excess of billings is $8,405,855 and $10,059,251, respectively.

 

Note 7 – Prepayments

 

Prepayments consisted of the following:

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Advances to suppliers and contractors  $1,333,307   $1,245,073 
Financing service fees charged as prepaid interests   1,273,537    1,831,157 
Excessive business tax and LAT liabilities   10,172,384    9,186,346 
Prepayments-related parties   16,505,185    14,174,150 
   $29,284,413   $26,436,726 

 

Pursuant to financing service contracts entered into between the Company, XingtaiChengjiao 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.

 

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 tax 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.

 

The prepayment to related parties is regarding to construction contract. In certain area, the related parties have more bargain power with the construction contractors. The construction contractors will provide construction service.

 

Note 8 – Other Receivables

 

The components of other receivables were as follows:

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Working capital borrowed by contractors  $26,780,192   $13,544,760 
Deposit   6,157,059    964,998 
Staff allowance   1,272,806    687,875 
Receivables of housing maintenance funds   237,622    392,781 
Others   638,279    599,476 
   $35,085,958   $16,189,890 

 

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Working capital borrowings by contractors are unsecured, bear no interest and become payable before the completion of the related construction. There was no allowance for doubtful accounts as at September 30, 2014 and December 31, 2013.

 

Note 9 – 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, 
   2014   2013 
   (Unaudited)     
Properties under development        
Kirin County        
Costs of land use rights  $1,110,047   $1,329,290 
Other development costs   502,917    528,347 
No. 79 Courtyard          
Costs of land use rights   51,069,148    54,720,055 
Other development costs   20,509,688    15,413,036 
Kirin Bay          
Costs of land use rights   28,291,461    35,605,444 
Other development costs   22,189,870    13,316,057 
           
Land lots under development   63,732,743    55,559,989 
   $187,405,874   $176,472,218 

 

As at September 30, 2014, 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.  All our land use rights are assigned to real estate projects.

 

Part of Company’s real estate properties under development and land lots under development were pledged as collateral for financial institution loans (Note 16).

 

The Residential buildings of Kirin County are fully completed in December, 2012. As of September 30, 2014 and December 31, 2013, the real estate property completed is $888,295 and $1,427,910, respectively.

 

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 (the “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, 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 the Program as land lots under development. The Company expects to secure land use rights through the auctions and will use acquired land use rights for the development of Kirin Bay and other project. In July 2011 the Company obtained the certificate of land use rights for a piece of land covered by the Program through the aforementioned public auction, and used it for the development of Kirin Bay project. Other land lots covered by the Program are expected to be auctioned and obtained by the Company in the near future. As at September 30, 2014 and December 31, 2013 capitalized expenditures under the Program, representing accumulated costs of the land use rights to be obtained by the Company in the future, were $63,732,743 and $55,559,989, respectively.

 

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Note 10 – Investments

 

As of September 30, 2014 and December 31, 2013, investment in Xingtai Rural Commercial Bank (“Xintai RC Bank”) was $7,147,498 and $7,196,598, consisting 31,000,000 shares, or 6.02%, of the common stock of Xingtai RC Bank

 

The Company used the cost method of accounting to record its investment in Xingtai RC Bank. The Company determined that there was no impairment on this investment during period ended September 30, 2014. The Company received RMB3,100,000 (approximately $505,000) and RMB1,280,000 (approximately $206,000) as dividend income from Xingtai RC Bank for the nine months ended September 30, 2014 and 2013, respectively.

 

As of September 30, 2014 and December 31, 2013, the Company has deposit balances (including restricted cash) of approximately $6,654,000 and $6,672,000 in Xingtai RC Bank, respectively.

 

In November 2013, the Company invested $700,000 to Hopkins Kirin Facilities Group, LLC (“Hopkins”) representing 22.5% of Hopkins’s membership interest.

 

The Company used the equity method of accounting to record its investment in Hopkins. The Company determined that there was no impairment on these investments during the nine months ended September 30, 2014. There is no transaction in 2014 for Hopkins Kirin Facilities Group, LLC. The Company didn’t receive investment income from Hopkins Kirin Facilities Group, LLC.

 

In January, 2014, the Company entered into an Operation agreement with ALFA IDG LLC for Archway Development Group LLC. As of September 30, 2014, the Company paid a deposit of $578,000 for Archway Development Group LLC to be formed.

 

In January, 2014, the Company entered into an Operation agreement with Archway Development Group LLC for HHC-6055 Center Drive LLC. As of September 30, 2014, the Company paid a deposit of $238,000 for HHC-6055 Center Drive LLC to be formed.

  

Note 11 – Accounts Payable

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Payables in relation to acquisitions of land use rights  $3,802,826   $3,726,753 
Payable to construction contractors   94,521,944    72,393,257 
   $98,324,770   $76,120,010 

 

The Company agreed to pay $22,649,880 (translated as historical rate) to compensate additional costs incurred by Kong Village Committee for the Program (see Note 9).  At September 30, 2014, unpaid balance plus accrued interest was $2,436,647. 

 

Note 12 – Other Payables and Accrued Liabilities

 

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

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Unrecognized tax benefit (Note 14(2))  $6,497,726   $6,542,362 
Deposits from customers on behalf of utility operators   6,562,103    2,677,913 
Car park deposits from customers   2,267,706    2,285,738 
Deposit from a contractor   113,921    140,661 
Accrued loan interest   315,789    706,575 
Others   1,068,561    1,389,803 
   $16,825,806   $13,743,052 

 

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Note 13 – 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, 2014 and December 31, 2013, the Company received $89,652,380 and $87,713,585 deposits from customers, respectively.

 

Note 14 – Income Taxes

 

(1)  Corporate income tax

 

The Company is incorporated in the State of Nevada in the U.S., and is subject to a progressive 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, 2014 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 subsidiaries Spectrum International Enterprise, LLC, Brookhollow Lake, LLC, Greenfield International Corporation, Kirin Hopkins Real Estate Group, LLC and Newport Property Holding, LLC were incorporated in State of California, United States of America and are subject to California taxes.

 

The Company’s subsidiaries and VIEs in China are subject to PRC Enterprise Income Tax (EIT) on taxable income. According to PRC tax laws and regulations, China subsidiaries and VIEs are subject to EIT with the tax rate 25%, except that deemed profit method is applied to XingtaiZhongding 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.

 

Income tax expenses for the three months and nine months ended September 30, 2014 and 2013 are summarized as follows:

 

   Nine Months Ended
September 30,
   Three Months Ended
September 30,
 
   2014   2013   2014   2013 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Current                
EIT expense  $1,298,342   $2,973,391   $638,348   $875,327 
LAT expense   1,118,819    182,441    356,765    60,039 
Deferred tax expense/( benefit) - EIT   (824,016)   (3,255,738)   (285,251)   (755,149)
                     
   $1,593,145   $(99,906)  $709,862   $(180,217)

  

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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, 2014 and 2013 is as follows: 

 

   Nine Months Ended
September 30,
 
   2014   2013 
   (Unaudited)   (Unaudited) 
         
EIT at the PRC statutory rate of 25%  $(299,538)  $(426,549)
LAT expense   1,118,819    (182,441)
EIT deficit of LAT   (279,705)   45,610 
Deferred tax valuation allowance   272,839    406,539 
Permanent items   780,730    56,935 
   $1,593,145   $(99,906)

 

(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, 2014 and 2013 is as follows:

 

   Nine Months Ended
September 30,
 
   2014   2013 
   (Unaudited)   (Unaudited) 
         
Unrecognized tax benefit, as the January 1  $6,542,362   $6,333,022 
Movement in current year due to foreign exchange rate fluctuation   (44,636)   169,563 
           
Unrecognized tax benefit, as of September 30  $6,497,726   $6,502,585 

 

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 benefit 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, 2014 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 2009 to 2013 remains subject to examination by tax authorities. The Company’s offshore subsidiaries also are subjected to examination by Internal Revenue Service. 

 

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(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, 2014 and December 31, 2013 are presented below.

 

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Deferred tax assets        
Operating loss carry forward  $4,711,456   $3,540,241 
Excess of interest expense   3,481,924    2,038,513 
Revenue recognized based on percentage-of-completion   1,214,139    2,109,682 
    9,407,519    7,688,436 
           
Valuation allowance   (3,939,771)   (3,012,026)
           
Net deferred tax assets  $5,467,748   $4,676,410 

  

Deferred taxes assets and liabilities are evaluated on individual subsidiary, VIE and subsidiary of VIE basis.  In assessing the ability to realize the deferred tax assets, the Company considers availability of future taxable income during the periods in which those temporary differences become deductible. The Company records a valuation allowance to reduce deferred tax assets to a net amount that management believes is more-likely-than-not of being realizable based on the weight of all available evidence.

 

Deferred taxes assets and liabilities associated with application of revenue recognized pursuant to percentage-of-completion will reverse when the construction progress of related projects proceeds to completion, which is expected to be December 2014 for No. 79 Courtyard (Phase I) and Kirin Bay (Phase I) projects, when the difference between accumulated revenue and cost of sales recognized based on percentage-of-completion method and enterprise income tax accrued pursuant to tax laws, converges.  Enterprise income tax comprises multiple interim prepayments determined predominately by periodic customer deposits collected and deemed profit ratio when a real estate project is under construction, followed by a closing to adjust to actual profit realized, after the construction is completed.  Deferred taxes assets and liabilities associated with application of revenue recognized pursuant to percentage-of-completion will also increase or decrease when the Company reevaluates and makes upward or downward adjustments to a project’s total revenue or cost estimate.  The Company believes deferred tax assets related to revenue recognized based on percentage-of-completion and excess of interest expense will be fully realizable.

