UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
or
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________
to __________________
Commission File Number: 333-166343
KIRIN INTERNATIONAL HOLDING, INC.
(Exact name of registrant as specified in its
charter)
Nevada |
|
27-1636887 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
|
|
|
12thFloor,Building F, Phoenix Plaza, No.A5,
ShuguangXili,
Chaoyang District, Beijing, 100028
People’s Republic of China |
|
100028 |
(Address of principal executive offices) |
|
(Zip Code) |
+86 10 8455 4001 (Registrant’s
telephone number, including area code)
N/A
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by a check mark whether the registrant
has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes x
No o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer o |
Accelerated Filer o |
Non-Accelerated Filer o |
Smaller Reporting Company x |
|
|
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant
is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o No
x
The registrant had 20,596,546 shares of common
stock, $0.0001 per share, outstanding at August 18, 2014.
KIRIN INTERNATIONAL HOLDING, INC.
QUARTERLY REPORT ON FORM 10-Q
June 30, 2014
TABLE OF CONTENTS
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.
PART I—FINANCIAL INFORMATION
Item 1. |
Financial Statements. |
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
| |
June 30, | |
December 31, |
| |
2014 | |
2013 |
| |
(Unaudited) | |
|
ASSETS | |
| |
|
| |
| |
|
Cash and cash equivalents | |
$ | 20,719,284 | | |
$ | 23,407,551 | |
Restricted cash | |
| 6,852,516 | | |
| 8,362,905 | |
Short term Investment | |
| 243,597 | | |
| - | |
Accounts receivable | |
| 88,938 | | |
| 231,598 | |
Notes receivable | |
| 600,800 | | |
| 1,418,595 | |
Revenue in excess of billings | |
| 6,491,497 | | |
| 10,059,251 | |
Prepayments | |
| 29,471,930
| | |
| 26,436,726 | |
Other receivables | |
| 36,729,217 | | |
| 16,189,890 | |
Receivable from a related party | |
| 2,837,256 | | |
| 4,247,788 | |
Short-term loan to related parties | |
| - | | |
| 12,250,572 | |
Loan to a related party | |
| 35,433,618 | | |
| 33,204,995 | |
Real estate property completed | |
| 897,596 | | |
| 1,427,910 | |
Real estate properties and land lots under development | |
| 179,819,068 | | |
| 176,472,218 | |
Investments | |
| 7,900,817 | | |
| 7,929,422 | |
Property and equipment, net | |
| 3,948,842 | | |
| 4,163,033 | |
Deferred tax assets | |
| 5,180,798
| | |
| 4,676,410 | |
Total assets | |
$ | 337,215,774
| | |
$ | 330,478,864 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 77,657,240 | | |
$ | 76,120,010 | |
Income taxes payable | |
| 1,976,671 | | |
| 2,079,681 | |
Other taxes payable | |
| 2,728,988 | | |
| 2,885,586 | |
Other payables and accrued liabilities | |
| 15,646,310 | | |
| 13,743,052 | |
Customer deposits | |
| 90,763,158 | | |
| 87,713,585 | |
Loans payable | |
| 91,755,038 | | |
| 89,466,798 | |
Total liabilities | |
| 280,527,405 | | |
| 272,008,712 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity | |
| | | |
| | |
Preferred stock at $0.0001 par value; 100,000,000 shares authorized; none issued or outstanding | |
| - | | |
| - | |
Common stock at $0.0001 par value; 500,000,000 shares authorized; 20,596,546 shares issued and outstanding as of June 30, 2014 and December 31, 2013 respectively | |
| 2,060 | | |
| 2,060 | |
Additional paid-in capital | |
| 37,149,630 | | |
| 37,149,630 | |
Statutory reserve | |
| 1,403,154 | | |
| 1,403,154 | |
Retained earnings | |
| 9,243,892
| | |
| 10,553,505 | |
Accumulated other comprehensive income | |
| 8,086,745
| | |
| 8,514,860 | |
Total Kirin International Holding, Inc.’s equity | |
| 55,885,481
| | |
| 57,623,209 | |
| |
| | | |
| | |
Non-controlling interest | |
| 802,888 | | |
| 846,943 | |
Total stockholders’ equity | |
| 56,688,369
| | |
| 58,470,152 | |
Total liabilities and stockholders’ equity | |
$ | 337,215,774
| | |
$ | 330,478,864 | |
See notes to the consolidated financial
statements
Certain of the assets of the VIEs can be used
only to settle obligations of the consolidated VIEs. Conversely, liabilities recognized as a result of consolidating these VIEs
do not represent additional claims on the Company’s general assets (Note 3).
