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EX-31.1 - CERTIFICATION - Yangtze River Port & Logistics Ltdf10q0315ex31i_kirininternat.htm
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EX-31.2 - CERTIFICATION - Yangtze River Port & Logistics Ltdf10q0315ex31ii_kirininternat.htm

 

 

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 March 31, 2015

 

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.)
     

12th Floor, Building F, Phoenix Plaza

No. A5ShuguangXili

Chaoyang District, Beijing

People’s Republic of China

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

 

Registrant’s telephone number, including area code: +86 10 84554001

 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

 

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 Act).  Yes ☐  No ☒

 

The registrant had 20,596,546 shares of common stock, $0.0001 per share, outstanding at May 26, 2015.

 

 

 

 
 

 

KIRIN INTERNATIONAL HOLDING, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2015

 

TABLE OF CONTENTS

 

        PAGE  
           
PART I   FINANCIAL INFORMATION        
             
Item 1.   Financial Statements (Unaudited)     4  
             
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
             
Item 3.   Quantitative and Qualitative Disclosures About Market Risk     47  
             
Item 4.   Controls and Procedures     47  
             
PART II   OTHER INFORMATION        
             
Item 1.   Legal Proceedings     47  
             
Item 1A.   Risk Factors     47  
             
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     48  
             
Item 3.   Defaults Upon Senior Securities     48  
             
Item 4.   Mine Safety Disclosures     48  
             
Item 5.   Other Information     48  
             
Item 6.   Exhibits     48  
             
SIGNATURES     49  
Financial Statements:        

 

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

 

Item1. Financial Statements.

 

KIRIN INTERNATIONAL HOLDING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
ASSETS    
         
Cash and cash equivalents  $10,214,161   $22,004,479 
Restricted cash   19,226,283    6,785,042 
Short-term Investment   2,123,975    487,527 
Accounts receivable   456,021    58,202 
Notes receivable   600,000    600,000 
Revenue in excess of billings   10,679,072    13,586,442 
Prepayments   27,589,195    26,448,654 
Other receivables   34,305,198    28,549,244 
Receivable from a trust equity owner   5,784,881    5,415,488 
Loan to related parties   49,745,039    48,353,101 
Real estate property completed   5,683,996    1,441,194 
Real estate properties and land lots under development   177,942,355    187,445,154 
Long-term Investments   7,888,838    7,850,402 
Property and equipment, net   6,392,871    7,477,607 
Deferred tax assets   4,876,988    5,525,048 
Total assets  $363,508,873   $362,027,584 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Liabilities          
Notes payable  $2,800,000   $- 
Accounts payable   103,231,575    102,265,749 
Income taxes payable   1,692,906    1,904,666 
Other taxes payable   404,322    2,263,163 
Other payables and accrued liabilities   18,125,441    23,455,757 
Customer deposits   84,021,907    83,522,070 
Loans payable   98,160,128    92,313,136 
           
Total liabilities   308,436,279    305,724,541 
           
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   2,060    2,060 
Additional paid-in capital   37,149,630    37,149,630 
Statutory reserve   1,403,154    1,403,154 
Retained earnings   7,581,253    8,967,841 
Accumulated other comprehensive income   8,337,922    8,110,120 
Total  Kirin International Holding, Inc.’s equity   54,474,019    55,632,805 
Non-controlling interest   598,575    670,238 
Total Stockholders' equity   55,072,594    56,303,043 
Total liabilities and stockholders’ equity  $363,508,873   $362,027,584 

 

See notes to the unaudited condensed 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.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

   Three months ended
March 31
 
   2015   2014 
   (Unaudited)   (Unaudited)
(Revised)
 
         
Revenue, net  $22,033,063   $7,412,177 
Cost of sales   19,771,195    5,765,986 
Gross profit   2,261,868    1,646,191 
           
Operating expenses          
Selling expenses   734,553    779,828 
General and administrative expenses   1,882,013    2,936,614 
           
Total operating expenses   2,616,566    3,716,442 
           
Loss from operations   (354,698)   (2,070,251)
           
Other income (expenses)          
Investment income   665,972    506,548 
Interest income   1,480,955    1,232,907 
Interest expense   (2,079,682)   (2,711,866)
Other non-operating income   469,593    211,111 
           
Total other income (expenses)   536,838    (761,300)
           
Income (loss) before income taxes   182,140    (2,831,551)
           
Income taxes expense (benefit)   1,639,552    (582,520)
           
Net loss   (1,457,412)   (2,249,031)
Less: net loss attributable to non-controlling interest   (70,825)   (8,577)
Net loss attributable to stockholder of Kirin International Holding, Inc.  $(1,386,587)  $(2,240,454)
           
Net loss  $(1,457,412)  $(2,249,031)
           
Other comprehensive income (loss)          
Foreign currency translation adjustment   227,802    (395,416)
Total comprehensive loss   (1,229,610)   (2,644,447)
Less: other comprehensive loss attributable to non-controlling interest   (70,825)   (8,577)
Comprehensive loss attributable to stockholder of Kirin International Holding, Inc.  $(1,158,785)   (2,635,870)
           
Basic and diluted loss per share  $(0.07)   (0.11)
Basic and diluted weighted average shares outstanding   20,596,546    20,596,546 

 

See notes to the unaudited condensed consolidated financial statements

 

5
 

 

KIRIN INTERNATIONAL HOLDING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Three months Ended
March 31,
 
   2015   2014 
   (Unaudited)   (Unaudited)
(Revised)
 
Cash flows from operating activities:        
Net loss  $(1,457,412)  $(2,249,031)
Adjustments to reconcile net  loss to net cash used in operating activities          
Depreciation   39,721    46,361 
Gain on disposal of equipment   (452,952)   (211,111)
Deferred tax   675,133    (815,972)
           
Changes in operating assets and liabilities          
Restricted cash   (12,356,721)   211,152 
Accounts receivable   (395,966)   130,264 
Notes receivable   -    (1,503,305)
Revenue in excess of billings   2,968,857    4,198,373 
Prepayments   (994,505)   (1,143,461)
Other receivables   (5,589,098)   (11,204,465)
Receivable from a trust equity owner   (304,495)   1,190,894 
Real estate property completed   (4,218,651)   474,019 
Real estate properties and land lots under development   10,416,444    (2,938,917)
Accounts payable   414,506    (21,197,653)
Income taxes payable   (221,138)   (72,243)
Other taxes payable   (1,863,759)   (438,215)
Other payables and accrued liabilities   (5,433,470)   (133,842)
Customer deposits   50,706    20,830,105 
           
Net cash used in operating activities   (18,722,800)   (14,827,047)
           
Cash flows from investing activities:          
Purchases of equipment   (147,209)   (10,822)
Proceeds from disposal of equipment   1,647,595    623,407 
Repayment of loans from related parties   13,815,832    1,143,819 
Loans to related parties   (14,943,474)   (1,232,907)
Repayment of short-term loan from related parties   -    12,238,862 
Payment for short-term investment   (1,627,499)   - 
Cash paid for investment at cost   -    (110,002)
           
Net cash provided by (used in) investing activities   (1,254,755)   12,652,357 
           
Cash flows from financing activities:          
Proceeds from financial institution loans   10,212,551    1,634,027 
Repayment of financial institution loans   (4,882,495)   (2,777,846)
Proceeds from Notes payable   2,800,000    - 
Distribution to non-controlling stockholder of Greenfield   (838)   - 
           
Net cash provided by (used in) financing activities   8,129,218    (1,143,819)
           
Effect of exchange rate changes on cash and cash equivalents   58,019    (142,629)
Net decrease in cash and cash equivalents   (11,790,318)   (3,461,138)
           
Cash and cash equivalents - beginning of the period   22,004,479    23,407,551 
           
Cash and cash equivalents - end of the period  $10,214,161   $19,946,413 
           
Supplementary cash flow information          
Cash paid for income tax  $855,749   $286,197 
Cash paid for interest expense  $1,923,911   $2,545,143 

 

See notes to the unaudited condensed consolidated financial statements

 

6
 

 