 

Entities established in the PRC had total deferred tax assets associated with net operating loss carry forward of $3,427,608 as of September 30, 2014, which will expire on various dates between December 31, 2014 and December 31, 2019. As of September 30, 2014, the Company provided a valuation allowance of $2,655,923 based on projected future revenue available to utilize net operating loss carried forward. Entities established out of the PRC had total deferred tax assets associated with operating loss carry forward of $1,283,848 and a 100% valuation allowance has been provided.

 

Note 15 – Other Taxes Payable

 

Other taxes payable consisted of the following: 

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Business tax and related urban construction tax and education surcharge  $1,988,502   $2,530,769 
Land Appreciation Tax   207,432    354,817 
   $2,195,934   $2,885,586 

 

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Note 16 – Loans Payable

 

Loans payable as of September 30, 2014 and December 31, 2013 consisted of the following:

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Loan from Hebei Xingtai Rural Commercial Bank(“Credit Union 2013 Short-term loan”)        
Due April 24, 2014, at 8.55% per annum  -   3,271,181 
           
Loan from Hebei Xingtai Rural Commercial Bank(“Credit Union 2014 Short-term loan”)          
Due April 24, 2015, at 12.56% per annum   3,248,863    - 
Loan from Kong Village Committee          
Origin loan due December 29, 2013, maturity extended to November 30, 2014 at 14.4% per annum   4,873,295    4,906,771 
           
Syndicated loans arranged by Xingtai Chengjiao Rural Credit Cooperative Union Association (“Syndicated Loans 2012”)          
Original loan due March 29, 2014, maturity extended to May 29,2014, at 11.38% per annum   -    2,453,386 
Original loan due April 29, 2014, maturity extended to May 29, 2014, at 11.38% per annum        2,453,386 
Due May 29, 2014, at 11.38% per annum   -    3,271,181 
Due June 29, 2014, at 11.38% per annum   -    3,271,181 
Due July 29, 2014, at 11.38% per annum   -    4,906,771 
Due August 29, 2014, at 11.38% per annum   -    8,177,952 
    -    24,533,857 
Loans from Industrial and Commercial Bank of China, XingtaiYejin Branch (“ICBC 2013 Loans”)          
Due January 30, 2015, at 9.84% per annum   5,685,510    5,724,567 
Due May 30, 2015, at 9.84% per annum   4,061,079    4,088,976 
Due September 30, 2015, at 9.84% per annum   4,061,079    4,088,976 
Due January 30, 2016, at 9.84% per annum   3,248,863    3,271,181 
Due May 30, 2016, at 9.84% per annum   2,436,647    2,453,386 
Due May 30, 2016, at 9.84% per annum   8,122,157    8,177,952 
Due May 30, 2016, at 9.84% per annum   1,624,431    - 
Due May 30, 2016, at 9.84% per annum   3,248,863    - 
Due May 30, 2016, at 9.84% per annum   1,624,431    - 
Due May 30, 2016, at 9.84% per annum   1,624,431    - 
Due May 30, 2016, at 9.84% per annum   3,248,863    - 
Due May 30, 2016, at 9.84% per annum   3,248,863    - 
    42,235,217    27,805,038 
           
Loans from Industrial and Commercial Bank of China, XingtaiYejin Branch (“ICBC 2012 Loans”)          
Due September 18, 2015, at 9.225% per annum   3,248,863    3,271,181 
Due September 18, 2015, at 9.225% per annum   3,248,863    3,271,181 
Due May 19, 2015, at 9.225% per annum   4,873,294    4,906,771 
Due January 19, 2015, at 9.225% per annum   4,873,294    4,906,771 
Due September 19, 2014, at 9.225% per annum   -    4,906,771 
Due May 19, 2014, at 9.225% per annum   -    4,906,771 
Due January 31, 2014, at 9.225% per annum   -    2,780,505 
    16,244,314    28,949,951 
           
Syndicated loans by Hebei Xingtai Rural Commercial Bank (“Syndicated loans 2014)          
Due May 8, 2015, at 7.2% per annum   8,122,157    - 
           
Loan from Hebei Xingtai Rural Commercial Bank (“Short term 2014 Loan”)          
Due June 26, 2015, at 11.46% per annum   3,248,863    - 
           
Loans from Xingtai Rural Commercial Bank          
Due July 24, 2015, at 11.46% per annum   8,122,157    - 
           
Loans from Xingtai Rural Commercial Bank          
Due July 3, 2015, at 11.79% per annum   4,873,295    - 
   $90,968,161   $89,466,798 

 

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ICBC 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2012 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 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2012.  The financing service fees were paid prior to financial institution releasing loans to the Company as prepaid interest, and have been included in the determination of respective loans’ effective interest rates. Credit Union 2014 Short-term Loan was guaranteed by an unrelated company as arranged by the financial institution. 

 

As of September 30, 2014 and December 31, 2013, Syndicated loans 2014, ICBC 2012 Loans and ICBC 2013 Loans were secured by the Company’s real estate held for development with carrying value of approximately $126,210,000 and $134,340,000, respectively.

 

The aggregate maturities of loans payable for each of years subsequent to September 30, 2014 are as follows:

 

Twelve Months Ending September 30,  Amount 
     
2015  $62,540,611 
2016   28,427,550 
Loans payable  $90,968,161 

 

Note 17 – Restricted Stock Compensation

 

In accordance with the Employment Agreements approved by the Board of the Directors, the Company granted certain employees restricted common stock (“Restricted Stock Awards”).   Restricted Stock Awards are issued to the employees in five even installments at the beginning or in the interim of each year of five-year employment period.  Shares issued under Restricted Stock Awards in each year of the employment period cannot be disposed of or pledged until they are fully vested, which is the last day of the full service year and the employment is not terminated.  Unvested shares maybe reacquired by the Company for no consideration following the employee’s termination of service.

 

The fair value of the Restricted Stock Awards is based on the market value of the Company’s common stock on the date of grant. Pre-vesting forfeiture is expected to be nil. The Company records compensation costs for the Restricted Stock Awards on a straight-line basis over the employment period for the entire award.

 

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Restricted Stock Awards activity as of and for the nine months ended September 30, 2014 is as follows:

 

   Shares   Weighted Average Grant Date Fair Value Per Share 
         
Outstanding at the beginning of the period   146,120   $0.12 
Granted   -   $- 
Vested   -   $- 
Forfeited   -   $- 
Outstanding at the end of the period   146,120   $0.12 

 

The Company recognized $nil and $nil of share-based compensation expense related to the Restricted Stock Awards for the nine months ended September 30, 2014 and 2013, respectively.

 

Note 18 – Revenue

 

The Company’s revenue is recognized under percentage-of-completion methods for the nine months and three months ended at September 30, 2014 and 2013 from pre-sale of real estate projects. Property service revenue is recognized when related service are provided. Revenue recognized for each real estate project, including adjustments made pursuant to change of estimates for the nine months and three months ended September 30, 2014 and 2013 was as follows:

  

   Nine Months Ended
September 30,
   Three Months Ended
September 30,
 
   2014   2013   2014   2013 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Kirin County  $577,955   $2,065,600   $(142,758)  $1,032,626 
No.79 Courtyard   22,034,298    57,281,766    9,330,227    21,908,286 
Kirin Bay   59,278,370    42,543,969    25,286,128    13,843,172 
Property Service   372,856    422,980    148,051    116,461 
   $82,263,479   $102,314,315   $34,621,648   $36,900,545 

   

Note 19 – Loss per Share

 

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss 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, Agent Warrants and unvested and unissued Restricted Stock Award, using the treasury stock method.

 

   Nine Months Ended
September 30,
   Three Months Ended
September 30,
 
   2014   2013   2014   2013 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Net loss  $(2,791,298)  $(4,712,053)  $(1,437,630)  $(2,352,389)
Basic and diluted loss per share  $(0.14)  $(0.23)  $(0.07)  $(0.11)
Basic and diluted weighted average shares outstanding   20,596,546    20,596,546    20,596,546    20,596,546 

 

Series A Warrants, Series B Warrants and Agent Warrants to acquire 392,090 shares of common stock, and unvested and unissued Restricted Stock Award were not included in the computation of diluted EPS because the effect would have been anti-dilutive.  Series A Warrants, Series B Warrants and Agent Warrants were still outstanding as of September 30, 2014.

 

24
 

 

Note 20 – Non-controlling interest

 

Non-controlling interests represent the non-controlling interest stockholders’ proportionate share of the equity of Brookhollow Lake, LLC, Greenfield International Corporation and Newport Property Holding, LLC. The non-controlling interests in the nine months ended at September 30, 2014 and 2013 are summarized as below:

 

   As of September 30 
   2014   2013 
   (Unaudited)   (Unaudited) 
Brookhollow Lake, LLC   10.0%   10%
Greenfield International Corporation   30.0%   0%
Newport Property Holding, LLC   50.0%   0%

 

The non-controlling interests in Brookhollow Lake, LLC, Greenfield International Corporation and Newport Property Holding, LLC that are not owned by the Company are shown as “non-controlling interests” in the consolidated balance sheets as of September 30, 2014 and “net loss attributable to non-controlling interests” in the consolidated statements of operations and comprehensive loss for the period ended September 30, 2014.

 

Note 21 – Related Party Transactions and Balances

 

(1) Loan to a related party

 

In August 2013, Kirin entered into a loan agreement with HuaxiaHuifeng Ventures Capital Management (Beijing) Co., Ltd. (“HuaxiaHuifeng”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to HuaxiaHuifeng for $35,953,000. On October 15, 2013, the Company signed a supplement loan agreement in amount of $27,610,000 (RMB 170,000,000) which bears 18% interest rate and has a term of one year. On October 14, 2014, Kirin signed a supplemental agreement with HuaxiaHuifeng, both parties agree to extend the term of loan to October 14, 2015.

 

As of September 30, 2014, the balance of the loan to HuaxiaHuifeng was $36,696,307 (RMB 196,560,000 for original loan and RMB 29,342,466 for interest income).