KIRIN INTERNATIONAL
HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
| |
Six Months Ended June 30, | |
Three Months Ended June 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
| |
(Unaudited) | |
(Unaudited) | |
(Unaudited) | |
(Unaudited) |
| |
| |
| |
| |
|
Revenue from real estate sales, net | |
$ | 47,641,831 | | |
$ | 65,413,770 | | |
$ | 40,229,654 | | |
$ | 51,367,925 | |
Cost of real estate sales | |
| 39,809,623 | | |
| 57,523,380 | | |
| 34,043,637 | | |
| 45,053,693 | |
Gross profit | |
| 7,832,208 | | |
| 7,890,390 | | |
| 6,186,017 | | |
| 6,314,232 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 1,665,126 | | |
| 2,194,408 | | |
| 885,298 | | |
| 1,276,950 | |
General and administrative expenses | |
| 4,619,838 | | |
| 4,569,038 | | |
| 1,894,335 | | |
| 1,930,037 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 6,284,964 | | |
| 6,763,446 | | |
| 2,779,633 | | |
| 3,206,987 | |
| |
| | | |
| | | |
| | | |
| | |
Income from operations | |
| 1,547,244 | | |
| 1,126,944 | | |
| 3,406,384 | | |
| 3,107,245 | |
| |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| | | |
| | | |
| | | |
| | |
Investment income (loss) | |
| 504,548 | | |
| 115,238 | | |
| (2,000 | ) | |
| 694 | |
Interest expense, net | |
| (2,522,177
| ) | |
| (3,881,969 | ) | |
| (1,191,059
| ) | |
| (2,125,491 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total other expenses | |
| (2,017,629 | ) | |
| (3,766,731 | ) | |
| (1,193,059
| ) | |
| (2,124,797 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) before income taxes | |
| (470,385
| ) | |
| (2,639,787 | ) | |
| 2,213,325
| | |
| 982,448 | |
| |
| | | |
| | | |
| | | |
| | |
Income taxes expense (benefit) | |
| 883,283
| | |
| (280,123 | ) | |
| 1,428,843
| | |
| (120,999 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | (1,353,668
| ) | |
$ | (2,359,664 | ) | |
$ | 784,482
| | |
$ | 1,103,447 | |
Less: net loss attributable to non-controlling interest | |
| (44,055 | ) | |
| - | | |
| (35,478 | ) | |
| - | |
Net income (loss) attributable to stockholder of Kirin International Holding, Inc. | |
$ | (1,309,613
| ) | |
$ | (2,359,664 | ) | |
$ | 819,960
| | |
$ | 1,103,447 | |
Net income (loss) | |
| (1,353,668
| ) | |
| (2,359,664 | ) | |
| 784,482
| | |
| 1,103,447 | |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income (loss) | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| (428,115 | ) | |
| 1,060,371 | | |
| (28,206 | ) | |
| 757,647 | |
Total comprehensive income (loss) | |
| (1,781,783
| ) | |
| (1,299,293 | ) | |
| 756,276
| | |
| 1,861,094 | |
Less: other comprehensive loss attributable to non-controlling interest | |
| (44,055 | ) | |
| - | | |
| (35,478 | ) | |
| - | |
Comprehensive income (loss) attributable to stockholder of Kirin International Holding, Inc. | |
$ | (1,737,728
| ) | |
$ | (1,299,293 | ) | |
$ | 791,754
| | |
$ | 1,861,094 | |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted income (loss) per share | |
$ | (0.07 | ) | |
$ | (0.11 | ) | |
$ | 0.04 | | |
$ | 0.05 | |
Basic and diluted weighted average shares outstanding | |
| 20,596,546 | | |
| 20,596,546 | | |
| 20,596,546 | | |
| 20,596,546 | |
See notes to the consolidated
financial statements
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six Months Ended June 30, |
|
|
2014 |
|
2013 |
|
|
(Unaudited) |
|
(Unaudited) |
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
Net loss |
|
$ |
(1,353,668 |
) |
|
|
(2,359,664 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
139,474 |
|
|
|
58,814 |
|
Deferred tax benefit |
|
|
(538,765 |
) |
|
|
(1,999,012 |
) |
Dividend received from investment |
|
|
(504,548 |
) |
|
|
(115,238 |
) |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
1,454,249 |
|
|
|
(5,362,566 |
) |
Accounts receivable |
|
|
141,329 |
|
|
|
566,830 |
|
Notes receivable |
|
|
813,788 |
|
|
|
- |
|
Revenue in excess of billings |
|
|
3,504,098 |
|
|
|
4,199,308 |
|
Prepayments |
|
|
(3,229,949 |
) |
|
|
(12,735,972 |
) |
Other receivables |
|
|
(24,469,467 |
) |
|
|
(9,893,448 |
) |
Receivable from a related party |
|
|
1,383,439 |
|
|
|
1,131,773 |
|
Real estate property completed |
|
|
521,331 |
|
|
|
152,331 |
|
Real estate properties and land lots under development |
|
|
(4,609,412 |
) |
|
|
13,526,037 |
|
Accounts payable |
|
|
2,082,034 |
|
|
|
(7,454,392 |
) |
Income taxes payable |
|
|
(88,446 |
) |
|
|
483,013 |
|
Other taxes payable |
|
|
(136,422 |
) |
|
|
(225,252 |
) |
Other payables and accrued liabilities |
|
|
5,698,306 |
|
|
|
(1,912,624 |
) |
Customer deposits |
|
|
3,680,092 |
|
|
|
26,972,760 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(15,512,537 |
) |
|
|
5,032,698 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of equipment |
|
|
(209,472 |
) |
|
|
(2,200,168 |
) |
Proceeds from disposal of equipment |
|
|
427,396 |
|
|
|
- |
|
Repayment of loans from a related party |
|
|
1,139,303 |
|
|
|
20,806,858 |
|
Loans to a related party |
|
|
(3,609,025 |
) |
|
|
(8,002,638 |
) |
Short term loan received from related parties |
|
|
12,190,537 |
|
|
|
- |
|
Cash paid for investment |
|
|
(22,468 |
) |
|
|
(3,841,266 |
) |
Payment of short term investment |
|
|
(244,136 |
) |
|
|
- |
|
Dividend from investment at cost |
|
|
504,548 |
|
|
|
115,238 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
10,176,683 |
|
|
|
6,878,024 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from financial institution loans |
|
|
29,296,350 |
|
|
|
22,407,385 |
|
Repayment of financial institution loans |
|
|
(26,366,715 |
) |
|
|
(12,003,957 |
) |
Proceeds from non-controlling stockholder |
|
|
- |
|
|
|
180,000 |
|
Net cash provided by financing activities |
|
|
2,929,635 |
|
|
|
10,583,428 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(282,048 |
) |
|
|
660,611 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
(2,688,267 |
) |
|
|
23,154,761 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of the period |
|
|
23,407,551 |
|
|
|
24,098,688 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of the period |
|
$ |
20,719,284 |
|
|
|
47,253,449 |
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information |
|
|
|
|
|
|
|
|
Cash paid for income tax |
|
$ |
746,874 |
|
|
|
1,613,449 |
|
Cash paid for interest expense |
|
$ |
4,931,525 |
|
|
|
4,361,323 |
|
See notes to the consolidated financial statements
KIRIN INTERNATIONAL HOLDING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 – Organization and Description
of Business
Kirin International Holding, Inc. (the “Company”)
was incorporated on December 23, 2009 under the laws of the State of Nevada. The Company and its subsidiaries, Variable Interest
Entities (“VIEs”) and VIEs’ subsidiaries are engaged in the development and sales of residential and commercial
real estate properties, and development of land lots in Xingtai city, Hebei province, People’s Republic of China (“China”,
or the “PRC”).