KIRIN INTERNATIONAL HOLDING, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 at March 31, 2015, the Company had following wholly-owned entities, VIEs and VIEs’ subsidiaries:

 

    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   State of California, United States of America   July 23,
2013
  Real estate development
Newport Property Holding, LLC   State of California, United States of America   July 11,
2013
  Real estate investment and management
Kirin Alamo, LLC   State of California, United States of Amercia   December 09,
2013
  Real Estate development
Archway Development Group LLC   State of California, United States of America   April 30,
2014 
  Real Estate development
HHC-6055 Centre Drive LLC   State of California, United States of America   April 30,
2014 
  Real Estate development
Applecrate LLC   State of California, United States of America   November 11,
2014
  E-Commerce Retail/Wholesale
VIEs            
HebeiZhongding Real Estate Development Co., Ltd. (“Hebei Zhongding”)   Xingtai, Hebei province, China   July 16,
2007
  Real estate development
XingtaiZhongdingJiye Real Estate Development Co., Ltd. (“Zhongding Jiye”, “Xingtai Zhongding”)   Xingtai, Hebei province, China   August 7,
2008
  Real estate development
             

Subsidiaries of VIEs

Subsidiaries of Hebei Zhongding

           
XingtaiZhongding Construction Project Management Co., Ltd.   Xingtai, Hebei province, China   September 3,
2007
 

Dormant

 

Subsidiaries of Xingtai Zhongding            
XingtaiZhongding Kirin Real Estate Development Co., Ltd. (formerly known as XingtaiZhongding Business Service Co., Ltd., “Business Service”, “Zhongding Kirin”)   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
Xingtai Hetai 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
Hebei Zhongding Property Service Co., Ltd.   Xingtai, Hebei province, China   December 19,
2011
  Property management

 

 

*In January 2015, Greenfield International Corporation was closed.

 

7
 

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2015 and 2014 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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, 2014 for further information. In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position at March 31, 2015, the results of operations for the three month periods ended March 31, 2015 and 2014, and cash flows for the three month periods ended March 31, 2015 and 2014. The results of operations for the three month periods ended March 31, 2015 are not necessarily indicative of the operating results for the year. The unaudited condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014, and the unaudited condensed consolidated statements of operations and comprehensive loss and cash flows for the three month periods ended March 31, 2015 and 2014 include those of the Company, its subsidiaries and VIEs, and subsidiaries of VIEs. All material intercompany transactions and balances have been eliminated in consolidation.

 

The condensed consolidated  balance sheets are presented unclassified because the time required to complete real estate projects and the Company’s working capital considerations usually stretch for more than one-year period.

 

Reclassifications

 

Certain amounts in the March 31, 2014 unaudited condensed consolidated financial statement have been reclassified to conform to the March 31, 2015 presentation.

 

Use of Estimates

 

The preparation of the condensed 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 condensed 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.

 

8
 

 

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.

 

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 condensed consolidated statements of operations and comprehensive income (loss) in accordance with ASC 220, comprehensive income.

 

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.

 

9
 

 

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.

 

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.

 

10
 

 

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 condensed 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.

  

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 ended March 31, 2015 and 2014, the Company did not recognize any grant income, respectively.  All government grants related to Kirin County have been recognized through 2009 to 2012 as the construction of Kirin County goes on during the years.  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 of March 31, 2015, the Company didn’t receive any request from the 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 the government to request the grant’s refund in next twelve months.

 

11
 

 

Capitalization of Interest

 

In accordance with ASC 360, Property, Plant and Equipment, interest incurred during construction is capitalized to properties under development. For the three months ended March 31, 2015 and the year ended December 31, 2014, $43,961 (unaudited) and $124,921 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.

 

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 $19,226,283 (unaudited) and $6,785,042 as of March 31, 2015 and December 31, 2014, 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. Besides this, deposits for bank acceptance notes required by PRC banks are also disclosed as restricted cash.

 

Short-term Investments

 

The classification of investment securities is based on the Company’s intent, which is re-evaluated at each balance sheet date, with respect to those securities. Short-term investments refer to the securities that the Company has positive intent and ability to hold to maturity and stated at amortized cost.

 

12
 

   

Long-term Investments

 

Investments in securities of private companies the Company does not have a controlling interest and is unable to exercise significant influence 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. The Company received $665,972 and $506,548 as dividend for the three months ended March 31, 2015 and 2014, respectively.

 

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. 

 

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. LAT was included in Income tax expense in the condensed consolidated statements of operations and comprehensive income (loss).

 

13
 

 

Accumulated Other Comprehensive Income

 

Accumulated other comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only component of other comprehensive income (loss) during the three months ended March 31, 2015 and 2014 was the foreign currency translation adjustment.

 

Earnings per Share

 

The Company reports earnings per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants and convertible preferred stock, were exercised or converted into common stock. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.

  

Advertising Expenses

 

Advertising costs are expensed as incurred, or the first time the advertising takes place, in accordance with ASC 720-35, Advertising Costs. For the three months ended March 31, 2015 and 2014, the Company recorded an advertising expense of $300,924 and $479,963, respectively. 

 

Property Warranty

 

The Company provides customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts. The warranty period varies from two to five years, depending on different property components the warranty covers.

 

The Company constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company withholds up to 5% of the contract total payment from contractors for periods of two to five years. These amounts are included in liabilities, and are only paid to the extent that there have been no warranty claims against the Company relating to the work performed or materials supplied by the contractors.  As of March 31, 2015 and December 31, 2014, the Company retained $111,313 (unaudited) and $117,218 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 ended March 31, 2015 and 2014, the Company didn’t incur incidental costs in addition to the amount retained from contractors.

 

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 ended March 31, 2015 and 2014.

 

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 to revise 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.

 

14
 

  

Recently Issued Accounting Pronouncements

 

The Company does not believe recently issued but not yet effective accounting standards from ASU 2015-01 through ASU 2015-08, if currently adopted, would have a material effect of the condensed consolidated financial position, results of operation and cash flows.

 

Correction of Prior Period Financial Statements

 

During the three months ended March 31, 2015, management determined that service fee incurred in connection with obtaining the loans should be deferred and amortized over the period of the related loans under straight-line method. In prior years, the Company had deferred the service fee and expensed when the loans are due.. The Company has adjusted its December 31, 2014 consolidated balance sheet and its income statement for the three months ended March 31, 2014.

 

The following tables detail the corrections and impact to condensed consolidated balance sheet at December 31, 2014:

 

   December 31, 2014 
   As 
Previously
       As
 Currently
 
   Reported     Adjustment   Reported 
Assets                  
             
Prepayments  $25,983,191   $465,463   $26,448,654 
Other receivables      30,206,838    (1,657,594)   28,549,244 
Deferred tax assets      5,227,015    298,033    5,525,048 
                
Total assets         362,921,682    (894,098)   362,027,584 
                
Stockholders’ equity                     
                
Retained earnings      9,857,778    (889,937)   8,967,841 
Accumulated other comprehensive income      8,114,281    (4,161)   8,110,120 
                
Total Stockholders' equity        $57,197,141   $(894,098)  $56,303,043 

 

The following tables detail the corrections and impact to the condensed income statements for the three months ended March 31, 2014

 

   For the Three Months Ended
March 31, 2014
 
   As
Previously
       As
Currently
 
   Reported   Adjustment   Reported 
             
Interest expense  $(2,564,025)  $(147,841)  $(2,711,866)
Total other income (expense)   (613,459)   (147,841)   (761,300)
Loss before income taxes       (2,683,710)   (147,841)   (2,831,551)
Income taxes expense (benefit)    (545,560)   (36,960)   (582,520)
Net loss       (2,138,150)   (110,881)   (2,249,031)
Net loss attributable to stockholder of Kirin International Holding, Inc.    (2,129,573)   (110,881)   (2,240,454)
Foreign currency translation adjustment    (399,909)   (4,493)   (395,416)
Total comprehensive loss       (2,538,059)   (106,388)   (2,644,447)
Comprehensive loss attributable to stockholder of Kirin International Holding, Inc.       (2,529,482)   (106,388)   (2,635,870)
                
Basic and diluted loss per share   $(0.10)  $(0.01)  $(0.11)

 

In accordance with SEC Staff Accounting Bulletin Nos. 99 and 108 (“SAB 99” and “SAB 108”), the Company has evaluated these errors, based on an analysis of quantitative and qualitative factors, as to whether they were material to each of the prior reporting periods affected and if amendments of previously filed registration statements with the SEC are required. The Company has determined that the impact is not material to prior periods and the understatement of expenses would not have influenced an investor’s decision making process. In accordance with SAB 108, the Company will include this revised financial information when it files subsequent reports on Form 10-Q and Form 10-K or files a registration statement under the Securities Act of 1933, as amended.