 

In August 2014, the Company entered into a loan agreement with Zhuolu Huada Real Estate Development Co., Ltd. (“Huada Real Estate”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to Huada Real Estate for RMB 29,750,000 ($4,832,684), at 20% interest rate and has a term of one year.

 

25
 

 

(2) Government grant escrowed by Business Investment

 

In 2008, a VIE of the Company, Xingtai Zhongding, was entitled to a government grant associated with its development of Kirin County project of RMB 160,000,000 ($22,981,000, translated at historical exchange rate).  Cash representing the grant has been remitted to Business Investment, a trust equity owner of Xingtai Zhongding in June 2008.  Business Investment originally acquired the land use rights of Kirin County project, and contributed the land use rights to Xingtai Zhongding as paid-in capital to develop the project.  Based on the arrangement between Business Investment and Xingtai Zhongding, which has been sanctioned by local government, the benefit of the government grant is to be transferred from Business Investment to Xingtai Zhongding.  Specifically, Business Investment acts as an escrow agent but also is nominally responsible for Xingtai Zhongding’s progress. Earned portions of the government grant become available to Xingtai Zhongding based on percentage of completion.

 

For the years ended December 31, 2012, 2011, 2010 and 2009, XingtaiZhongding was entitled to receive RMB2,800,000, RMB43,000,000, RMB63,000,000, and RMB51,200,000, respectively ($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at respective years’ historical rates) earned government grant from Business Investment, representing total amount of the government grant. The Company has the right to determine how to utilize the earned government grant. As at September 30, 2014 and December 31, 2013, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($25,990,903 and $26,169,447) was used to repay working capital provided by Jianfeng Guo for the support of other real estate projects’ development.

 

(3) Working capital provided by Jianfeng Guo

 

Jianfeng Guo, the controlling stockholder of the Company, through various affiliate companies and individuals, provides working capital to the VIEs (hereafter, including subsidiaries of VIEs) of the Company.  In addition to repaying borrowings directly, the Company’s VIEs may also provide working capital to affiliate companies and individuals as designated by Jianfeng Guo.  Balances received or provided by the Company’s VIEs are unsecured, interest-free and did not have specific repayment dates.

 

At each balance sheet date, affiliate companies and individuals who have working capital transactions with the Company’s VIEs assigned their balances to Jianfeng Guo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered into between Jianfeng Guo, related affiliate companies and individuals, and the Company’s VIEs. Xingtai Zhongding also chooses to use its accumulated government grant receivable from Business Investment, to repay working capital provided by Jianfeng Guo.  As at September 30, 2014 and December 31, 2013, the working capital provided by Jianfeng Guo was RMB130,218,029 and RMB134,029,025 ($21,153,026 and $21,921,659 translated at respective historical rates).  Accordingly, the Company is entitled to present netted balance with Jianfeng Guo on its consolidated balance sheets.

 

Gross amount of working capital provided by and to affiliate companies and individuals designated by Jianfeng Guo as at September 30, 2014 and December 31, 2013 were as follows:

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Gross of working capital received from affiliate companies and individuals designated by Jianfeng Guo  $(40,488,130)  $(41,521,029)
Gross of working capital provided to affiliate companies and individuals designated by Jianfeng Guo   19,335,104    19,599,370 
Gross earned government grant held by a related party   25,990,903    26,169,447 
Receivable from a related party  $4,837,877   $4,247,788 

 

26
 

 

(4) Short-term Loans to Related party

 

As of December 31, 2013, the ending balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these are all wired to five related companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies are ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin.

 

On December 30, 2013, Hebei Zhongding entered into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing Cathay Kirin Assets Management Company and Beijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000. On December 30, 2013, Business Service entered into loan agreements with Beijing Cathay Kirin Hospitality Management Company, and Cathay Brother (Beijing) Investment Management Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000, respectively. The maturity date of the loan agreements is January 2, 2014. On January 2, 2014 the Company received RMB 74,900,000 short-term loans from related party companies.

 

(5) Prepayment to related party

 

Please see Note 7 – Prepayments

 

Note 22 – Contingencies and Commitments

 

As at September 30, 2014 and December 31, 2013, the Company provided approximately $121,710,000 and $77,130,000 guarantees to mortgage bank loans granted to homebuyers of the Company’s real estate properties. Guarantees commence when the banks release mortgage to the Company and end when House Ownership Certificates are issued and pledged to banks instead. The fair value of the guarantees is insignificant because the possibility of the homebuyers’ default is remote, and in case of default, the Company can repossess the related properties to cover repayments of outstanding principal, interest and penalty to mortgage banks, and accordingly, the Company did not recognize fair value of these guarantees.

 

Note 23 – Subsequent Events

 

The Company evaluated subsequent events up until the time the financial statement were filed with SEC.

 

In October 2014, the Company received RMB 24,000,000 (approximately $3,900,000) three-year term loan from Xingtai Rural Commercial Bank with an annual effective interest rate of 7.38%.

 

27
 

 

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, 2014 and 2013 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 “Forward-Looking Statements.”

 

We are a non-state-owned 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, Wancheng New World and Kirin County projects in Xingtai City. Our current projects include Kirin Plaza, Kirin Bay and No.79 Courtyard, which collectively call for the development of more than 7,000 homes over the next five years in Xingtai City. 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 relying on: (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

 

At September 30, 2014, we have the following projects under development:

 

   POC   Construction beginning  Estimated
Completion
Kirin County (including Kirin Plaza)   98.3%  September 2011  Late 2014
No.79 Courtyard (Phase I)   96.1%  September 2011  Late 2014
No.79 Courtyard (Phase II)   78.3%  September 2012  Mid-to-late 2015
No.79 Courtyard (Phase III)   70.9%  April 2013  Mid-to-late 2015
Kirin Bay (Phase I)   97.4%  October 2011  Late 2014
Kirin Bay (Phase II)   84.7%  March 2013  Early 2015
Kirin Bay ( Phase III)   52.3%  May 2013  Mid-to-late 2015
Kirin Bay (Phase IV)   9.9%  April 2014  Late 2016

 

Furthermore, in 2014, we started the constructions of No. 79 Courtyard (Phase IV).

 

Financial Performance Highlights

 

The following summarizes certain key financial information for the nine months ended September 30, 2014.

 

Total revenue was $82.3 million for the nine months ended September 30, 2014, a decrease of $20.0 million, or 19.6%, from $102.3 million for the same period of 2013. Our revenue stream has shifted from the Kirin County project, which was completed in 2012, to No. 79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II, Phase III and Phase IV), which are expected to generate the majority of our revenue in the upcoming 12 to 18 months;
   
Gross profit was $11.9 million for the nine months ended September 30, 2014, an increase of $0.8 million, or 6.4%, from $11.1 million for the same period of 2013. Gross margin ratio was 14.4% for the nine months ended September 30, 2014, an increase of 3.5% as compared to the gross margin ratio of 10.9% for the same period of 2013.  The increase of gross margin ratio was contributed by construction progress and sales of Kirin Bay Phase III and No. 79 Courtyard Phase III for the nine months ended September 30, 2014. Kirin Bay Phase III and No. 79 Courtyard Phase III have higher gross margin ratio than other projects in the first half year of 2013. 
   
Net loss was $2.8 million for the nine months ended September 30, 2014, a decrease of $1.9 million, or approximately 40.8%, from net loss of $4.7 million for the same period of 2013, as a result of the increased gross profit contributed by the sales of Kirin Bay Phase III and No.79 Courtyard Phase III.

 

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 9.2% in 2011, 7.8% in 2012 and 7.7% in 2013. 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 fall and our revenue could correspondingly decline.

 

28
 

 

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 the related 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, residential housing and other buildings still 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 project sales or presales of such project. Local governments act on the region’s interests by helping private companies streamline such projects and often coordinate with regional housing developers to allow for preliminary presales while Pre-Sales Permits are being processed. The local government in Xingtai has recognized the financial cost the Company 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 this type of buyer, we can offer a contractually fixed price to our consumers and ensure them a preference in housing selection.  We may not obtain such approval in other cities if we expand beyond Xingtai.

 

Government Controls on Real Estate Industry. The State Council on March 1, 2013 issued five policies and measures to regulate and control the country's soaring real estate market, of which the most significant and also the most controversial point is that 20-percent individual income tax would be levied on capital gains by home sellers whose families own more than one apartment.

 

The five policies and measures are designed to: 1) Improve and maintain the stability of house prices. Municipalities under the auspices of central government, cities specifically designated in the State plan, and provincial capital cities excluding Lhasa must follow the principle of maintaining basic price stability. They must also compile and publish annual new commercial house price control targets and establish an effective system of accountability for assessing price stability; 2) Curb speculative investments seen in the housing market and implement strict commercial housing purchase limitation measures. For those municipalities under the auspices of the central government, cities specifically designated in the State plan and provincial capital cities that have already implemented housing purchase limitation measures, they must improve limitation measures in the fields of housing areas, housing types, and purchase qualification examinations according to the unified criteria. As for those cities where house prices continue to rise too rapidly, provincial-level governments should request that local-level officials implement purchase limitation measures, as well as enforce differential housing credit policies and expand the range of experimental areas for individual housing property tax reform. An individual income tax of 20 percent would be levied on capital gains made by those home sellers whose families own more than one apartment. 3) Increase the supply of ordinary commercial housing and land and accelerate the supply of land, construction and listing of small- and medium-sized ordinary commercial housing projects, rapidly ensuring an effective supply. In 2013, the total supply of land for housing is lower than the average supply over the past five years in principle. 4) Accelerate the planning and construction of affordable housing projects and ensure the projects to build 4.7 million sets of affordable housing and begin the construction of 6.3 million sets. Supporting facilities should be planned, constructed, and delivered for use within the same time frame as the affordable housing projects. The entry and exit system should also be improved in order to ensure equal distribution. By the end of 2013, prefecture-level cities and above must include into local housing guarantee coverage those migrant workers who meet the requirements. 5) Strengthen market supervision. Strengthen the management of commercial housing sales in advance, strictly implement a clear house price system, tighten enterprise credit management, and severely punish any illegal behavior among intermediaries. The urban individual housing information system should also be promoted and, in addition, market monitoring and publishing management should be strengthened.