As of June 30, 2014, the Company had following
wholly-owned entities:
|
|
Place
of
Incorporation |
|
Date of Incorporation |
|
Principal Activities |
|
|
|
|
|
|
|
Subsidiaries |
|
|
|
|
|
|
Kirin China Holding Limited (“Kirin China”) |
|
British Virgin Islands |
|
July 6, 2010 |
|
Investment holding |
|
Kirin Huaxia Development Limited (“Kirin Development”) |
|
Hong Kong, China |
|
July 27, 2010 |
|
Investment holding |
|
Shijiazhuang Kirin Management Consulting Co., Ltd. (“Kirin Management”) |
|
Shijiazhuang, Hebei province, China |
|
December 22, 2010 |
|
Primary beneficiary of VIEs |
|
Spectrum International Enterprise, LLC |
|
State of California, United States of America. |
|
January 11, 2013 |
|
Property holding |
|
Brookhollow Lake, LLC |
|
State of California, United States of America. |
|
February 8 , 2013 |
|
Property holding |
|
Greenfield International Corporation |
|
State of California, United States of America |
|
August 12, 2013 |
|
Whole sale Agent of Food & Grocery |
|
Kirin Hopkins Real estate Group, LLC |
|
State of California, United State of America |
|
July 23, 2013 |
|
Real estate development |
|
Newport Property Holding, LLC |
|
State of California United State of America |
|
July 11, 2013 |
|
Real estate investment and management |
|
|
|
|
|
|
|
|
|
VIEs |
|
|
|
|
|
|
|
HebeiZhongding Real Estate Development Co., Ltd. (“HebeiZhongding”) |
|
Xingtai, Hebei province, China |
|
July 16, 2007 |
|
Real estate development |
|
XingtaiZhongdingJiye Real Estate Development Co., Ltd. |
|
Xingtai, Hebei province, China |
|
August 7, 2008 |
|
Real estate development |
|
|
|
|
|
|
|
|
|
Subsidiaries of VIEs |
|
|
|
|
|
|
|
XingtaiZhongding Construction Project Management Co., Ltd. |
|
Xingtai, Hebei province, China |
|
September 3, 2007 |
|
Dormant |
|
XingtaiZhongding Kirin Real Estate Development Co., Ltd. (formerly known as XingtaiZhongding Business Service Co., Ltd., “Business Service”) |
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Xingtai, Hebei province, China |
|
July 29, 2008 |
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Real estate development |
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Huaxia Kirin (Beijing) Garden Project Co., Ltd. |
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Beijing, China |
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January 19, 2010 |
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Garden design and planting |
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XingtaiHetai Real Estate Development Co., Ltd. |
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Xingtai, Hebei province, China |
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December 6, 2010 |
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Real estate development |
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Huaxia Kirin (Beijing) Property Management Co., Ltd. |
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Beijing, China |
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December 19, 2011 |
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Property management |
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HebeiZhongding Property Service Co., Ltd. |
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Xingtai, Hebei province, China |
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December 19, 2011 |
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Property management |
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Baoding City Heda Kirin Science and Technology Park Investment Co., Ltd. (“Heda Kirin”) |
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Baoding, Hebei province, China |
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September 3, 2012 |
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Investment holding |
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Baoding City Heda Kirin Real Estate Development Co., Ltd. |
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Baoding, Hebei province, China |
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November 28, 2012 |
|
Real estate development |
|
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial
statements for the three months and six months ended June 30, 2014 and 2013 have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United States have
been omitted pursuant to such rules and regulations. Accordingly, the reader of this Form 10-Q is referred to Kirin
International Holding, Inc. (“the Company”) Form 10-K for the year ended December 31, 2013 for further information. In
the opinion of management of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for fair presentation and to ensure that the consolidated financial statements
are not misleading. The results of operations for the three month and six months periods ended June 30, 2014 are not
necessarily indicative of the operating results for the year. The consolidated balance sheets as of June 30, 2014 and
December 31, 2013, and the consolidated statements of operations and comprehensive income(loss) and cash flows for the three months
and six months periods ended June 30, 2014 and 2013 include those of the Company, its subsidiaries and VIEs, and subsidiaries
of VIEs. All material intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
Certain amounts in the June 30, 2013 condensed
consolidated financial statement have been reclassified to conform to the June 30, 2014 presentation.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements
and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Significant items subject to such estimates and assumptions include percentage-of-completion of properties under construction and
related revenue and costs recognized, allowance for doubtful accounts, recoverability of deferred tax assets, and the assessment
of impairment of long-lived assets. The current economic environment has increased the degree of uncertainty inherent in those
estimates and assumptions.