 

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Note 3 – Variable Interest Entities

 

In accordance with the VIE Agreements 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.

 

Risks in Relation to the VIE Structure

 

The Ministry of Commerce of PRC (“MOFCOM”) published a discussion draft of the proposed Foreign Investment Law (the “Draft”) in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China. The Draft embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments.

  

The MOFCOM is currently soliciting comments on the Draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The Draft, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations. The Draft expands the definition of foreign investment and introduces the principle of "actual control" in determining whether a company is considered a Foreign Investment Enterprise (“FIE”).

  

Under the Draft, Variable Interest Entities (“VIEs”) that are controlled via contractual arrangement would be deemed as FIEs, if they are ultimately "controlled" by foreign investors. Therefore, for any companies with a VIE structure in an industry category that falls under restricted to foreign investment or prohibited from foreign investment, the VIE structure may be deemed legitimate only if the ultimate controlling persons) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the VIEs will be treated as FIEs and any operation in the industry category falls under restricted to foreign investment or prohibited from foreign investment, without market entry clearance may be considered as illegal. Moreover, for the enterprises which are not incorporated under the laws of China (foreign investors) but are "controlled" by Chinese investors, they may submit documentary evidence to apply for identifying their investment as the investment by Chinese investors when they applying for the market entry clearance to engage in any investment as set out in industries restricted to foreign investment or prohibited from foreign investment in China. The competent authorities of foreign investment will grant the review opinion on whether the said investment is identified as the investment by Chinese investors.

 

In conclusion, if the Draft enacted as proposed, it is possible that the Company's conduct of certain of its operations and businesses through the VIEs could be found by PRC authorities to be in violation of PRC laws and regulations prohibiting or restricting foreign ownership of companies that engage in such operations and businesses. If such a finding were made, regulatory authorities with jurisdiction over the licensing and operation of such businesses would have broad discretion in dealing with such a violation, including levying fines, confiscating the Company's income, revoking the business or operating licenses of the affected businesses, requiring the Company to restructure its ownership structure or operations, or requiring the Company to discontinue all or any portion of its operations. Any of these actions could cause significant disruption to the Company's business operations, and have a material adverse impact on the Company's cash flows, financial position and operating performance. The Company's management considers the possibility of such a finding by PRC regulatory authorities to be remote.

 

16
 

 

These contractual arrangements may not be as effective in providing the Company with control over the VIEs as direct ownership. Due to its VIE structure, the Company has to rely on contractual rights to effect control and management of the VIEs, which exposes it to the risk of potential breach of contract by the shareholders of the VIEs for a number of reasons. For example, their interests as shareholders of the VIEs and the interests of the Company may conflict and the Company may fail to resolve such conflicts; the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith. If any of the foregoing were to happen, the Company may have to rely on legal or arbitral proceedings to enforce its contractual rights, including specific performance or injunctive relief, and claiming damages. Such arbitral and legal proceedings may cost substantial financial and other resources, and result in a disruption of its business, and the Company cannot assure that the outcome will be in its favor. In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event that the Company is unable to enforce any of these agreements, the Company would not be able to exert effective control over the affected VIEs and consequently, the results of operations, assets and liabilities of the affected VIEs and their subsidiaries would not be included in the Company's condensed consolidated financial statements. If such were the case, the Company's cash flows, financial position and operating performance would be materially adversely affected.

  

The Company's agreements with respect to its consolidated VIEs are approved and in place. The Company's management believes that such agreements are enforceable, and considers it a remote possibility that PRC regulatory authorities with jurisdiction over the Company's operations and contractual relationships would find the agreements to be unenforceable under existing laws.

 

Summary information regarding consolidated VIEs is as follows:

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
ASSETS
         
Cash and cash equivalents  $6,836,551   $21,084,446 
Restricted cash   19,226,283    6,785,042 
Short-term Investment   2,123,975    487,527 
Accounts receivable   456,021    58,202 
Revenue in excess of billings   10,679,072    13,586,442 
Prepayments   27,589,195    26,448,654 
Other receivables   47,560,154    42,314,953 
Receivable from a trust equity owner   12,222,576    11,853,261 
Loan to related parties   49,745,039    48,353,101 
Real estate property completed   5,683,996    1,441,194 
Real estate properties and land lots under development   167,799,803    178,040,195 
Investment at cost   7,188,838    7,150,402 
Property and equipment, net   446,136    466,557 
Deferred tax assets   4,876,988    5,525,048 
Total assets  $362,434,627   $363,595,024 
           
LIABILITIES 
           
Accounts payable  $103,231,575   $102,265,749 
Income taxes payable   1,692,906    1,904,666 
Other taxes payable   404,322    2,263,163 
Other payables and accrued liabilities   17,712,665    23,325,237 
Customer deposits   84,021,907    83,507,580 
Financial institution loans   98,160,128    92,313,136 
Total liabilities  $305,223,503   $305,579,531 

 

17
 

  

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.

 

For the three months ended March 31, 2015 and 2014, the financial performance of VIEs is as follows:

 

   Three Months Ended March 31, 
   2015   2014 
   (Unaudited)   (Unaudited) 
       (Revised) 
         
Revenue from real estate sales, net  $22,033,063   $7,375,480 
Cost of real estate sales  $19,771,195   $5,765,986 
Operation expenses  $1,818,098   $3,229,128 
Net loss  $(1,111,896)  $(2,009,525)

 

Note 4 – Short-term Investments

 

On December 15, 2014 and February 15, 2015, the Company invested RMB 3,000,000 (approximately $490,000, matured in one year) and RMB 10,000,000 (approximately $1,634,000, matured in three months), respectively in a financial instrument managed by Xingtai Small and Micro Enterprises Investment Association. Nil investment income is earned for the three months ended March 31, 2015.

 

Note 5 – 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 of March 31, 2015 and December 31, 2014, accounts receivable due from complete properties represents revenue in excess of billings balances of Kirin County project and No.79 Courtyard Phase I 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.

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
         
Receivable from sales of condominium units  $455,650   $55,375 
Receivable from property management   371    2,827 
           
   $456,021   $58,202 

 

Note 6 – Notes Receivable

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
         
Receivable from individual (Promissory note)  $600,000   $600,000 

 

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

 

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Note 7 – Revenue in Excess of Billings

 

Revenue in excess of billings represents the amount revenue recognized for certain residential and commercial units in Kirin Plaza, No. 79 Courtyard and Kirin Bay 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 March 31, 2015 and December 31, 2014, revenue in excess of billings is $10,679,072 (unaudited) and $13,586,442, respectively.

 

Note 8 – Prepayments

 

Prepayments consisted of the following:

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
         
Advances to suppliers and contractors  $1,266,852   $1,250,734 
Prepaid financing service fees   1,796,956    1,291,465 
Excessive business tax and LAT liabilities   9,495,020    8,873,569 
Prepayments-related parties   15,030,367    15,032,886 
   $27,589,195   $26,448,654 

 

Pursuant to financing service contracts entered into between the Company, Xingtai Rural Commercial Bank 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. Pursuant to service contracts entered into between the Company and Hebei Pufa Investment Development Co., Ltd (“Pufa”), the Company paid service fees to Pufa for the origination and extension of several loans from Industrial and Commercial Bank of China, Xingtai Branch. These financing service fees are regarded as prepaid financing service fees 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 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 prepayments to related parties are regarding to construction contract. In certain area, the related parties have more bargain power with the construction contractors. These related parties will pay contractors on behalf of the Company according to contract terms. The construction contractors will provide construction service to the Company, and then the prepayments are recorded in costs over the course of construction period, based on the completion progress of a project. The balance of Prepayments-related parties represents the amount these related parties are yet to pay to contractors.