 

The State Council also emphasized the importance of accelerating the implementation of an enduring and effective mechanism to guide the healthy development of the real estate market.

 

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 5.4% in 2011, 2.6% in 2012 and 2.6% in 2013. 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.

 

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.

 

29
 

 

Significant Accounting Policies

 

There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2014 compared with those contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Result of operations” included in our Annual Report on Form 10-K for the year ended December 31, 2013. 

 

Recently Issued Accounting Pronouncements

 

The Company does not believe recently issued but not yet effective accounting standards from ASU 2014-01 to ASU 2014-17, if currently adopted, would have a material effect of the consolidated financial position, results of operation and cash flows.

 

Results of Operations

 

Comparison of Nine and Three Months Ended September 30, 2014 and 2013

 

   Nine Months Ended September 30,   Three Months Ended September 30, 
   2014   2013   2014   2013 
       % of
Revenue
       % of
Revenue
       % of
Revenue
       % of
Revenue
 
                                 
Revenue from real estate sales, net  $82,263,479    100%   $    102,314,315    100%  $34,621,648    100%  $36,900,545    100%
Cost of real estate sales   70,402,868    85.6%        91,164,755    89.1%   30,593,245    88.4%   33,641,375    91.2%
Gross profit   11,860,611    14.4%        11,149,560    10.9%   4,028,403    11.6%   3,259,170    8.8%
Selling expenses   2,794,450    3.4%        3,248,828    3.2%   1,129,324    3.3%   1,054,420    2.9%
Operating and administrative expenses   6,916,512    8.4%        6,636,340    6.5%   2,296,674    6.6%   2,067,302    5.6%
Income from operations   2,149,649    2.6%        1,264,392    1.2%   602,405    1.7%   137,448    0.4%
Investment income   504,548    0.6%        205,738    0.2%   -    0.0%   90,500    0.2%
Interest expense   (3,852,350)   -4.7%        (6,282,089)   -6.1%   (1,330,173)   -3.8%   (2,400,120)   -6.5%
Total other expenses   (3,347,802)   -4.1%        (6,076,351)   -5.9%   (1,330,173)   -3.8%   (2,309,620)   -6.3%
Loss before income taxes expense   (1,198,153)   -1.5%        (4,811,959)   -4.7%   (727,768)   -2.1%   (2,172,172)   -5.9%
Income taxes expense (benefit)   1,593,145    1.9%        (99,906)   -0.1%   709,862    2.1%   180,217    0.5%
Net  loss  $(2,791,298)   -3.4%   $    (4,712,053)   -4.6%  $(1,437,630)   -4.2%  $(2,352,389)   -6.4%

 

Our net loss for the nine months ended September 30, 2014 was $2.8 million, a decrease of $1.9 million, from net loss of $4.7 million for the nine months ended September 30, 2013. Net Loss decreased because of the following reasons: 1) in the nine months ended September 30, 2014, Kirin Bay Phase III and No.79 Courtyard Phase III became the main revenue resource and contributed most of the increased gross profit; 2) for the nine months ended September 30, 2014, the interest expenses decreased substantially due to the interest income  increased by $3.7 million in the nine months ended September 30, 2014; 3) in the nine months ended September 30, 2014, the company received more investment income from Xingtai Rural commercial bank.

 

30
 

 

Our net loss for the three months ended September 30, 2014 was $1.4 million, a decrease of $1.0 million, from net loss of $2.4 million for the three months ended September 30, 2013. Net loss decreased because in the three months ended September 30, 2014, the gross profit increased by $0.8 million and interest expense decreased by $1.1 million, meanwhile, income tax expenses increased by $0.5 million and operating expenses increased by $0.3 million as compared with the same period ended September 30, 2013.

 

A project’s revenue and cost estimates are of inherent nature of uncertainty throughout its multiple-year development period. Factors that potentially affect a project’s total revenue and cost estimates (including a salable unit’s allocated cost), include, but are not limited to: (1) changes in government’s land-use planning, building density, plot ratio and other quotas; which lead to changes of total gross floor area available for sale and per-unit cost estimate; (2) the Company’s voluntary modification of design to enhance attractiveness and competiveness of an on-going project; (3) fluctuation of commodity prices and government-regulated labor cost rates; (4) contractors’ request to renegotiate consideration of fixed-price agreements, for which the Company’s preference of complete the discussion early to avoid unfavorable impact on construction progress; (5) unforeseeable geological and engineering difficulties causing modifications of a project’s construction plan; (6) government agencies’ compliance inspections in the late stage of the construction, which may lead to modification of design; (7) major prospective property buyers’ request to alter specifications of the property to be delivered; and (8) contractors’ claims throughout the construction period.

 

The Company enters into non-cancellable, fixed-price pre-sale contracts with homebuyers. Under certain circumstances, for example, changes in floor size or floor plan of a property due to legal compliance requirements, or change of deliverable standards upon request of major customers, we may agree to revise the pre-sale contract price to match conditions of the properties to be delivered to customers. Furthermore, the Company is subject to a penalty payable to homebuyers in the event the property is delivered later than the date specified in the pre-sale contracts, and usually such penalty usually constitutes only an insignificant amount compared to the contract value. These adjustments to contract price are recorded as reduction of revenue in the current period on a cumulative catch-up basis.

 

With regard to a project’s cost estimate, the Company’s in-house cost estimating staffs, work in collaboration with a committee comprising the Company’s engineers, project managers, financial professionals, and senior management staff, prepare at least two versions of cost estimate. The first version is Preliminary Cost Estimate, prepared in schematic design stage, which is before commencement of excavation and recognition of revenue. Preliminary Cost Estimate utilizes top-down approach. It projects major cost components at higher level using a project’s planned parameters (e.g., building density, by-category gross floor area) and standard per-unit cost from past experience (e.g., concrete cost, measured at US$ per square meter). Preliminary Cost Estimate is intrinsically less accurate; it heavily relies on the Company’s historical information accumulated in the development of similar types of construction in similar municipal region. The second version is Detailed Cost Estimate, prepared after receiving construction documents from the architect. Ideally Detailed Cost Estimate can be available before commencement of excavation and recognition of revenue; however, in order to suit the pre-sale progress and to maximize flexibility, construction documents are provided in several batches as the construction processes. It is likely that a project’s Detailed Cost Estimate is finalized only in late stage of the construction. Detailed Cost Estimate utilizes bottom-up approach. Based on construction documents and assisted by the Company’s computerized Building Information Modeling system, Detailed Cost Estimate is able to sum up cost at element level of a real estate property, taking into consideration of quantitative consumption and on-going rate of materials, labor, machinery and overheads. For the purpose of preparing the Company’s consolidated financial statements; a project’s cost estimate is reviewed by in-house cost estimators at each year-end and adjusted for material developments in the interval. Changes in estimates of a project’s revenue and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a project’s percentage of completion. When a project’s total cost estimate to be incurred exceeds total estimated revenue to be earned, a provision for the entire loss on the project is recorded in the period the loss is determined. In addition to our existing monthly detailed cost estimated upon receiving construction data from the architects, we have hired additional competent professionals to ensure early identification of variances from prior estimated project revenue and cost, to reduce the likelihood of significant changes to the estimates.

 

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Revenues and Gross Profit

 

   Nine Months Ended September 30,   Three Months Ended September 30, 
   2014   2013   2014   2013 
       % of
Revenue
       % of
Revenue
       % of
Revenue
       % of
Revenue
 