Fair Value of Financial Instruments
The Company applies the provisions of ASC Subtopic
820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair
value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC Subtopic
820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Subtopic 820-10 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted
to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it
considers assumptions that market participants would use when pricing the asset or liability.
ASC Subtopic 820-10 establishes a fair value
hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy are as follows:
|
● |
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
|
● |
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
|
● |
Level 3 inputs are unobservable inputs for the asset or liability. |
The level in the fair value hierarchy within
which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement
in its entirety.
Reporting Currency and Foreign Currency Translation
The functional currency of the Company, Kirin
China, Kirin Development and Kirin Management is the United States dollar (“US$”). The functional currency of the
Company’s VIEs and subsidiaries of VIEs in the PRC is Renminbi (“RMB”). The Company’s reporting currency
is US$. The assets and liabilities of the Company’s VIEs and subsidiaries of VIEs in China are translated at the exchange
rate on the balance sheet dates, stockholders’ equity is translated at the historical rates and the revenues and expenses
are translated at the weighted average exchange rates for the periods. The resulting translation adjustments are reported under
accumulated other comprehensive income in the consolidated statements of operations and comprehensive income
(loss) in accordance with ASC 220.
Revenue Recognition
Real estate sales are reported in accordance
with the provisions of ASC 360-20, Property, Plant and Equipment, Real Estate Sales.
Revenue from the sales of completed properties
and properties where the construction period is twelve months or less is recognized by the full accrual method when (a) sale is
consummated; (b) the buyer’s initial and continuing involvements are adequate to demonstrate a commitment to pay for the
property; (c) the receivable is not subject to future subordination; (d) the Company has transferred to the buyer the usual risks
and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with
the property. A sale is not considered consummated until (a) the parties are bound by the terms of a contract or agreement,
(b) all consideration has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged,
(d) all conditions precedent to closing have been performed. Fair value of buyer’s payments to be received in future periods
pursuant to sales contract is classified under accounts receivable. Sales transactions not meeting all the conditions of the full
accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as
incurred, and payments received from the buyer are recorded as a deposit liability.
Revenue and profit from the sale of development
properties where the construction period is more than twelve months is recognized by the percentage-of-completion method on the
sale of individual units when the following conditions are met: (a) construction is beyond a preliminary stage; (b) the buyer is
committed to the extent of being unable to require a refund except for non-delivery of the unit; (c) sufficient units have already
been sold to assure that the entire property will not revert to rental property; (d) sales prices are collectible and (e) aggregate
sales proceeds and costs can be reasonably estimated. If any of these criteria are not met, proceeds are accounted for
as deposits until the criteria are met and/or the sale consummated.
Under the percentage of completion method,
revenues from units sold and related costs are recognized over the course of the construction period, based on the completion progress
of a project. In relation to any project, revenue is determined by calculating the ratio of completion and applying that ratio
to the contracted sales amounts. The Company uses a cost-to-cost method to measure the ratio of completion. Qualified
construction quality supervision firms are engaged by the Company, as required by relevant laws and regulations in the PRC, to
determine that pieces of construction completed by contractors have met predetermined quality and safety standards, and are eligible
to be counted towards costs. Cost of sales is recognized by multiplying the ratio by the total budgeted costs. Changes to total
estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenue recognized to date
in excess of amounts received from customers is classified under revenue in excess of billings. Amounts received from customers
in excess of revenue recognized to date are classified under customer deposits. Any losses incurred or identified on
real estate transactions are recognized in the period in which the losses are identified.
Except for the down payment, the remaining
contract price can be settled by several installments or financed by mortgage. The Company requires customers to pay
a non-refundable cash down payment equivalent to no less than 20% of the contract price upon the execution of sale or pre-sale
contracts prior to recognizing revenue under either full-accrual method or percentage-of-completion method. The cash
down payment collected from customers subordinates to no claims. If buyer’s purchase is financed by mortgage
the Company does not recognize revenue until the application for the mortgage loan has been filed and the Company reasonably believes
the mortgage will be approved. The Company provides guarantees for mortgage loans from financial institutions
to customers (see “Restricted cash”). Such guarantees expire when customers have obtained a House Ownership
Certificate for their purchased properties and the mortgage has been registered in favor of the financial institutions. Because
guarantees of mortgage do not cover any portion of the non-refundable cash down payment received by the Company from customers,
the Company does not consider guarantees when determining recognizing revenues under either full-accrual method or percentage-of-completion
method.
A project’s revenue and cost estimates
have an inherent nature of uncertainty throughout its multiple-year development period. Factors that potentially affect
a project’s total revenue and cost estimates (including a salable unit’s allocated cost), include, but are not limited
to: (1) changes in government’s land-use planning, building density, plot ratio and other quotas; which lead to changes of
total gross floor area available for sale and per-unit cost estimate; (2) the Company’s voluntary modification of design
to enhance attractiveness and competiveness of an on-going project; (3) fluctuation of commodity prices and government-regulated
labor cost rates; (4) contractors’ request to renegotiate consideration of fixed-price agreements, for which the Company’s
preference of complete the discussion early to avoid unfavorable impact on construction progress; (5) unforeseeable geological
and engineering difficulties causing modifications of a project’s construction plan; (6) government agencies’ compliance
inspections in the late stage of the construction, which may lead to modification of design; (7) major prospective property buyers’
request to alter specifications of the property to be delivered; and (8) contractors’ claims throughout the construction
period.