 

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Note 9 – Other Receivables

 

The components of other receivables were as follows:

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
         
Working capital borrowed by contractors  $20,195,061   $20,209,181 
Due from a related party supplier   5,390,331    5,361,511 
Due from a third party supplier   4,901,480    - 
Deposit   1,699,820    1,693,773 
Staff allowance   1,276,072    1,069,379 
Receivables of housing maintenance funds   175,935    204,651 
Others   666,499    10,749 
           
   $34,305,198   $28,549,244 

 

Working capital borrowings by contractors are unsecured, bear no interest and become payable before the completion of the related construction and program. There was no allowance for doubtful accounts as at March 31, 2015 and December 31, 2014.

 

On April 10, 2014, the Company entered into a loan agreement with Hebei Yoerma Business Service Co.,Ltd (“Hebei Yoerma”), a related party ultimately controlled by Jianfeng Guo, Chairman of the Company’s Board of Directors, and the controlling stockholder of the Company, with no interest, the original amount is RMB 32,992,060 (approximately $5,390,000 (unaudited) and, $5,362,000 as of March 31, 2015 and December 31, 2014) and has a term of two years. As of March 31, 2015 and December 31, 2014, there is RMB 18,211,330 (unaudited) (approximately $2,975,000) and RMB 18,211,330 (approximately $2,960,000) working capital borrowed by Hebei Yoerma, respectively

 

On February 11, 2015, the Company entered into a loan agreement with Xingtai Dongxinshun Construction decoration Co., Ltd (“Dongxinshun”), a third party supplier. According to the agreement, the Company made a loan to Dongxinshun of RMB 30,000,000 (approximately $4,901,000), with no interest and is due on May 30, 2015.

 

Note 10 – Real Estate Properties and Land Lots under Development

 

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

   March 31,   December 31, 
   2015   2014 
Properties under development  (Unaudited)     
Kirin County        
Costs of land use rights  $1,219,229   $1,153,179 
Other development costs   485,704    483,486 
No. 79 Courtyard          
Costs of land use rights   43,650,487    45,263,421 
Other development costs   19,933,819    22,400,751 
Kirin Bay          
Costs of land use rights   22,702,231    24,579,507 
Other development costs   17,168,950    22,547,288 
Archway HHC Apartment          
Costs of land use rights   8,730,454    8,730,454 
Other development costs   1,412,098    674,505 
           
Land lots under development   62,639,383    61,612,563 
           
   $177,942,355   $187,445,154 

 

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, all related cost are recorded in Costs of land use rights. Other development costs include direct development costs, interest on indebtedness, construction overhead and indirect project costs.

 

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 development costs are allocated to units within a project based on the ratio of the sales value of units to the estimated total sales value.

 

As of March 31, 2015, the Company has obtained certificates representing titles of the land use rights used for the development of Kirin County, No. 79 Courtyard, Kirin Plaza and Kirin Bay projects.  All our land use rights are assigned to real estate projects.

 

20
 

 

 

Part of Company’s real estate held for development and land lots under development were pledged as collateral for financial institution loans (Note 18).

 

The Residential buildings of Kirin County are fully completed in December, 2012, the Residential building of No.79 Courtyard Phase I are fully completed in March, 2015. As of March 31, 2015 and December 31, 2014, the account balance of the real estate property completed is $5,683,996 (unaudited) and $1,441,194 respectively.

 

Archway HHC Apartment is a proposed apartment located in Howard Hughes Center Site 4, Los Angeles, California, which will have 109 units apartment and 187 parking spaces. As of March 31, 2015, the Company paid land cost and incurred some other development cost.

 

Kong Village Relocation Program

 

Pursuant to incentive policies issued by Xingtai local government encouraging modernization of villages situated in urban vicinity, the Company participated in Kong Village Relocation Program in which the Company constructs a real property and transfers to local government at no costs, and reimburses costs incurred by local government compensating villagers and zoning and developing vacated land lots.  In exchange for the financing, the Company will be invited to bid for vacated land parcels for residential and commercial use at public auction at market price, and majority of the proceeds received by local government will be refunded to the Company. The Company capitalizes all expenditures attributable to Kong Village Relocation Program under land lots under development.  The Company expects to secure land use rights through the auditions 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 March 31, 2015 and December 31, 2014, residual expenditures under Kong Village Relocation Program, representing accumulated costs of the land use rights to be obtained by the Company in the future, were capitalized in land lots under development in amount of $62,639,383 and $61,612,563, respectively.

 

On March 31, 2015, Xingtai Qiaoxi District Government filed an application to Xingtai Municipal Government for a refund of RMB 125,512,500 (approximately $20,397,000) on behalf of the Company under the Kong Village Relocation Program, the refund is expected to be approved and received in 2015.

 

Note 11 – Long-term Investments

 

Long term Investments include the Company’s equity interest in Hebei Xingtai Rural Commercial Bank Co., Ltd. (“Xingtai RC Bank”), a private financial institution. In June 2011, the Company agreed to become a stockholder of Xingtai RC Bank and paid RMB 20,000,000, or approximately $3,142,000 to subscribe to 16,000,000 shares, or 6.96%, of the common stock of the financial institution.  The establishment of Xingtai RC Bank is based on restructured business of Xingtai Chengjiao Rural Credit Cooperative Union Association.  On December 12, 2012, Xingtai RC Bank obtained required approvals from China banking regulatory agencies and completed all registration procedures.

 

The Xingtai RC Bank increased paid in capital from RMB 240,000,000, or approximately $38,207,000 to RMB 500,000,000, or approximately $79,598,000 on April 26, 2013. The Company paid approximately RMB 24,000,000, or approximately $3,841,000 to keep its stockholder position.

 

As of March 31, 2015 and December 31, 2014, the balance of Long term investment for Xingtai RC Bank was $7,188,838 (unaudited) and $7,150,402, consisting 31,000,000 shares, or 5.03%, of the common stock of Xingtai RC Bank.

 

The Company used the cost method of accounting to record its investment in Xingtai RC Bank since the Company does not have the ability to exercise significant influence over the operating and financing activities of Xingtai RC Bank.

 

As of March 31, 2015 and December 31, 2014, the Company has deposit balances (including restricted cash) of $7,201,827 (unaudited) and $5,818,000 in Xingtai RC Bank, respectively.

 

In November 2013, the company invested $700,000 to Hopkins Kirin Facilities Group, LLC (“Hopkins”) to obtain 22.5% share.

 

The Company used the equity method of accounting to record its investment in Hopkins.

 

As of March 31, 2015 and December 31, 2014, the ending balance in long-term investment was $7,888,838  (unaudited) and $7,850,402. The Company determined that there was no impairment on its long-term investment at March 31, 2015.

 

21
 

 

Note 12 – Notes Payable

 

   March 31,   December 31, 
   2015   2014 
    (Unaudited)     
Notes Payables (Promissory note)  $2,800,000   $- 

  

The Promissory note with original principle amount of $2,800,000 will be due at January 22, 2017, at the rate of 10% per annum.

 

Note 13 – Accounts Payable

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
Payables in relation to acquisitions of land use rights  $3,824,821   $3,804,371 
Construction contractors   99,406,754    98,461,378 
           
   $103,231,575   $102,265,749 

  

In March 2011, the Company entered into a supplementary agreement with Huada Mining Co., Ltd. in relation to the acquisition of land use rights for the development of No. 79 Courtyard project. The Company agreed to increase the land use rights’ purchase price in the original contract, to compensate Huada Mining Co., Ltd. for its inability to realize the appreciation of the transferred land use rights during the substantially prolonged contract closing period of three years. The Company has unconditionally received the title of the land use rights in 2010 before the commencement of the supplementary agreement negotiation.   In accordance with the supplementary agreement, the Company and Huada Mining Co., Ltd. will not pursue any adjustments of the land use rights’ transfer price.  As of March 31, 2015, payable to Huada Mining Co., Ltd. was $1,374,081.  The Company and Huada Mining Co., Ltd. have agreed that remaining balance will be repaid in an unspecific near future period, taking into accounts of the Company’s liquidity. Unpaid balance does not bear interest.