                                 
Revenue from real estate, net  $82,263,479    100%  $102,314,315    100%  $34,621,647    100%  $36,900,545    100%
-No.79 Courtyard (Phase I)   2,245,537    2.7%   43,877,017    42.9%   1,012,137    2.9%   15,857,230    43.0%
-No.79 Courtyard (Phase II)   7,210,167    8.8%   13,404,749    13.1%   3,147,174    9.1%   6,051,056    16.4%
-No.79 Courtyard (Phase III)   12,578,594    15.3%   -    -    5,170,915    14.9%   -    - 
-Kirin Bay (Phase I)   13,841,275    16.8%   22,341,840    21.8%   4,525,420    13.1%   8,287,842    22.5%
-Kirin Bay (Phase II)   20,269,892    24.6%   20,202,129    19.7%   9,972,008    28.8%   5,555,330    15.1%
-Kirin Bay (Phase III)   23,781,384    28.9%   -    -    10,681,410    30.9%   -    - 
-Kirin Bay (Phase IV)   1,385,819    1.7%   -    -    107,290    0.3%   -    - 
-Kirin County   577,955    0.7%   2,065,600    2.0%   (142,758)   -0.4%   1,032,626    2.8%
-Property Service   372,856    0.5%   422,980    0.4%   148,051    0.4%   116,461    0.3%
Cost of real estate sales   70,402,868    85.6%   91,164,755    89.1%   30,593,245    88.4%   33,641,375    91.2%
-No.79 Courtyard (Phase I)   1,647,079    2.0%   35,938,835    35.1%   757,226    2.2%   13,012,888    35.3%
-No.79 Courtyard (Phase II)   7,098,123    8.6%   13,450,148    13.1%   2,985,520    8.6%   5,886,968    16.0%
-No.79 Courtyard (Phase III)   7,997,292    9.7%   -    -    3,425,699    9.9%   -    - 
-Kirin Bay (Phase I)   12,994,935    15.8%   22,006,787    21.5%   5,063,628    14.6%   8,749,820    23.7%
-Kirin Bay (Phase II)   18,964,025    23.1%   17,512,732    17.1%   9,567,262    27.6%   5,034,215    13.6%
-Kirin Bay (Phase III)   19,065,450    23.2%   -    -    8,679,428    25.1%   -    - 
-Kirin Bay (Phase IV)   1,248,577    1.5%   -    -    108,487    0.3%   -    - 
-Kirin County   959,118    1.2%   1,961,351    1.9%   (153,540)   -0.4%   873,395    2.4%
-Property Service   428,269    0.5%   294,902    0.3%   159,535    0.5%   84,089    0.2%
Gross profit   11,860,611    14.4%   11,149,560    10.9%   4,028,402    11.6%   3,259,170    8.8%
-No.79 Courtyard (Phase I)   598,458    0.7%   7,938,182    7.8%   254,911    0.7%   2,844,342    7.7%
-No.79 Courtyard (Phase II)   112,044    0.1%   (45,399)   -0.0%   161,654    0.5%   164,088    0.4%
-No.79 Courtyard (Phase III)   4,581,302    5.6%   -    -    1,745,216    5.0%   -    - 
-Kirin Bay (Phase I)   846,340    1.0%   335,053    0.3%   (538,208)   -1.6%   (461,978)   -1.3%
-Kirin Bay (Phase II)   1,305,867    1.6%   2,689,397    2.6%   404,746    1.2%   521,115    1.4%
-Kirin Bay (Phase III)   4,715,934    5.7%   -    -    2,001,982    5.8%   -    - 
-Kirin Bay (Phase IV)   137,242    0.2%   -    -    (1,197)   0.0%   -    - 
-Kirin County   (381,163)   -0.5%   104,249    0.1%   10,782    0.0%   159,231    0.4%
-Property Service   (55,413)   -0.1%   128,078    0.1%   (11,484)   0.0%   32,372    0.1%
Profit margin   14.4%        10.9%        11.6%        8.8%     
-No.79 Courtyard (Phase I)   26.7%        18.1%        25.2%        17.9%     
-No.79 Courtyard (Phase II)   1.6%        -0.3%        5.1%        2.7%     
-No.79 Courtyard (Phase III)   36.4%        -         33.8%        -      
-Kirin Bay (Phase I)   6.1%        1.5%        -11.9%        -5.6%     
-Kirin Bay (Phase II)   6.4%        13.3%        4.1%        9.4%     
-Kirin Bay (Phase III)   19.8%        -         18.7%        -      
-Kirin Bay (Phase IV)   9.9%        -         -1.1%        -      
-Kirin County   -66.0%        5.0%        -7.6%        15.4%     
-Property Service   -14.9%        30.3%        -7.8%        27.8%     

 

32
 

 

Revenue from Real Estate, net. Real estate sales represent revenue from the pre-sale of properties under development. For the nine months and three months ended September 30, 2014 and 2013, revenue was derived from the pre-sale of No.79 Courtyard (Phase I, Phase II, and Phase III), Kirin Bay (Phase I, Phase II, Phase III and Phase IV) and Kirin County (including adjacent shopping arcade) and property management service. Under the percentage-of-completion method, revenue is the percentage of completed construction at a point in time is multiplied by total value of contracts signed up to that same point.

 

Our revenue from the pre-sale of real estate properties for the nine months ended September 30, 2014 was $82.3 million, a decrease of $20.0 million, or approximately 19.6%, compared to $102.3 million for the same period of year 2013. The revenue decreased mainly because of the revenue derived from No. 79 Courtyard decreased by $35.2 million, meanwhile, the revenue of Kirin Bay increased by $15.3 million. The revenue of No. 79 Courtyard decreased for the nine months ended September 30, 2014 as compared to the same period ended September 30, 2013 due from the following two reasons: 1) As announced by Housing and Construction Department of Hebei Province in September 2013, 15 Rules of Construction Dust Control Regulation (‘Construction Dust Control Regulation’) is applied for construction industry since October 1, 2013 in Hebei Province of People’s Republic of China. According to the Construction Dust Control Regulation, all construction sites in urban area must be closed when the weather condition is not favorable as a result of the construction dust. No. 79 Courtyard is located in urban area of Xingtai City, Hebei province, as a result of the Construction Dust Control Regulation, No. 79 Courtyard was not permitted by local government to return to work until March 25, 2014; 2) Phase I of No. 79 Courtyard was almost completed in year 2013, the POC is 96.1% as of December 31, 2013, thus only $2.2 million revenue was recognized in the nine months ended September 30, 2014, whilst $43.9 million was recognized in the same period of 2013. Phase III of No. 79 Courtyard which started in the second half year of 2013, generated $12.6 million revenue in the nine months ended September 30, 2014.

 

Revenue from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), Kirin Bay (Phase I), Kirin Bay (Phase II), Kirin Bay (Phase III) and Kirin Bay (Phase IV) was $2.2 million, $7.2 million, $12.6 million, $13.8 million, $20.3 million, $23.8 million and $1.4 million respectively, representing 2.7%, 8.8%, 15.3%, 16.8%, 24.6%, 28.9% and 1.7% of total revenue earned in the nine months ended September 30, 2014. For the nine months ended September 30, 2014, Hebei Zhongding Property Service Co., Ltd. began to provide property service and recognized revenue of $0.4 million.

 

Our revenue from the pre-sale of real estate properties for the three months ended September 30, 2014 was $34.6 million, a decrease of $2.3 million, or approximately 5.8%, compared to $36.9 million for the same period of year 2013. Revenue from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), Kirin Bay (Phase I), Kirin Bay (Phase II), Kirin Bay (Phase III) and Kirin Bay ( Phase IV) was $1.0 million, $3.1 million, $5.2 million, $4.5 million, $10.0 million, $10.7 million and $0.1 million respectively, representing 2.9%, 9.1%, 14.9%, 13.1%, 28.8%, 30.9% and 0.3% of total revenue earned in the three months ended September 30, 2013.

 

Our revenue from the pre-sale of real estate properties for the three months ended September 30, 2014 was $34.7 million, a decrease of $5.5 million, compared to $40.2 million for the three months ended June 30, 2014.

 

The following tables set forth the percentage-of-completion (POC) by project for the period ended September 30, 2014 and 2013 and year ended December 31, 2013 and 2012:

 

   As at
September 30, 2014
   As at
December 31, 2013
   As at
September 30, 2013
   As at
December 31, 2012
 
No.79 Courtyard Phase I   96.1%   95.3%   91.2%   65.5%
No.79 Courtyard Phase II   78.3%   59.1%   38.8%   - 
No.79 Courtyard Phase III   70.9%   53.6%   -    - 
Kirin Bay Phase I   97.4%   85.0%   70.6%   56.1%
Kirin Bay Phase II   84.7%   61.0%   44.5%   - 
Kirin Bay Phase III   52.3%   35.9%   -    - 
Kirin Bay Phase IV   9.9%   -    -    - 
Kirin County   98.3%   98.1%   97.9%   96.1%

 

Kirin Bay is a three-phase, master-planned community built on a land of approximately 660,000 square meters. Positioned as a mid-market residential development, Kirin Bay also features kindergarten, a primary school, hotel, office buildings and apartments. As of this Report, we have obtained necessary government approvals. For Kirin Bay (Phase I), we acquired Land Use Rights Certificates (issued on July 7, 2011), Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued on August 10, 2011), Work Commencement Permit (issued on September 29, 2011) and Pre-Sales Permit (issued on September 30, 2011; for Kirin Bay (Phase II), we acquired Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued on July 31, 2012), Work Commencement Permit (issued on November 22, 2012) and Pre-Sales Permit (issued on March 26, 2013); for Kirin Bay (Phase III), we obtained Construction Land Planning permit (issued on June 9, 2011), Construction Work Planning Permit (issued on January 15, 2013), Work Commencement Permit (issued on March 26, 2013) and Pre-sales Permit (issued on September 18, 2013); and for Kirin Bay (Phase IV), we obtained Construction Land Planning permit (issued on June 9, 2011), Construction Work Planning Permit (issued on September 22, 2013), Work Commencement Permit (issued on April 9, 2014) and Pre-sales Permit (issued on May 27, 2014).

 

No. 79 Courtyard is positioned as a high-end residential development with some mixed commercial use, which covers a land of over 290,000 square meters and a total building area of approximately 520,000 square meters. As of this Report, we have obtained necessary government approvals. For No.79 Courtyard (Phase I), we acquired Land Use Rights Certificate (issued on November 9, 2010), Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on September 1, 2011), Work Commencement Permit (issued on November 2, 2011) and Pre-Sales Permit (issued on November 2, 2011); for No.79 Courtyard (Phase II), we acquired Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on July 20, 2012), Work Commencement Permit (issued on September 1, 2012) and Pre-Sales Permit (issued on September 27, 2012); and for No.79 Courtyard (Phase III), we obtained Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on January 16, 2013), Work Commencement Permit (issued on April 3, 2013) and Pre-sales Permit (August 12, 2013).

 

33
 

  

We bought the land use right of No. 79 Courtyard in 2007 and incurred land use right acquisition cost from year 2008 to 2011. We also started the land cleanup preparation work such as the demolishment and relocation in 2010 and early 2011, which resulted relevant cost as well. We also incurred cost related to the planning of the project as well as government levied tax and fees prior to the fourth quarter of 2011.

 

We have obtained necessary government approvals, including Land Use Rights Certificates, Construction Land Planning Permits, Construction Work Planning Permits, Work Commencement Permits and Pre-Sales Permits, for our No. 79 Courtyard (Phase I, Phase II, Phase III and Phase IV) and Kirin Bay (Phase I, Phase II, Phase III and Phase IV). We also commenced to construct Kirin County’s shopping arcade from year 2011, which is supposed to complement Kirin County project, and provide convenience to the residents of Kirin County. However, due to the regional planning by the local authority, we have not obtain the Construction Land Planning Permits in a timely manner so far, and therefore, the construction shopping arcade part of Kirin County, is suspended temporarily from January 2012. We have communicated with the competent authority and received a notice called “Xingtai City Administrative Notice of Punishment” from the competent authority. According to the Notice, the government will issue the necessary approvals and permits for the shopping arcade in the near future, and we expect to receive the related permits in early 2015. Our current design of the shopping arcade, including but not limited to, salable gross floor area, is not disputed by local government agencies.