The Company enters into non-cancellable, fixed-price
pre-sale contracts with homebuyers. Under certain circumstances, for example, changes in floor size or floor plan of
a property due to legal compliance requirements, or change of deliverable standards upon request of major customers, we may agree
to revise the pre-sale contract price to match conditions of the properties to be delivered to customers. Furthermore,
the Company is subject to a penalty payable to homebuyers in the event the property is delivered later than the date specified
in the pre-sale contracts, and usually such penalty constitutes only an insignificant amount compared to the contract value. These
adjustments to contract price are recorded as a reduction of revenue in the current period on a cumulative catch-up basis.
With regard to a project’s cost estimate,
the Company’s in-house cost estimators work in collaboration with a committee also comprising the Company’s engineers,
project managers, financial professionals, and senior management staff, to prepare at least two versions of the cost estimate. The
first version is a Preliminary Cost Estimate, prepared in schematic design stage, which is before commencement of excavation and
recognition of revenue. Preliminary Cost Estimate utilizes top-down approach. It projects major cost components at higher
level using a project’s planned parameters (e.g., building density, by-category gross floor area) and standard per-unit cost
from past experience (e.g., concrete cost, measured at US$ per square meter). Preliminary Cost Estimate is intrinsically
less accurate; it heavily relies on the Company’s historical information accumulated in the development of similar types
of construction in similar municipal region. The second version is Detailed Cost Estimate, prepared after receiving
construction documents from the architect. Ideally Detailed Cost Estimate can be available before commencement of excavation
and recognition of revenue; however, in order to suit the pre-sale progress and to maximize flexibility, construction documents
are provided in several batches as the construction processes. It is likely that a project’s Detailed Cost Estimate
is finalized only in late stage of the construction. Detailed Cost Estimate utilizes bottom-up approach. Based
on construction documents and assisted by the Company’s computerized Building Information Modeling system, Detailed Cost
Estimate is able to sum up cost at element level of a real estate property, taking into consideration of quantitative consumption
and on-going rate of materials, labor, machinery and overheads. For the purpose of preparing the Company’s consolidated financial
statements, a project’s cost estimate is reviewed by in-house cost estimators at each year-end and adjusted for material
developments in the interval. Changes in estimates of a project’s revenue and cost of sales are recognized on
a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods
based on a project’s percentage of completion. When a project’s total cost estimate to be incurred exceeds total estimated
revenue to be earned, a provision for the entire loss on the project is recorded in the period the loss is determined. In addition
to our existing monthly detailed cost estimate upon receiving construction data from the architects, we have hired additional competent
professionals to ensure early identification of variances from prior estimated project revenue and cost, to reduce the likelihood
of significant changes to the estimates.
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, XingtaiZhongding was entitled to a
government grant of RMB 160,000,000 (approximately $22,981,000, translated at historical exchange rate) related to Kirin County
project to subsidize the modernization of the neighborhood where the real estate project is situated, and control of property price
volatility. The Company believes the government’s demands associated with the grant are gradually fulfilled as
the construction and pre-sale of Kirin County make progress, and accordingly recognizes grant income at the percentage of construction
completed during the year of the total grant amount. For the three months and six months ended June 30, 2014 and 2013,
the Company did not recognize any grant income, respectively. All government grants related to Kirin County have been
recognized as of December 31, 2012 as the construction of Kirin County completed during the year. The local government
has arranged a lump sum payment of the grant to XingtaiJiye 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 XingtaiZhongding in proportion to the percentage of the project
completed as a measure to ensure that the project satisfies the grant’s guidelines. The grant does not have refund
conditions and the Company believes government will not revoke the grant or claw back cash remitted to the escrow account unless
the construction and sale of Kirin County project is cancelled by the Company. As at June 30, 2014, the Company didn’t
receive any request from government demanding revocation and/or partial refund of the grant previously given, and the Company expects
no development relating to the Kirin County project will cause government to request the grant’s refund in next twelve months.
Capitalization of Interest
In accordance with ASC 360, Property,
Plant and Equipment, interest incurred during construction is capitalized to properties under development. For the six
months ended June 30, 2014 and the year ended December 31, 2013, $148,369 and $326,259 were
capitalized as properties under development, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with original maturities of three months or less when purchased to be cash equivalents. The Company maintains the majority of its
bank accounts in the PRC. Cash includes cash on hand and demand deposits in accounts maintained with state-owned and commercial
financial institutions within the PRC. China does not have a deposit insurance system; however, the credit risk on bank
balances is limited because the Company conducts transactions and deposits balances with several state-owned banks with high
credit ratings assigned by international credit rating agencies.
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 $6,852,516 and $8,362,905 as
at June 30, 2014 and December 31, 2013, respectively. These deposits are not covered by insurance. The Company has not experienced
any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts.
Investments
Investments in securities of private companies
the Company does not have a controlling interest in and is unable to exercise significant influence over are accounted for using
cost method of accounting. The Company evaluates at each period end whether an event or change in circumstances has occurred in
that period that may have a significant adverse effect on the fair value of the investments. If a decline in fair value is determined
to be other than temporary, an impairment loss is recognized to reduce an investment’s cost to its fair value.