 

In May 2011, the Company entered into an agreement with Xingtai Kong Village Real Properties Co., Ltd., a company controlled by Kong Village Committee.  The Company agreed to pay $22,649,880 (translated as historical rate) to compensate additional costs incurred by Kong Village Committee for the Kong Village Relocation Program.   At March 31, 2015, unpaid balance plus accrued interest was $2,450,740.  The Company capitalized the additional consideration in the costs land lots under development.

  

Note 14 – Other Payables and Accrued Liabilities

 

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

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
Unrecognized tax benefit (Note 16(2))  $6,535,307   $6,500,366 
Deposits from customers on behalf of utility operators   9,058,262    8,195,227 
Car park deposits from customers   1,053,818    1,732,347 
Due to a related party suppliers   -    6,500,366 
Deposit from a contractor   111,313    117,218 
Accrued loan interest   176,453    175,510 
Estimated penalty   657,088    - 
Others   533,200    234,723 
   $18,125,441   $23,455,757 

 

On December 30, 2014, the Company entered into RMB 40,000,000 (approximately $6,500,000) loan agreement with Hebei Yoerma, a related party ultimately controlled by Jianfeng Guo, Chairman of the Company’s Board of Directors, and the controlling stockholder of the Company, with no interest and the loan is due on March 30, 2015, the Company repaid the loan on January 28, 2015.

 

The Company enters into non-cancellable, fixed-price pre-sale contracts with homebuyers.  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.As of March 31, 2015, $657,088 estimated penalty is reasonably estimated for Kirin Bay and No. 79 Courtyard and probably will occur in future.

 

Note 15 – 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 March 31, 2015 and December 31, 2014, the Company received $84,021,907 (unaudited) and $83,522,070 deposits from customers, respectively.

 

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Note 16 – Income Taxes

 

(1)  Corporate income tax

 

The Company is incorporated in the State of Nevada in the United States of America (“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 March 31, 2015 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 (closed in January 2015), Kirin Hopkins Real Estate Group LLC, Newport Property Holding, LLC, Applecrate LLC, Archway Development Group LLC, HHC-6055 Centre Drive LLC and Kirin Alamo, LLC were incorporated in State of California, U.S. and are subject to California taxes.

 

The Company’s subsidiaries, VIEs and subsidiaries of VIEs in China are subject to PRC Enterprise Income Tax (EIT) on taxable income. According to PRC tax laws and regulations, China subsidiary and VIEs are subject to EIT with the tax rate 25% since January 1, 2008, except that deemed profit method is applied to Xingtai Zhongding Construction Project Management Co., Ltd., which local tax authorities levy income tax based on deemed profit of 10% 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 (benefit) for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   Three Months Ended
March 31,
 
   2015   2014 
   (Unaudited)   (Unaudited) 
Current      (Revised) 
         
EIT expense  $634,611   $213,957 
LAT expense   329,808    19,495 
Deferred tax expense (benefit)- EIT   675,133    (815,972)
           
   $1,639,552   $(582,520)

  

A reconciliation between taxes computed at the PRC statutory rate of 25% and the Company’s effective tax rate for the three months ended March 31, 2015 and 2014 is as follows:

 

   Three Months Ended
March 31,
 
   2015   2014 
   (Unaudited)   (Unaudited) 
       (Revised) 
EIT at the PRC statutory rate of 25%  $45,535   $(707,888)
LAT expense   329,808    19,495 
EIT benefit of LAT   (82,452)   (4,874)
Change in Deferred tax valuation allowance   828,936    167,178 
Permanent items   517,725    (56,431)
           
   $1,639,552   $(582,520)

 

23
 

 

(2)  Liability for unrecognized tax benefit

  

A reconciliation of the beginning and ending amount of liability associated with unrecognized tax benefit for the three months ended March 31, 2015 and 2014 is as follows:

 

   Three Months Ended
March 31,
 
   2015   2014 
   (Unaudited)   (Unaudited) 
Unrecognized tax benefit, as the January 1  $6,500,366   $6,542,362 
Movement in current period due to foreign exchange rate fluctuation   34,941    (53,490)
           
Unrecognized tax benefit, as of March 31  $6,535,307   $6,488,872 

 

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 March 31, 2015 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 2010 to 2014 remains subject to examination by tax authorities.

 

(3)  Deferred tax

 

The tax effects of temporary differences that give rise to the following approximate deferred tax assets and liabilities as of March 31, 2015 and December 31, 2014 are presented below.

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
Deferred tax assets        
Operating loss carry forward  $5,062,659   $4,892,926 
Excess of interest expense   4,302,569    3,929,488 
Revenue recognized based on percentage-of-completion   126,158    515,577 
Accrued expenses   340,020    298,033 
    9,831,406    9,636,024 
           
Valuation allowance   (4,954,418)   (4,110,976)
           
           
Net deferred tax assets  $4,876,988   $5,525,048 

 

24
 

 

Deferred taxes 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 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 2017 for No. 79 Courtyard and December 2016 for Kirin Bay 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 complete.  Deferred taxes 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 net operating losses carry forward of $11,359,000 as of March 31, 2015 which will expire on various dates between December 31, 2015 and December 31, 2019. Entities established out of the PRC had net operation losses carry forward of $5,614,000 as of March 31, 2015.

 

Note 17 – Other Taxes Payable

 

Other taxes payable consisted of the following:

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
         
Business tax and related urban construction tax and education surcharge  $310,415   $2,060,115 
Land Appreciation Tax   93,907    203,048 
           
   $404,322   $2,263,163 

 

25
 

 

Note 18 – Loans Payable

 

Loans payable consisted of the following:

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
           
Loans from Industrial and Commercial Bank of China, Xingtai Yejin Branch (“ICBC 2013 Loans”)          
Original loan due January 30, 2015; maturity extended to March 30, 2016, at 9.84% per annum   11,110,026    11,050,621 
Original loan due May 30, 2015, maturity extended to December 30, 2015, at 9.84% per annum   7,842,368    7,800,439 
Due September 30, 2015, at 9.84% per annum   7,842,368    7,800,439 
Due January 30, 2016, at 9.84% per annum   7,842,368    7,800,439 
Due May 30, 2016, at 9.84% per annum   7,842,368    7,800,439 
    42,479,498    42,252,377 
Loans from Industrial and Commercial Bank of China, Xingtai Yejin Branch (“ICBC 2012 Loans”)          
Due September 18, 2015, at 9.225% per annum   3,267,653    3,250,183 
Due September 18, 2015, at 9.225% per annum   3,267,653    3,250,183 
Due May 19, 2015, at 9.225% per annum (note(a))   4,901,480    4,875,274 
Due January 19, 2015, at 9.225% per annum   -    4,875,274 
    11,436,786    16,250,914 
Loans from Hebei Xingtai Rural Commercial Bank          
Due April 24, 2015, at 12.56% per annum (“Credit Union 2014 Short-term loan”, note (a))   3,267,653    3,250,183 
Due May 8, 2015, at 12.036% per annum (Syndicated Loans 2014”, note(a))   8,169,134    8,125,457 
Due July 24, 2015, at 11.46% per annum (“Zhongding Kirin 2014 Loan”)   7,554,632    7,514,241 
Due June 26, 2015, at 11.46% per annum (“Short-term 2014 Loan”)   3,267,653    3,250,183 
Due October 16, 2017, at 7.38% per annum (“Garden 2014 Loan”)   4,901,480    4,875,274 
Due November 12, 2015, at 15.00% per annum (“Entrust Loan 2014”)   1,929,549    1,919,233 
Due July 3, 2015, at 11.79% per annum (“Zhongding Kirin Loan 2014”)   4,901,480    4,875,274 
Due February 6, 2016, at 15% per annum (“Entrust Loan 2015”)   2,083,129    - 
    Due February 8, 2017, at 7% per annum (“Syndicated Loans 2015”)   8,169,134    - 
    44,243,844    33,809,845 
   $98,160,128   $92,313,136 

 

Note (a): These loans were repaid in full when they become mature subsequent to balance sheet date.