 

The following table summarizes the key pre-sale information of our projects (in thousands dollars):

 

   Cumulative
contract
value of
pre-sale
as of
September 30,
2014
   Cumulative
Customer
deposits
collected
as of
September 30,
2014
   Contract
value of
pre-sale for
the nine
months ended
September 30,
2014
   Customer
deposits
collected for
the nine
months ended
September 30,
2014
 
No.79 Courtyard Phase I  $129,019   $130,903   $1,465   $2,503 
No.79 Courtyard Phase II   37,742    37,419    510    2,848 
No.79 Courtyard Phase III   49,012    46,359    8,642    16,254 
No. 79 Courtyard Phase IV   -    5,295    -    3,771 
Kirin Bay Phase I   92,776    93,301    4,683    3,410 
Kirin Bay Phase II   68,396    66,682    8,838    13,285 
Kirin Bay Phase III   73,812    70,464    32,825    34,206 
Kirin Bay Phase IV   14,159    13,292    14,159    13,305 
Kirin County   108,260    116,349    511    476 

 

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 nine months ended September 30, 2014 were $70.4 million, a decrease of $20.8 million, or approximately 22.8%, compared to $91.2 million for the same period of year 2013. Our total cost of real estate sales decreased as a result of the decrease of the revenue derived from No. 79 Courtyard, which decreased by $32.6 million in the nine months ended September 30, 2014 as compared with the same period of year 2013.

 

Our costs of real estate sales for the three months ended September 30, 2014 were $30.6 million, a decrease of $3.0 million, or approximately 9.1%, compared to $33.6 million for the same period of year 2013. Our total cost of real estate sales decreased as a result of the decrease of the revenue derived from No. 79 Courtyard, which decreased by $11.7 million for the three months ended September 30, 2014 as compared with the same period of year 2013.

 

Gross Profit Gross profit was $11.9 million for the nine months ended September 30, 2014, an increase of $0.8 million, or approximately 6.4%, compared to gross profit of $11.1 million for the same period of last year. Gross margin ratio was 14.4% for the nine months ended September 30, 2014, an increase of 3.5% as compared to the gross margin ratio of 10.9% for the same period of last year. The increase of gross margin ratio was contributed by construction progress and sales of Kirin Bay Phase III and No.79 Courtyard Phase III, which have higher gross margin ratio than other projects.

 

Gross income for the three months ended September 30, 2014 was $4.0 million (gross income ratio: 11.6%), is nearly the same as compared with gross income of $3.3 million (gross income ratio: 8.8%) for the same period of year 2013, due to the higher gross margin ratio of Kirin Bay Phase III and No.79 Courtyard Phase III.

 

34
 

 

The following tables set forth the aggregate Gross Floor Area (GFA) and the percentage-of-completion (POC) and Contract sold by project for the nine months ended September 30, 2014 and 2013:

 

   Total GFA   POC cumulative
accomplished
for the
nine months
ended
September 30,
   Contract value
of units sold
for the
nine months
ended
September 30,
   Revenue
recognized
for the
nine months
ended
September 30,
 
       2014   2013   2014   2013   2014   2013 
No.79 Courtyard (Phase I)   130,096    96.1%   91.2%  $1,464,941   $21,581,804   $2,245,537   $43,877,017 
No.79 Courtyard (Phase II)   45,122    78.3%   38.8%   510,292    36,493,239    

7,210,167

  13,404,749 
No.79 Courtyard (Phase III)   47,960    70.9%   -    8,642,494    -    12,578,594    - 
Kirin Bay (Phase I)   163,652    97.4%   70.6%   4,683,330    18,746,091    13,841,275    22,341,840 
Kirin Bay (Phase II)   92,043    84.7%   44.5%   8,837,687    40,608,941    20,269,892    20,202,129 
Kirin Bay (Phase III)   130,734    52.3%   -    32,825,384    -    23,781,384    - 
Kirin Bay (Phase IV)   21,523    9.9%   -    14,159,223    -    1,385,819    - 
Kirin County   183,069    98.3%   97.9%   511,363    786,621    577,955   $2,065,600 
Total   814,199             $71,634,714   $118,216,696   $81,890,623   $101,891,335 

 

The following tables set forth the consolidated square meters sold and average selling price per square meter by each project for the nine months ended September 30, 2014 and 2013: 

 

   Nine Months Ended September 30, 
   2014   2013 
   Contract
Sales(1)
   Square
Meters
Sold(2)
   Average
Selling
Price(3)
   Contract
Sales(1)
   Square
Meters
Sold(2)
   Average
Selling
Price(3)
 
No.79 Courtyard Phase I                        
-residential  $803,841    545   $1,475   $16,832,535    15,422   $1,091 
-commercial   18,035    -    -    2,023,408    374    5,410 
-garage   643,065    888    724    2,725,861    4,372    623 
No.79 Courtyard Phase II                              
-One elevator and four suites   369,972    292    1,267    34,373,500    41,351    831 
-Parking lots   140,320    96    1,462    2,119,739    1,656    1,280 
No.79 Courtyard Phase III                              
-residential   7,774,748    5,557    1,399    -    -    - 
-commercial   473,891    123    3,853    -    -    - 
-garage   393,855    346    1,138    -    -    - 
Kirin Bay Phase I                              
-residential   797,286    829    962    17,711,068    24,628    719 
-commercial   1,992,228    737    2,703    -    -    - 
-garage   1,893,816    3,445    550    1,035,023    2,777    373 
Kirin Bay Phase II                              
-residential   8,510,868    6,971    1,221    39,164,248    38,666    1,013 
-garage   326,819    526    621    1,444,693    2,241    645 
Kirin Bay Phase III                              
-residential   31,932,109    35,199    907    -    -    - 
-commercial   -    -    -    -    -    - 
-garage   893,275    1,222    731    -    -    - 
Kirin Bay Phase IV                              
-residential   14,159,223    15,744    899    -    -    - 
-commercial   -    -    -    -    -    - 
-garage   -    -    -    -    -    - 
Kirin County                              
-residential   2,868    -    -    17,386    99    176 
-commercial   329,451    1,030    320    663,473    (571)   (1,162)
-garage   179,044    807    222    105,762    250    423 
Total  $71,634,714    74,359   $963   $118,216,696    131,265   $901 

 

35
 

 

The following tables set forth the consolidated square meters sold and average selling price per square meter by each project for the three months ended September 30, 2014 and 2013: 

 

    Three Months Ended September 30,  
    2014     2013  
    Contract
Sales(1)
    Square
Meters
Sold(2)
    Average
Selling
Price(3)
    Contract
Sales(1)
    Square
Meters
Sold(2)
    Average
Selling
Price(3)
 
No.79 Courtyard Phase I                                                
-residential   $ -     -     $ -     $ 2,227,816       1,883     $ 1,183  
-commercial     -   -       -       974,539       180       5,416  
-garage     223,146       232       962       427,343       740       577  
No.79 Courtyard Phase II                                                
-One elevator and four suites     185,839       149       1,249       5,429,940       5,841       930  
-Parking lots     35,179       24       1,466       533,936       372       1,435  
No.79 Courtyard Phase III                                                
-residential     2,828,105       2,100       1,347       -       -       -  
-commercial     -     -       -       -       -       -  
-garage     85,967       65       1,325       -       -       -  
Kirin Bay Phase I                                                
-residential     96,066       87       1,104       253,068       211       1,199  
-commercial     603,875       237       2,543       -       -       -  
-garage     140,576       344       409       381,568       976       391  
Kirin Bay Phase II                                                
-residential     3,282,670       2,791       1,176       4,488,411       2,995       1,498  
-garage     (21,247 )     (31 )     685       774,801       1,197       647  
Kirin Bay Phase III                                                
-residential     8,562,698       9,205       930       -       -       -  
-commercial     -       -       -       -       -       -  
-garage     199,383       272       734       -       -       -  
Kirin Bay Phase IV                                                
-residential     1,257,625       1,087       1,157       -       -       -  
-commercial     -       -       -       -       -       -  
-garage     -       -       -       -       -       -  
Kirin County                                                
-residential     -     -       -       27,329       45       606  
-commercial     (300,244 )     236       (1,272 )     550,246       91       6,041  
-garage     14,236       69       206       19,334       35       552  
Total   $ 17,193,874       16,865     $ 1,020     $ 16,088,331       14,566     $ 1,104  

  

(1) This column reflects the aggregate amount of all contracts entered into as of the end of the applicable period.
(2) This column reflects the total square meters sold during the applicable period.
(3) This column reflects the average price per square meter for all properties sold during the applicable period.

 

Operating Expenses. Operating expenses for the nine months ended September 30, 2014 and 2013 were $9.7 million and $9.9 million respectively, decreased slightly by $0.2 million, or 2%.

 

Operating expenses for the three months ended September 30, 2014 were $3.4 million, an increase of $0.3 million, or 9.7%, from $3.1 million for the three months ended September 30, 2013.

 

36
 

  

We expect our selling and marketing expenses to increase in the near future in connection with pre-sale and construction of Kirin Bay and No.79 Courtyard’s new phases and development of new projects.