Property and Equipment, Net
Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
|
Estimated Useful Lives |
Fixtures, furniture and office equipment |
5 years |
Property in US |
39 years |
Income Taxes
The Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Subsidiaries, VIEs and subsidiaries of VIEs
of the Company located in China are governed by the Income Tax Law of the People’s Republic of China concerning the private-run
enterprises, which are generally subject to tax at a new statutory rate of 25% on income reported in the statutory financial statements
after appropriate tax adjustments.
According to the Income Tax Laws of the PRC
for real estate developers, income tax of the Company is calculated by project. When all units of a project are sold, tax authorities
will assess the tax due on the project and issue a tax due notification to the Company. The Company has to pay the tax by the
due date on the notification. If the Company does not pay the tax by the due date, the tax authorities will charge the Company
interest. The Company includes any interest and penalties in general and administrative expenses.
Unrecognized tax benefits represent the difference
the benefits recognized for the financial statement purposes and tax positions taken or expected to be taken in a tax return.
The Company recognizes that virtually all tax
positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the PRC government.
Land Appreciation Tax (“LAT”)
In accordance with the relevant taxation laws
in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value,
which is calculated as the proceeds of sales of properties less deductible expenditures, including borrowing costs and all property
development expenditures. LAT is prepaid at 1% to 2% of the pre-sales proceeds each year as required by the local tax authorities,
and is settled generally after the construction of the real estate project is completed and majority of the units are sold. The
Company provides LAT as expensed when the related revenue is recognized based on estimate of the full amount of applicable LAT
for the real estate projects in accordance with the requirements set forth in the relevant PRC laws and regulations.
Earnings per Share
Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts,
such as warrants and convertible preferred stock, to issue common stock were exercised and converted into common stock. Dilutive
securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation. The Company
had losses, therefore, exclude all dilutive securities in the calculation for the six months ended June 30, 2014 and income
for the three months ended June 30, 2014.
Advertising Expenses
Advertising costs are expensed as incurred.
For the three months ended June 30, 2014 and 2013, the Company recorded an advertising expense of $517,761 and $817,385, respectively.
For the six months ended June 30, 2014 and 2013, the Company recorded an advertising expense of $997,724 and $1,218,095, respectively.
Property Warranty
The Company provides customers with warranties
which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant
sales contracts. The warranty period varies from two to five years, depending on different property components the warranty covers.
The Company constantly estimates potential
costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property.
Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The
Company monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes
in trends and historical data as information becomes available. The Company may seek further recourse against its contractors
or any related third parties if it can be proven that the faults are caused by them. In addition, the Company withholds up to
5% of the contract total payment from contractors for periods of two to five years. These amounts are included in liabilities,
and are only paid to the extent that there have been no warranty claims against the Company relating to the work performed or
materials supplied by the contractors. As at June 30, 2014 and December 31, 2013, the Company retained $107,394 and
$140,661 contract payment to contractors, and the Company didn’t experience any incidences where the withheld amounts were
less than the amounts the Company had to pay for the defects of properties. The Company didn’t provide any warranty
reserve as prospective expenditure amount on property warranty by the Company is insignificant. For the three months
and six months ended June 30, 2014 and 2013, 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 and six months ended June 30, 2014 and 2013.
Stock-Based Compensation
The Company adopted ASC 718 Stock Compensation. Stock-based
compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite
service period, which is generally the vesting period. The fair value estimate is based on the share price and other
pertinent factors. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent
periods if actual forfeitures differ from those estimates. The Company used a mix of historical data and future assumptions to
estimate pre-vesting forfeitures and to record stock-based compensation expense only for those awards that are expected to vest.
Recently Issued Accounting Pronouncements
The Company does not believe recently issued
but not yet effective accounting standards from ASU 2014-01 to ASU 2014-12, if currently adopted, would have a material effect
of the consolidated financial position, results of operation and cash flows.
Note 3 – Variable Interest Entities
VIE Agreements were entered into between Kirin
Management and each of Operating Companies and their respective shareholders. As a result of the VIE Agreements, Kirin Management
has the power to direct the VIEs’ activities that most significantly impact the VIEs’ economic performance and the
obligation to absorb the VIEs’ losses that could be significant to the VIEs and the right to receive benefits from the VIEs
that could be significant to the VIEs. Therefore Kirin Management is deemed to have a controlling financial interest
in the VIEs, is considered the primary beneficiary of and consolidates with the VIEs.