 

ICBC 2012 Loans and ICBC 2013 Loans are floating rate loans whose rates are set at 10% above 1-to-3 year base borrowing rate stipulated by the People’s Bank of China at the date of each drawdown, and are subject to revision every 12 months.  The Company also paid financing service fees for ICBC 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2014.  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 Hebei Yoerma and Zhongding Kirin Loan 2014 was guaranteed by an unrelated party company as arranged by the financial institution.  The Company did not pay for the guarantees.

 

26
 

 

As of March 31, 2015 and December 31, 2014, Zhongding Kirin 2014 Loan, Garden 2014 Loan, ICBC 2012 Loans, ICBC 2013 Loans, Short term 2014 Loan, Syndicated Loans 2014 and Syndicated Loans 2015 were secured by the Company’s real estate held for development with carrying value of approximately $165,021,000 (unaudited) and $144,640,000, respectively.

 

On November 14, 2014, the Company entered into a series of entrust loan agreements with Xingtai Rural Commercial bank and individuals with amount RMB 11,810,000 (approximately $1,930,000, “Entrust Loan 2014”), and borne an annual effective interest rate of 15%, including loan of RMB 1,100,000 due to managements of the Company, with the remaining balance due to third party individuals.

 

On February 10, 2015, the Company entered into a series of entrust loan agreements with Xingtai Rural Commercial bank and individuals with amount RMB 12,750,000 (approximately $2,080,000, “Entrust Loan 2015”), and borne an annual effective interest rate of 15%, including loan of RMB 1,400,000 due to managements of the Company, with the remaining balance due to third party individuals.

 

The aggregate maturities of loans payable for each of years subsequent to March 31, 2015 are as follows:

 

Twelve months  Ending March 31  Amount 
     
2016  $77,247,146 
2017   16,011,502 
2018   4,901,480 
Loans payable  $98,160,128 

 

Note 19 – 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.

 

There are 146,120 unvested shares outstanding at March 31, 2015 and December 31, 2014, weighted average grant date fair value per share is $0.12. The Company did not recognize of share-based compensation expense related to the Restricted Stock Awards for the three months ended March 31, 2015 and 2014, respectively.

 

Note 20 – Revenue

 

The Company’s revenue is recognized under percentage-of-completion methods for the three months ended March 31, 2015 and 2014 from pre-sale of real estate projects.  Revenue recognized for each real estate project, including adjustments made pursuant to change of estimates for the three months ended March 31, 2015 and 2014 was as follows:

 

   Three Months Ended
March 31,
 
   2015   2014 
   (Unaudited)   (Unaudited) 
Kirin County  $(84,312)  $204,032 
No.79 Courtyard   10,710,962    966,026 
Kirin Bay   11,214,484    6,090,458 
Property Service   191,929    151,661 
           
   $22,033,063   $7,412,177 

 

Note 21 – Loss per Share

 

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net earnings per share are 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.

 

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Series A Warrants, Series B Warrants and Agent Warrants to acquire 392,090 shares of common stock, and 146,120 shares of unvested and unissued Restricted Stock Award were not included in the computation of diluted EPS because the effect would have been anti-dilutive. Summary information of Series A Warrants, Series B Warrants and Agent Warrants outstanding as of March 31, 2015 is as follows:

 

    Unvested Restricted   Stock Awards     Series A Warrants     Series B Warrants     Agent Warrants  
Exercise price     N/A     $ 6.25     $ 7.50     $ 5.00  
Shares of stock awards/warrants     146,120       169,004       169,004       54,082  

 

Note 22 – 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 Kirin Alamo, LLC. The non-controlling interests in 2015 and 2014 are summarized as below:

 

   March 31,     December 31, 
   2015   2014 
   (Unaudited)    
Brookhollow Lake, LLC   10%   10%
Greenfield International Corporation   closed    30%
Newport Property Holding, LLC   50%   50%
Kirin Alamo, LLC   40%   - 

 

The non-controlling interests in Brookhollow Lake, LLC, Greenfield International Corporation and Kirin Alamo and Newport Property Holding, LLC that are not owned by the Company are shown as “non-controlling interests” in the condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014 and “net loss attributable to non-controlling interests” in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2015 and 2014.

 

Note 23 – Related Party Transactions and Balances

 

(1) Loan to related parties consisted of the following:

 

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
HuaxiaHuifeng Ventures Capital Management (Beijing) Co., Ltd(note(a))        
Due October 14, 2015, at 18% per annum  $16,338,267   $27,626,554 
Due October 14, 2015, no interest   2,123,975    4,532,380 
    18,462,242    32,158,934 
           
Zhuolu Huada Real Estate Development Co., Ltd          
Due August 5, 2015, at 20% per annum   4,860,635    4,834,647 
           
Zhenjiang Huaxia Kirin Real Estate Development Co.,Ltd          
Due October 16. 2017, at 7.92% per annum   4,901,480    4,875,274 
Due February 8, 2017, at 8.90% per annum   8,169,134    - 
Due December 31, 2015, at 15% per annum   81,691    - 
Due December 31, 2015, at 15% per annum   81,691    - 
Due December 31, 2015, at 15% per annum   506,486    - 
Due December 31, 2015, at 15% per annum   2,143,581    - 
Due December 31, 2015, at 15% per annum   2,450,740    - 
Due December 31, 2015, at 15% per annum   187,890    - 
    18,522,693    4,875,274 
           
Langfang Hualin Real Estate Development Co.,Ltd          
Due December 31, 2015, at 15% per annum   13,888    - 
Due December 31, 2015, at 15% per annum   24,507    - 
    38,395    - 
           
Interest income receivables   7,861,074    6,484,246 
           
   $49,745,039   $48,353,101 

 

Note (a): On February 11, 2015, the Company received RMB 84,890,000 ($13,869,555) from Huaxia Huifeng.

 

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(2) Government grant escrowed by Business Investment (Receivable from a Trust Equity Owner)

 

In 2008, a VIE of the Company, XingtaiZhongding, was entitled to a government grant associated with its development of Kirin County project of RMB 160,000,000 (approximately $22,981,000, translated at historical exchange rate).  Cash representing the grant has been remitted to Business Investment, a trust equity owner of XingtaiZhongding in June 2008.  Business Investment originally acquired the land use rights of Kirin County project, and contributed the land use rights to XingtaiZhongding as paid-in capital to develop the project.  Based on the arrangement between Business Investment and XingtaiZhongding, which has been sanctioned by local government, the benefit of the government grant is to be transferred from Business Investment to XingtaiZhongding.  Specifically, Business Investment acts as an escrow agent but also is nominally responsible for XingtaiZhongding’s progress. Earned portions of the government grant become available to XingtaiZhongding 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 March 31, 2015 and December 31, 2014, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($26,141,228 and $26,001,463) was used to repay working capital provided by Jianfeng Guo for the support of other real estate projects’ development. As at March 31, 2015, the Company had a remaining $5,784,881 earned government grant available for future drawdown after repaid working capital provided by Jianfeng Guo, which is included in “Receivable from a trust equity owner” in condensed consolidated balance sheet.

 

(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. XingtaiZhongding also chooses to use its accumulated government grant receivable from Business Investment, to repay working capital provided by Jianfeng Guo.  Accordingly, the Company is entitled to present netted balance with Jianfeng Guo on its condensed consolidated balance sheets.

 

Gross amount of working capital provided by and to affiliate companies and individuals designated by Jianfeng Guo as at March 31, 2015 and December 31, 2014 were as follows:

 

   March 31,   December 31, 
   2015   2014 
   (unaudited)     
Gross of working capital received from affiliate companies and individuals designated by Jianfeng Guo  $(42,754,325)  $(42,278,247)
Gross of working capital provided to affiliate companies and individuals designated by Jianfeng Guo   22,397,978    21,692,272 
Gross earned government grant held by a related party   26,141,228    26,001,463 
Receivable from a trust equity owner  $5,784,881   $5,415,488 

 

(4) Prepayment to related party

 

Please see Note 8 – Prepayments

 

(5) Loan from Related party

 

Please see Note 18 Credit Union 2014 Short-term Loan, Entrusted loan 2014 and 2015.