 

   Nine Months Ended September 30,   Three Months Ended September 30, 
   2014   2013   2014   2013 
       % of
Expenses
       % of
Expenses
       % of
Expenses
       % of
Expenses
 
Operating expenses  $9,710,962    100%  $9,885,168    100%  $3,425,998    100%  $3,121,722    100%
Selling expenses   2,794,450    28.8%   3,248,828    32.9%   1,129,324    33.0%   1,054,420    33.8%
Advertising expense   1,789,192    18.4%   1,886,130    19.1%   791,468    23.1%   668,035    21.4%
Staff salaries   384,017    4.0%   579,748    5.9%   165,358    4.8%   164,969    5.3%
Office and Administrative expenses   621,241    6.4%   782,950    7.9%   172,498    5.0%   221,416    7.1%
General and administrative expenses   6,916,512    71.2%   6,636,340    67.1%   2,296,674    67.0%   2,067,302    66.2%
Staff salaries   2,303,659    23.7%   2,247,461    22.7%   562,740    16.4%   824,760    26.4%
Professional expenses   2,299,221    23.7%   1,914,064    19.4%   578,426    16.9%   627,022    20.1%
Office and Administrative expenses   2,313,632    23.8%   2,474,815    25.0%   1,155,508    33.7%   615,520    19.7%

 

Advertising Expenses. Our advertising expenses decreased from $1.9 million for the nine months ended September 30, 2013 to $1.8 million for the same period of year 2014. The advertising expenses contained marketing facilities, advertisement fee, promotion fee and sales agency fee. The decrease of the revenue derived from No. 79 Courtyard resulted in the decrease of $0.1 million of the sales agency fee.

 

Our advertising expenses increased from $0.7 million for the three months ended September 30, 2013 to $0.8 million for the same period of year 2014.

 

Staff Salaries. For the nine months ended September 30, 2014 and 2013 our selling and administrative staff expenses were $2.7 million and $2.8 million respectively. 

 

For the three months ended September 30, 2014 and 2013 our selling and administrative staff expenses were $0.7 million and $1.0 million respectively.

 

Office and Administrative Expenses. Office and administrative expenses decreased from $3.3 million for the nine months ended September 30, 2013 to $2.9 million for the nine months ended September 30, 2014, that’s because the Company recorded tax expense for prior years in the first quarter of 2013.

 

Office and administrative expenses increased by $0.5 million from $0.8 million to $1.3 million for the three months ended September 30, 2013 to 2014.

  

Professional Expenses. Professional expenses increased from $1.9 million for the nine months ended September 30, 2013 to $2.3 million for the nine months ended September 30, 2014 because more legal fee was paid to legal agency for new operation agreements.

 

For the three months ended September 30, 2014 and 2013 our professional expenses were $0.6 million and $0.6 million respectively. 

 

Interest Expense, Net. Our interest expense was $3.9 million for the nine months ended September 30, 2014, a decrease of $2.4 million, or 38.7%, from $6.3 million for the same period of year 2013. Our interest expense was $1.3 million for the three months ended September 30, 2014, a decrease of $1.1 million, or 44.6%, from $2.4 million for the same period of year 2013. The decrease was primarily due to the interest income of $3.7 million in nine months ended September 30, 2014 and interest income of $1.3 million for the three months ended September 30, 2014.

 

Income Taxes. Income taxes expense for the nine months ended September 30, 2014 totaled $1.6 million, an increase of $1.7 million or 1694.6% from income taxes benefit of $0.1 million for the nine months ended September 30, 2013. In the nine months ended September 30, 2014, Land Appreciation Tax increased by $0.9 as compared with the same period of year 2013, Income tax increased by $0.8 as compared with the same period of year 2013 as a result of less loss generated.

 

Income taxes expense for the three months ended September 30, 2014 totaled $0.7 million, an increase of $0.5 million from income taxes expense of $0.2 million for the three months ended September 30, 2013. In the three months ended September 30, 2014, Land Appreciation Tax increased by $0.3 as compared with the same period of year 2013, Income tax increased by $0.2 as compared with the same period of year 2013 as a result of less loss generated.

 

Net Loss. Net loss for the nine months ended September 30, 2014 was $2.8 million, a decrease of $1.9 million, from net loss of $4.7 million for the nine months ended September 30, 2013. Net Loss decreased because of the following reasons: 1) in the nine months ended September 30, 2014, Kirin Bay Phase III and No.79 Courtyard Phase III became the main revenue resource and contributed most of the increased gross profit; 2) for the nine months ended September 30, 2014, the interest expenses decreased substantially due to the interest income  increased by $3.7 million in the nine months ended September 30, 2014; 3) in the nine months ended September 30, 2014, the company received more investment income from Xingtai Rural commercial bank.

 

37
 

 

Our net loss for the three months ended September 30, 2014 was $1.4 million, a decrease of $1.0 million, from net loss of $2.4 million for the three months ended September 30, 2013. Net loss decreased because in the three months ended September 30, 2014, the gross profit increased by $0.8 million and interest expense decreased by $1.1 million, meanwhile, income tax expenses increased by $0.5 million and operating expenses increased by $0.3 million as compared with the same period ended September 30, 2013.

 

Liquidity and Capital Resources

 

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

 

   Nine Months Ended
September 30,
 
   2014   2013 
Net cash generated from (used in) operating activities  $(12,734,907)  $9,218,302 
Net cash provided by (used in ) investing activities   318,956    (26,375,309)
Cash flows provided by financing activities   2,113,742    10,717,608 
Effect of exchange rate changes on cash and cash equivalent   (124,208)   470,141 
Net decrease in cash and cash equivalents   (10,426,417)   (5,969,258)
Cash and cash equivalents - beginning of period   23,407,551    24,098,68 
Cash and cash equivalents - end of period   12,981,134    18,129,430 

 

We had a balance of cash and cash equivalents of $13.0 million as of September 30, 2014 compared with a balance $18.1 million as of September 30, 2013. We have historically funded our working capital needs through advance payments from customers and bank borrowings. Our working capital requirements are influenced by the state and level of our operations, and the timing of capital needed for projects.

 

Operating Activities. Net cash outflow from operating activities was $12.7 million for the nine months ended September 30, 2014, compared to net cash provided from operating activities of $9.2 million for the nine months ended September 30, 2013, an increase of $21.9 million in cash outflow. The increase in net cash flows used in operating activities was primarily due to the following:

 

We received $4.1 million from customers as down payments and subsequent installments (combination of revenue in excess of billings and customer deposits) in the nine months ended September 30, 2014, compared to $29.9 million received in the nine months ended September 30, 2013, which led to a $25.8 million decrease in net cash inflow from operating activities; 

 

We saved $11.1 million in real properties and land lots under development (combination of accounts payable) in the nine months ended September 30, 2014. In the same period of 2013, we saved $6.8 million on our projects in the nine months ended September 30, 2013. This accounted for $4.3 million increase in the net cash inflow from operating activities;

 

 

Changes in other receivable provided $22.8 million cash outflow for the nine months ended September 30, 2014. In the same period of 2013, changes in other receivable contributed $9.2 million cash outflow, which led to a $13.6 million increase in net cash outflow from operating activities.

 

Changes in other payable provided $6.9 million cash inflow for the nine months ended September 30, 2014.  In the same period of 2013, changes in other payable contributed $0.1 million cash inflow, which led to a $6.8 million increase in net cash inflow from operating activities.

 

Changes in Prepayment (combination of Receivable from a trust equity owner) provided $3.7 million cash outflow for the nine months ended September 30, 2014. In the same period of 2013, changes in prepayment contributed $14.0 million cash outflow, which led to a $10.3 million decrease in net cash outflow from operating activities. 

   

Changes in Restricted cash contributed $5.2 million cash outflow for the nine months ended September 30, 2014. In the same period of 2013, changes in restricted cash provided $1.8 million cash outflow, which led to a $3.4 million increase net cash outflow from operating activities.

 

Investing Activities. Net cash inflow provided by investing activities was $0.3 million for the nine months ended September 30, 2014, compared to net cash outflow of $26.4 million provided from investing activities for the nine months ended September 30, 2013, represented an increase of $26.7 million of cash inflow.

 

Financing Activities. Net cash inflow from financing activities was $2.1 million for the nine months ended September 30, 2014, compared to $10.7 million cash inflows for the nine months ended September 30, 2013, a decrease of cash inflows of $8.6 million of cash inflow. This was mainly due to repayment of financial institution loan of $40.2 million and $12.1 million for the nine months ended September 30, 2014 and 2013 respectively, meanwhile, we received financial institution loan of $42.3 million and $22.5 million for the nine months ended September 30, 2014 and 2013, respectively.

 

38
 

 

Contractual Obligations

 

Long-term debt obligations, costs of land use rights and non-cancellable construction contract obligations for the nine months ended of September 30, 2014.

 

   Payments due by period 
       less than   1-3 
in thousands of US Dollars  Total   1 year   years 
Loans payable  $90,969   $62,541   $28,428 
Costs of land use rights   3,803    3,803    - 
Non-cancellable construction contract obligations   151,038    150,557    481 
Total   245,810    216,901    28,909 

 

Customers’ down payments and installments provide a significant portion of our cash inflows. We may also acquire additional cash by raising funds through new borrowings, refinancing of existing borrowings, public or private sales of equity securities, or a combination of one or more of the above; however, there can be no absolute assurance that our internally generated cash flows and external financing will be sufficient to meet our contractual and financing obligations in a timely manner.

 

As of September 30, 2014, we entered into non-cancellable agreements with several suppliers for our on-going business of constructing residential and commercial properties. The total amount we committed to pay contractors as outlined in these non-cancellable construction agreements aggregates approximately $151.0 million.

 

Material Financial Obligations

 

Loans Payable

 

As of September 30, 2014 our total loan balance was $91.0 million.

 

In August 2012 one of the wholly-owned subsidiaries of our variable interest entity, XingtaiZhongding Kirin Real Estate Development Co., Ltd., entered into a long-term loan contract totaling RMB 150,000,000 (approximately $24,370,000) with XingtaiChengjiao Rural Credit Cooperative Union Association. The loan provides terms ranging from maximums of 18 to 24 months and is designated for propagating the development of the Kirin Bay Project. The loan is collateralized with the Kirin Bay land use rights. The company repaid all loans to the financial institution in 2014.