Summary information regarding consolidated
VIEs is as follows:
| |
June 30, | |
December 31, |
| |
2014 | |
2013 |
| |
(Unaudited) | |
|
ASSETS | |
| |
|
| |
| |
|
Cash and cash equivalents | |
$ | 18,121,919 | | |
$ | 19,219,581 | |
Restricted cash | |
| 6,852,516 | | |
| 8,362,905 | |
Short term Investment | |
| 243,597 | | |
| - | |
Accounts receivable | |
| 88,938 | | |
| 231,598 | |
Notes receivable | |
| - | | |
| 817,795 | |
Revenue in excess of billings | |
| 6,491,497 | | |
| 10,059,251 | |
Prepayments | |
| 29,471,930
| | |
| 26,436,726 | |
Other receivables | |
| 44,143,512 | | |
| 23,763,798 | |
Receivable from a related party | |
| 2,837,256 | | |
| 4,247,788 | |
Short-term loan to related parties | |
| - | | |
| 12,250,572 | |
Loan to a related party | |
| 35,433,618 | | |
| 33,204,995 | |
Real estate property completed | |
| 897,596 | | |
| 1,427,910 | |
Real estate properties and land lots under development | |
| 179,819,068 | | |
| 176,472,218 | |
Investments | |
| 7,145,525 | | |
| 7,196,598 | |
Property and equipment, net | |
| 641,266 | | |
| 654,998 | |
Deferred tax assets | |
| 5,180,798
| | |
| 4,676,410 | |
Total assets | |
$ | 337,369,036
| | |
$ | 329,023,143 | |
| |
| | | |
| | |
Accounts payable | |
$ | 77,657,240 | | |
$ | 76,120,010 | |
Income taxes payable | |
| 1,976,671 | | |
| 2,079,681 | |
Other taxes payable | |
| 2,728,988 | | |
| 2,885,487 | |
Other payables and accrued liabilities | |
| 15,147,551 | | |
| 12,558,258 | |
Customer deposits | |
| 90,750,565 | | |
| 87,700,992 | |
Loans payable | |
| 91,755,038 | | |
| 89,466,798 | |
Total liabilities | |
$ | 280,016,053 | | |
$ | 270,811,226 | |
For
the six months ended June 30, 2014 and 2013, the financial performance of VIEs reported in the consolidated statements of operations
and comprehensive income (loss) includes sales of approximately $47,570,000 and $65,414,000, respectively, cost of sales of approximately
$39,810,000 and $57,523,000, respectively, operating expenses of approximately $5,311,000 and $5,284,000, respectively, and net
loss of approximately $447,000 and $1,928,000, respectively.
Note 4 – Accounts Receivable
Accounts receivable consists of balances due
from completed properties in accordance with full accrual method, under which the Company recognizes related revenue after customers
have made sufficient down payment.
As at June 30, 2014, accounts receivable represents
revenue in excess of billings balances of Kirin County project as the construction is completed and related condominium units
are available for delivery to customers.
Receivables from sales of condominium units
are collateralized by underlying properties’ Ownership Certificates and bear no interest.
Note 5 – Notes receivable
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
| |
Receivable from Bank acceptance notes due from related party | |
$ | - | | |
$ | 817,795 | |
Receivable from individual (Promissory note) | |
| 600,000 | | |
| 600,000 | |
Other | |
| 800 | | |
| 800 | |
| |
$ | 600,800 | | |
$ | 1,418,595 | |
The Promissory note with original principle
amount of $600,000 will be due on August 16, 2016, at the rate of 3% per annum.
Note 6 – Revenue in Excess of Billings
Revenue in excess of billings represents the
amount revenue recognized for certain residential and commercial units in commercial building of Kirin County, No.79 Courtyard
and Kirin Bay projects in accordance with the percentage-of-completion method over the cumulative payments received from respective
customers. Pursuant to sales contracts, customers are required to pay a minimum 20% of the full contract amount as a
down payment, and pay the remaining balances before delivery of the properties by the Company, which is expected to be within the
next 12 to 24 months, depending on construction progress of related real estate properties. As of June 30, 2014 and December 31,
2013, revenue in excess of billings is $6,491,497 and $10,059,251, respectively.
Note 7 – Prepayments
Prepayments consisted of the following:
| |
June 30, | |
December 31, |
| |
2014 | |
2013 |
| |
(Unaudited) | |
|
Advances to suppliers and contractors | |
$ | 1,941,282 | | |
$ | 1,245,073 | |
Financing service fees charged as prepaid interests | |
| 1,770,618
| | |
| 1,831,157 | |
Excessive business tax and LAT liabilities | |
| 9,996,324 | | |
| 9,186,346 | |
Prepayments-related parties | |
| 15,763,706 | | |
| 14,174,150 | |
| |
$ | 29,471,930
| | |
$ | 26,436,726 | |
Pursuant to financing service contracts entered
into between the Company, XingtaiChengjiao Rural Credit Cooperative Union Association, and Industrial and Commercial Bank of China,
Xingtai Branch, the Company paid service fees for the origination of several long-term loans before they were released to the Company.
The financing service fees are regarded as prepaid loan interest and amortized over the respective terms of the loans.
Business tax and LAT are payable each
year at 5% and 1% - 2% of customer deposits received. The Company recognizes sales-related business tax and LAT in the income
statement to the extent that they are proportionate to the revenue recognized each period. Any excessive amounts
of business tax and LAT liabilities recognized at period-end pursuant to tax laws and regulations over the amounts recognized
in the income statement are capitalized in prepayments and will be expensed in subsequent periods.
The prepayment to related parties is regarding
to construction contract. In certain area, the related parties have more bargain power with the construction contractors. The
construction contractors will provide construction service.
Note 8 – Other Receivables
The components of other receivables were as
follows:
| |
June 30, | |
December 31, |
| |
2014 | |
2013 |
| |
(Unaudited) | |
|
Working capital borrowed by contractors | |
$ | 26,642,927 | | |
$ | 13,544,760 | |
Deposit | |
| 7,944,253 | | |
| 964,998 | |
Staff allowance | |
| 1,247,431 | | |
| 687,875 | |
Receivables of housing maintenance funds | |
| 257,840 | | |
| 392,781 | |
Others | |
| 636,766 | | |
| 599,476 | |
| |
$ | 36,729,217 | | |
$ | 16,189,890 | |
Working capital borrowings by contractors are
unsecured, bear no interest and become payable before the completion of the related construction. There was no allowance for doubtful
accounts as at June 30, 2014 and December 31, 2013.