 

(6) Balances with a related party supplier

 

Please see Note 9 – Other receivable and Note 14 – Other Payable and Accrued liabilities.

 

(7) Service fee

 

For three months ended March 31, 2015 and 2014, the Company recorded service fee with an amount of RMB 1,200,000 (approximately $196,000) and RMB 1,200,000 (approximately $195,000) respectively, for the service received from affiliate companies designated by Jianfeng Guo.

 

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Note 24 – Contingencies and Commitments

  

As at March 31, 2015 and December 31, 2014, the Company provided $147,959,677 (unaudited) and $132,308,930 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 25 – Subsequent Events

 

On April 22, 2015, the Company received RMB 20,000,000 loan from Hebei Xingtai Rural Commercial Bank guaranteed by Hebei Yoerma Business Co., Ltd, and borne an annual effective interest rate of 13.11% with a term of one year.

 

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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 three months ended March 31, 2015 and 2014 should be read in conjunction with the financial statements and the notes to those financial statements, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, previously filed with the SEC (the “2014 Form 10-K”).  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, HebeiProvince, 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 March 31, 2015, we have the following projects under development:

 

   POC   Construction beginning  Completion/
Estimated Completion
Kirin County   100%  September 2011  Late 2012
Kirin Plaza  85.8%  September 2011  Late 2015
No.79 Courtyard (Phase I)   100%  September 2011  Late 2014
No.79 Courtyard (Phase II)   90.1%  September 2012  Mid-to-late 2015
No.79 Courtyard (Phase III)   91.7%  April 2013  Mid-to-late 2015
No.79 Courtyard (Phase IV)   45.9%  July 2014  Late 2017
Kirin Bay (Phase I)   98.4%  October 2011  Late 2014
Kirin Bay (Phase II)   90.3%  March 2013  Early 2015
Kirin Bay ( Phase III)   56.2%  May 2013  Mid-to-late 2015
Kirin Bay (Phase IV)   25.2%  April 2014  Late 2016

  

Financial Performance Highlights

 

The following summarizes certain key financial information for the three months ended March 31, 2015.

 

Total revenue was $22.0 million for the three months ended March 31, 2015, an increase of $14.6 million, or 197.3%, from $7.4 million for the same period of 2014. Our revenue stream has shifted from No.79 Courtyard Phase I and Kirin Bay Phase I, which were completed in late 2014, to No. 79 Courtyard (Phase II, Phase III and Phase IV) and Kirin Bay (Phase II, Phase III and Phase IV), which are expected to generate the majority of our revenue in the upcoming 12 months;

 

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Gross profit was $2.3 million for the three months ended March 31, 2015, an increase of 0.7 million, or 37.4%, from $1.6 million for the same period of 2014. Gross margin ratio was 10.3% for the three months ended March 31, 2015, a decrease of 11.9% as compared to the gross margin ratio of 22.2% for the same period of 2014.  
   

Net loss was $1.5 million for the three months ended March 31, 2015, a decrease of $0.7 million, or approximately 35.2%, from net loss of $2.2 million for the same period of last year.

  

Factors Affecting our Operating Results

 

Growth of China’s Economy. We operate and derive all of our revenue from sales in China. Economic conditions in China, therefore, affect our operations, including the demand for our properties and the availability and prices of our raw materials among other expenses. China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 7.8% in 2012, 7.7% in 2013 and 7.4% in 2014. 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.

 

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.

 

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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 2.6% in 2012, 2.6% in 2013 and 2.0% in 2014. 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.

 

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Significant Accounting Policies

 

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2015 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, 2014 filed with SEC on April 15, 2015.

 

Recently Issued Accounting Pronouncements

 

The company does not believe other recently issued but not yet effective accounting standards from ASU 2015-01 through ASU 2015-08, if currently adopted, would have a material effect of the consolidated financial position, result of operation and cash flows.

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2015 and 2014

 

   2015 (Unaudited)   2014 (Unaudited)(Revised) 
       % of
Revenue
       % of
Revenue
 
Revenue from real estate sales, net  $22,033,063    100%  $7,412,177    100%
Cost of real estate sales   19,771,195    89.7%   5,765,986    77.8%
Gross profit   2,261,868    10.3%   1,646,191    22.2%
Selling expenses   734,553    3.3%   779,828    10.5%
Operating and administrative expenses   1,882,013    8.5%   2,936,614    39.6%
Loss from operations   (354,698)   -1.6%   (2,070,251)   -27.9%
Investment income   665,972    3.0%   506,548    6.8%
Interest income   1,480,955    6.7%   1,232,907    16.6%
Interest expense   (2,079,682)   -9.4%   (2,711,866)   -36.6%
Other non-operating income   469,593    2.1%   211,111    2.8%
Total other income (expenses)   536,838    2.4%   (761,300)   -10.3%
Income (Loss) before income taxes expense   182,140    0.8%   (2,831,551)   -38.2%
Income taxes expense (benefit)   1,639,552    7.4%   (582,520)   -7.9%
Net loss   (1,457,412)   -6.6%   (2,249,031)   -30.3%

 

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Our net loss for the three months ended March 31, 2015 was $1.5 million, a decrease of $0.7 million, from net loss of $2.2 million for the three months ended March 31, 2014.  Net Loss decreased because gross profit increased $0.6 million, other income increase $1.3 million and the operating and administrative expense decreased $1.1 million, meanwhile income tax expense increased $2.2 million for the three months ended March 31, 2015 as compared to the same period of 2014.

 

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 condensed 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

 

   Three Months Ended March 31, 
   2015   2014 
       % of
Revenue
       % of
Revenue
 
Revenue from real estate, net  $22,033,063    100%  $7,412,177    100%
-Kirin County   (84,312)   -0.4%   240,729    3.2%
-No.79 Courtyard (Phase I)   4,358,675    19.8%   103,485    1.4%
-No.79 Courtyard (Phase II)   764,716    3.5%   43,599    0.6%
-No.79 Courtyard (Phase III)   3,965,906    18.0%   818,942    11.0%
-No.79 Courtyard (Phase IV)   1,621,665    7.4%   -    - 
-Kirin Bay (Phase I)   190,778    0.9%   1,629,804    22.0%
-Kirin Bay (Phase II)   2,631,838    11.9%   1,855,196    25.0%
-Kirin Bay (Phase III)   7,324,827    33.2%   2,605,458    35.2%
-Kirin Bay (Phase IV)   1,067,041    4.8%   -    - 
-Property Service   191,929    0.9%   114,964    1.6%
Cost of real estate sales   19,771,195    89.7%   5,765,986    77.8%
-Kirin County   (28,438)   -0.1%   577,537    7.8%
-No.79 Courtyard (Phase I)   4,109,605    18.7%   88,259    1.2%
-No.79 Courtyard (Phase II)   754,177    3.4%   22,620    0.3%
-No.79 Courtyard (Phase III)   3,009,884    13.7%   637,825    8.6%
-No.79 Courtyard (Phase IV)   1,390,653    6.3%   -    - 
-Kirin Bay (Phase I)   326,511    1.5%   539,206    7.3%
-Kirin Bay (Phase II)   2,906,799    13.2%   1,714,745    23.1%
-Kirin Bay (Phase III)   5,935,717    26.9%   2,061,762    27.8%
-Kirin Bay (Phase IV)   965,972    4.4%   -    - 
-Property Service   400,315    1.8%   124,032    1.7%
Gross profit   2,261,868    10.3%   1,646,191    22.2%
-Kirin County   (55,874)   -0.3%   (336,808)   -4.5%
-No.79 Courtyard (Phase I)   249,070    1.1%   15,226    0.2%
-No.79 Courtyard (Phase II)   10,539    0.1%   20,979    0.3%
-No.79 Courtyard (Phase III)   956,022    4.3%   181,117    2.4%
-No.79 Courtyard (Phase IV)   231,012    1.0%   -    - 
-Kirin Bay (Phase I)   (135,733)   -0.6%   1,090,598    14.7%
-Kirin Bay (Phase II)   (274,961)   -1.2%   140,451    1.9%
-Kirin Bay (Phase III)   1,389,110    6.3%   543,696    7.3%
-Kirin Bay (Phase IV)   101,069    0.5%   -    - 
-Property Service   (208,386)   -0.9%   (9,068)   -0.1%
Profit margin   10.3%        22.2%     
-Kirin County   66.3%        -139.9%     
-No.79 Courtyard (Phase I)   5.7%        14.7%     
-No.79 Courtyard (Phase II)   1.4%        48.1%     
-No.79 Courtyard (Phase III)   24.1%        22.1%     
-No.79 Courtyard (Phase IV)   14.2%        -      
-Kirin Bay (Phase I)   -71.1%        66.9%     
-Kirin Bay (Phase II)   -10.4%        7.6%     
-Kirin Bay (Phase III)   19.0%        20.9%     
-Kirin Bay (Phase IV)   9.5%        -      
-Property Service   -108.6%        -7.9%     