 

On September 17, 2012, one of the wholly-owned subsidiaries of our variable interest entity, HebeiZhongding Real Estate Development Co., Ltd. entered into a loan contract with Industrial and Commercial Bank of China, XingtaiYejin branch for a series of loans with a maximum principle amount of RMB180,000,000 (approximately $29,240,000). These loans were collateralized by partial of the Company’s No. 79 Courtyard land use rights and properties under development, due in several installments through January 31, 2014 to September 18, 2015, and borne an annual interest rate of 9.225%. The company repaid RMB 3,000,000 in 2013, RMB 77,000,000 in 2014 to the financial institution. As of September 30, 2014, the balance of loan is RMB 100,000,000 (approximately $16,244,000).

 

 ●

In December 2013, one of the wholly-owned subsidiaries of our variable interest entity XingtaiZhongding Kirin Real Estate Development Co., Ltd. entered into a loan contract to totaling RMB 30,000,000 (approximately $4,873,000) with Kong Village Committee with 6 to 9 months term, with an interest rate of 14.4% per annum. This loan is not collateralized.

 

On April 25, 2014, one of our group companies, XingtaiZhongding Kirin Real Estate Development Co., Ltd entered into a loan contract with Xingtai Rural Commercial Bank with amount of RMB 20,000,000 (approximately $3,248,000) through HebeiYouerma Business Service Co., Ltd. (a third party company). This loan was credit loan, and borne an annual effective interest rate of 12.56%. The principal amount of the loan is due on April 24, 2015.

 

On May 15, 2013, HebeiZhongding Real Estate Development Co., our subsidiary, entered into a loan contract with Industrial and Commercial Bank of China, XingtaiYejin Branch for a series of loans with a maximum principle amount of RMB270,000,000 (approximately $43,800,000). These loans were partially collateralized by the Company’s No. 79 Courtyard land use, and borne an annual effective interest rate of 9.84%. As of September 30, 2014, the Company has drawn RMB 260,000,000 (approximately $42,235,000) from the bank. The term of the loan is for 36 months, which will start from the actual withdrawal date. RMB 70,000,000 shall be repaid by January 30, 2014. RMB 50,000,000 shall be repaid by March 30, 2015. RMB 50,000,000 shall be repaid by January 30, 2016. RMB 50,000,000 shall be repaid by May 30, 2016. The subsidiary agreed to pay RMB 3,800,000 to the lender as a financing service charge under the loan.

 

On May 13, 2014, HebeiZhongding Real Estate Development Co., Ltd, our subsidiary, entered into a loan contract totaling RMB 50,000,000 (approximately $8,122,000) with HebeiXingtai Rural Commercial Bank, the loan is collateralized with the properties under development, and borne an annual effective interest rate of 7.2%. The principal amount of the loan is due on May 8, 2015.

 

On June 28, 2014, Cathay Kirin (Beijing) Garden construction Co., Ltd., our subsidiary, entered into a loan contract totaling RMB 20,000,000 (approximately $3,249,000) with HebeiXingtai Rural Commercial Bank, the loan is credit loan, and borne an annual effective interest rate 11.46%. The principal amount of the loan is due on June 26, 2015.

   

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On July 4, 2014, Xingtai Zhongding Kirin Real Estate Development Co., Ltd., our subsidiary, entered into a loan contract totaling RMB 30,000,000 (approximately $4,873,000) with Xingtai Rural Commercial Bank, with the interest rate of 11.79% per annum. The principal amount of the loan is due on July 3, 2015

 

On July 25, 2014, Xingtai Zhongding Kirin Real Estate Development Co., Ltd., our subsidiary, entered into a loan contract totaling RMB 50,000,000 (approximately $8,112,000) with Xingtai Rural Commerial Bank, the loan is credit loan, and borne an annual effective interest rate 11.46%. The principal amount of the loan is due on July 24, 2015.

 

Related Party Transactions and Balances

 

(1) Loan to a related party

 

In August 2013, Kirin entered into a loan agreement with Huaxia Huifeng Ventures Capital Management (Beijing) Co., Ltd. (“Huaxia Huifeng”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to Huaxia Huifeng for $35,953,000. On October 15, 2013, the Company signed a supplement loan agreement in amount of $27,620,000 (RMB 170,000,000) which bears 18% interest rate and has a term of one year. On October 14, 2014, Kirin signed a supplemental agreement with HuaxiaHuifeng, both parties agree to extend the term of loan to October 14, 2015.

 

As of September 30, 2014, the balance of the loan to HuaxiaHuifeng was $36,696,307 (RMB 196,560,000 for original loan and RMB 29,342,466 for interest income).

 

In August 2014, the Company entered into a loan agreement with Zhuolu Huada Real Estate Co., Ltd. (“Huada”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to Huada for RMB 2,9750,000 ($4,832,684), at 20% interest rate and has a term of one year.

 

(2) Government grant escrowed by Business Investment

 

In 2008, a VIE of the Company, Xingtai Zhongding, was entitled to a government grant associated with its development of Kirin County project of RMB 160,000,000 ($22,981,000, translated at historical exchange rate). Cash representing the grant has been remitted to Business Investment, a trust equity owner of Xingtai Zhongding in June 2008. Business Investment originally acquired the land use rights of Kirin County project, and contributed the land use rights to Xingtai Zhongding as paid-in capital to develop the project. Based on the arrangement between Business Investment and Xingtai Zhongding, which has been sanctioned by local government, the benefit of the government grant is to be transferred from Business Investment to Xingtai Zhongding. Specifically, Business Investment acts as an escrow agent but also is nominally responsible for Xingtai Zhongding’s progress. Earned portions of the government grant become available to Xingtai Zhongding based on percentage of completion.

 

For the years ended December 31, 2012, 2011, 2010 and 2009, Xingtai Zhongding was entitled to receive RMB 2,800,000, RMB 43,000,000, RMB 63,000,000, and RMB 51,200,000, respectively ($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at respective years’ historical rates) earned government grant from Business Investment, representing total amount of the government grant. The Company has the right to determine how to utilize the earned government grant. As at September 30, 2014 and December 31, 2013, accumulated earned government grant of RMB 160,000,000 and RMB160,000,000 ($25,990,903 and $26,169,447) was used to repay working capital provided by Jianfeng Guo for the support of other real estate projects’ development.

 

(3) Working capital provided by Jianfeng Guo

 

Jianfeng Guo, the controlling stockholder of the Company, through various affiliate companies and individuals, provides working capital to the VIEs (hereafter, including subsidiaries of VIEs) of the Company. In addition to repaying borrowings directly, the Company’s VIEs may also provide working capital to affiliate companies and individuals as designated by Jianfeng Guo. Balances received or provided by the Company’s VIEs are unsecured, interest-free and did not have specific repayment dates.

 

At each balance sheet date, affiliate companies and individuals who have working capital transactions with the Company’s VIEs assigned their balances to Jianfeng Guo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered into between Jianfeng Guo, related affiliate companies and individuals, and the Company’s VIEs. Xingtai Zhongding also chooses to use its accumulated government grant receivable from Business Investment, to repay working capital provided by Jianfeng Guo. As at September 30, 2014 and December 31, 2013, the working capital provided by Jianfeng Guo was RMB 130,218,029 and RMB 134,029,025 ($21,153,026 and $21,921,659 translated at respective historical rates). Accordingly, the Company is entitled to present netted balance with Jianfeng Guo on its consolidated balance sheets.

 

Gross amount of working capital provided by and to affiliate companies and individuals designated by Jianfeng Guo as at September 30, 2014 and December 31, 2013 were as follows:

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)     
Gross of working capital received from affiliate companies and individuals designated by Jianfeng Guo  $(40,488,130)  $(41,521,029)
Gross of working capital provided to affiliate companies and individuals designated by Jianfeng Guo   19,335,104    19,599,370 
Working capital provided by Jianfeng Guo in total   (21,153,026)   (21,921,659)
Gross earned government grant held by a related party   25,990,903    26,169,447 
Receivable from a related party  $4,837,877   $4,247,788 

 

40
 

 

(4) Short-term Loans to Related party

 

As of December 31, 2013, the ending balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these are all wired to five related companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies are ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin.

 

On December 30, 2013, Hebei Zhongding entered into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing Cathay Kirin Assets Management Company and Beijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000. On December 30, 2013, Business Service entered into loan agreements with Beijing Cathay Kirin Hospitality Management Company, and Cathay Brother (Beijing) Investment Management Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000, respectively. The maturity date of the loan agreements is January 2, 2014. On January 2, 2014 the Company received RMB 74,900,000 short-term loans from related party companies.

 

(5) Prepayment to related party

 

Please see financial statements Note 7 – Prepayments

 

Relocation Program of Kong Village

 

Local government did not have enough funds to pay for the relocation and new accommodations of Kong Village’s residents prior to the sale of the village’s land-use right. Consequently, the Company funded the local government by building new complexes and compensating and accommodating the villagers for and during the relocation. The government will repay our costs (a form of financing provided to government) when it sells the land use rights on which the previous villagers were removed. In exchange for such financing, the Company is assured the vacated land use right in public auction; (we will be refunded according to the sale price of the land so the bidding process is noncompetitive). As of September 30, 2014, we have completed the construction of Phase I and Phase II of Kong village (totally 1,330 units), Phase III of Kong village is under construction, the total units of the program is 1,818 units , or about 280,000 square meters in housing. We will get repaid as the parcels of land use rights are sold. We will attend all the auction and bidding process and acquire the vacated land.

 

Off-Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) (the Company’s principal executive officer) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, for the reasons set forth below, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. For the material weakness described below, management concluded that our internal controls over financial reporting were not effective as of September 30, 2014.

 

We do not have a functional audit committee; and

 

We have substantial related party transactions and have no corporate governance policies in place to review, authorize and approve such transactions.

  

The Company is still determining what steps it will take to remedy these material weaknesses.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

To the best of our knowledge, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject. However, from time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

Item 1A. Risk Factors.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit

Number<