 

36
 

 

Revenue, net.  Real estate sales represent revenue from the pre-sale of properties under development. For the three months ended March 31, 2015 and 2014, revenue was derived from the pre-sale of No.79 Courtyard (Phase I, Phase II, Phase III and Phase IV), Kirin Bay (Phase I, Phase II, Phase III and Phase IV) and property 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 for the three months ended March 31, 2015 was $22.0 million, an increase of $14.6 million, or approximately 197.3%, compared to $7.4 million for the same period of 2014.  The revenue increased because of the following reason: 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, which mostly happens in winter. No. 79 Courtyard is located in urban area of Xingtai City, Hebei province, besides the impact of Chinese New Year holidays in the first quarter of 2014, 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, thus no progress of the POC for No. 79 Courtyard (Phase I, Phase II, Phase III) in the first quarter of 2014. The revenue of No.79 Courtyard increased by $9.7 million in the three months ended March 31, 2015 as compared with the same period of 2014. Furthermore, the revenue of Kirin Bay increase by $5.1 million in the three months ended March 31, 2015 as compared with the same period of 2014.

 

Revenue from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), No.79 Courtyard (Phase IV), Kirin Bay (Phase I), Kirin Bay (Phase II), Kirin Bay (Phase III) and Kirin Bay (Phase IV) was $4.4 million, $0.8 million, $4.0 million, $1.6 million, $0.2 million, $2.6 million, $7.3 million and $1.1 million respectively, representing 19.8%, 3.5%, 18.0%, 7.4%, 0.9%, 11.9%, 33.2% and 4.8% of total revenue earned in the three months ended March 31, 2015. For the three months ended March 31, 2015, revenue of property service increase by 0.1 million in the three months ended March 31, 2015 as compared with the same period of 2014.

 

The following tables set forth the percentage-of-completion (POC) by project for the period ended March 31, 2015 and 2014 and year ended December 31, 2014 and 2013:

 

   As at
March 31,
2015
   As at
December 31,
2014
   As at
March 31,
2014
   As at
December 31,
2013
 
No.79 Courtyard Phase I   100%   96.1%   95.3%   95.3%
No.79 Courtyard Phase II   90.1%   88.0%   59.1%   59.1%
No.79 Courtyard Phase III   91.7%   86.3%   53.6%   53.6%
No.79 Courtyard Phase IV   45.9%   44.9%   -    - 
Kirin Bay Phase I   98.4%   98.3%   85.1%   85.0%
Kirin Bay Phase II   90.3%   88.7%   63.1%   61.0%
Kirin Bay Phase III   56.2%   55.4%   38.3%   35.9%
Kirin Bay Phase IV   25.2%   22.9%   -    - 
Kirin County   98.5%   98.4%   98.3%   98.1%

 

Kirin Bay is a three-phase, master-planned community built on a land area 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 issuance date of the Company’s Form 10-Q for the quarter ended March 31, 2015, (“the Form 10-Q”), 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 January 15, 2013), Work Commencement permit (issued on April 9, 2014) and Pre-sales Permit (issued on May 27, 2014).

 

37
 

 

No. 79 Courtyard is a project positioned as a high-end residential development with some mixed commercial use, which covers a land area of over 290,000 square meters and a total building area of approximately 520,000 square meters. As of issuance date of the Form 10-Q, 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); for No.79 Courtyard (Phase III), 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 (issued on August 12, 2013); for No.79 Courtyard (Phase IV), Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on December 12, 2013), Work Commencement Permit (issued on July 1, 2014) and Pre-sales Permit (issued on September 29, 2014).

 

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 and Phase III) and Kirin Bay (Phase I, Phase II and Phase III). 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 late 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
March 31,
2015
   Cumulative
Customer
 deposits
collected
 as of
March 31,
2015
   Contract
value of
 pre-sale for
 the three
months ended
 March 31,
2015
   Customer
deposits
 collected for
the three
 months ended
March 31,
2015
 
No.79 Courtyard Phase I  $128,213    133,002    32    250 
No.79 Courtyard Phase II   37,789    38,051    27    34 
No.79 Courtyard Phase III   58,319    53,667    1,805    4,427 
No.79 Courtyard Phase IV   29,457    25,528    3,848    5,887 
Kirin Bay Phase I   92,658    94,148    44    63 
Kirin Bay Phase II   71,999    71,909    2,007    2,163 
Kirin Bay Phase III   95,959    90,816    13,456    11,861 
Kirin Bay Phase IV   18,062    17,093    2,784    2,301 
Kirin County   108,044    116,828    -113    -300 

 

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Cost  Cost of real estate sales consist of land use rights costs, construction and installation costs. Our costs of real estate sales for the three months ended March 31, 2015 were $19.8 million, an increase of $14.0 million, or 242.9%, compared to $5.8 million for the same period of 2014.  Our total cost of real estate sales increased in relation to the increase of revenue. As under the percentage of completion method, revenue from units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project.

 

Gross Profit   Gross profit was $2.3 million for the three months ended March 31, 2015 (gross profit ratio: 10.3 %), increased by $0.7 million as compared to gross profit of $1.6 million (gross profit ratio: 22.2%) for the three months ended March 31, 2014. The decrease of gross profit ratio mainly caused by the penalty fee for late delivery of $0.8 million and the sales of residential units of Kirin Bay Phase IV and No. 79 Courtyard Phase IV for the three months ended March 31, 2015, residential units generally have a far lower gross profit ratio than commercial units.

 

The following tables set forth the aggregate Gross Floor Area (GFA) and the percentage-of-completion (POC) and Contract sold by project for the three months ended March 31, 2015 and 2014:

 

   Total GFA   POC cumulative
accomplished
   Contract value
of units sold
for the
 three months
 ended
March 31,
   Revenue
recognized
 for the
three months
 ended
March 31,
 
       2015   2014   2015   2014   2015   2014 
No.79 Courtyard
(Phase I)
   130,067    100%   95.3%  $32,036   $135,264   $4,358,675   $103,485 
No.79 Courtyard
(Phase II)
   45,122    90.1%   59.1%   27,309    105,558    764,716    43,599 
No.79 Courtyard
(Phase III)
   47,960    91.7%   53.6%   1,805,090    1,835,192    3,965,906    818,942 
No.79 Courtyard
(Phase IV)
   40,767    45.9%   -    3,848,070    -    1,621,665    - 
Kirin Bay (Phase I)   163,607    98.4%   85.1%   44,409    1,804,987    190,778    1,629,804 
Kirin Bay (Phase II)   92,043    90.3%   63.1%   2,006,530    1,990,055    2,631,838    1,855,196 
Kirin Bay (Phase III)   130,734    56.2%   38.3%   13,456,333    4,736,710    7,324,827    2,605,458 
Kirin Bay (Phase IV)   31,496    25.2%        2,783,521         1,067,041      
Kirin County   183,209    98.4%   98.3%   (113,219)   217,785    (84,312)  $240,729 
Total   865,005             $23,890,079   $10,825,551   $21,841,134   $7,297,213 

 

39
 

 

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 March 31, 2015 and 2014:

 

   2015   2014 
   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