Note
9 – Real Estate Properties and Land Lots under Development
The
components of real estate properties and land lots under development were as follows:
| |
June 30, | |
December 31, |
| |
2014 | |
2013 |
| |
(Unaudited) | |
|
Properties under development | |
| |
|
Kirin County | |
| |
|
Costs of land use rights | |
$ | 834,693 | | |
$ | 1,329,290 | |
Other development costs | |
| 514,855 | | |
| 528,347 | |
No. 79 Courtyard | |
| | | |
| | |
Costs of land use rights | |
| 52,456,401 | | |
| 54,720,055 | |
Other development costs | |
| 18,305,713 | | |
| 15,413,036 | |
Kirin Bay | |
| | | |
| | |
Costs of land use rights | |
| 31,568,838 | | |
| 35,605,444 | |
Other development costs | |
| 16,124,118 | | |
| 13,316,057 | |
| |
| | | |
| | |
Land lots under development | |
| 60,014,450 | | |
| 55,559,989 | |
| |
$ | 179,819,068 | | |
$ | 176,472,218 | |
As
at June 30, 2014, the Company has obtained certificates representing titles of the land use rights used for the development of
Kirin County, No. 79 Courtyard and Kirin Bay projects. All our land use rights are assigned to real estate projects.
Part of Company’s real estate properties
under development and land lots under development were pledged as collateral for financial institution loans (Note 16).
The Residential buildings of Kirin County are
fully completed in December, 2012. As of June 30, 2014 and December 31, 2013, the real estate property completed is $897,596 and
$1,427,910, respectively.
Kong Village Relocation Program
Pursuant
to incentive policies issued by Xingtai local government encouraging modernization of villages situated in urban vicinity, the
Company participated in Kong Village Relocation Program (the “Program”) in which the Company constructs a real property
and transfers to local government at no costs, and reimburses costs incurred by local government compensating villagers and zoning
and developing vacated land lots. In exchange, the Company will be invited to bid for vacated land parcels for residential
and commercial use at public auction at market price, and majority of the proceeds received by local government will be refunded
to the Company. The Company capitalizes all expenditures attributable to the Program as land lots under development. The Company
expects to secure land use rights through the auctions and will use acquired land use rights for the development of Kirin Bay
and other project. In July 2011 the Company obtained the certificate of land use rights for a piece of land covered by the Program
through the aforementioned public auction, and used it for the development of Kirin Bay project. Other land lots covered
by the Program are expected to be auctioned and obtained by the Company in the near future. As at June 30, 2014 and December 31,
2013 capitalized expenditures under the Program, representing accumulated costs of the land use rights to be obtained by the Company
in the future, were $60,014,450 and $55,559,989, respectively.
Note 10 –
Investments
As of June 30, 2014 and December 31,
2013, investment in Xingtai Rural Commercial Bank (“Xintai RC Bank”) was $7,145,525 and $7,196,598, consisting
31,000,000 shares, or 6.02%, of the common stock of Xingtai RC Bank
The Company used the cost method of accounting
to record its investment in Xingtai RC Bank. The Company determined that there was no impairment on this investment during period
ended June 30, 2014. The Company received RMB3,100,000 (approximately $505,000) and RMB720,000 (approximately $115,000) as dividend
income from Xingtai RC Bank for the six months ended June 30, 2014 and 2013, respectively.
As of June 30, 2014 and December 31, 2013,
the Company has deposit balances (including restricted cash) of $8,840,000 and $6,672,000 in Xingtai RC Bank, respectively.
In November 2013, the Company invested $700,000
to Hopkins Kirin Facilities Group, LLC (“Hopkins”) representing 22.5% of Hopkins’s membership interest.
The Company used the equity method of accounting
to record its investment in Hopkins. The Company determined that there was no impairment on these investments during the six months
ended June 30, 2014. There is no transaction in 2014 for Hopkins Kirin Facilities Group, LLC. The Company didn’t receive
investment income from Hopkins Kirin Facilities Group, LLC.
On May 13, 2014, Xingtai Zhongding invested in bank financial product
with an amount of RMB 1,500,000 ($243,597), which is due on August 12, 2014 and yields at 4.7%. The amount was repaid in full
when it became mature subsequent to balance sheet date.
Note 11 – Accounts Payable
| |
June 30, | |
December 31, |
| |
2014 | |
2013 |
| |
(Unaudited) | |
|
Payables in relation to acquisitions of land use rights | |
$ | 3,801,776 | | |
$ | 3,726,753 | |
Payable to construction contractors
| |
| 73,855,464 | | |
| 72,393,257 | |
| |
$ | 77,657,240 | | |
$ | 76,120,010 | |
The Company agreed to pay $22,649,880
(translated as historical rate) to compensate additional costs incurred by Kong Village Committee for the Program (see Note
9). At June 30, 2014, unpaid balance plus accrued interest was $2,435,974.
Note 12 – Other Payables and Accrued
Liabilities
The components of other payables and accrued
liabilities were as follows:
| |
June 30, | |
December 31, |
| |
2014 | |
2013 |
| |
(Unaudited) | |
|
Unrecognized tax benefit (Note 14(2)) | |
$ | 6,495,932 | | |
$ | 6,542,362 | |
Deposits from customers on behalf of utility operators | |
| 5,486,558 | | |
| 2,677,913 | |
Car park deposits from customers | |
| 2,267,080 | | |
| 2,285,738 | |
Deposit from a contractor | |
| 107,394 | | |
| 140,661 | |
Accrued loan interest | |
| 743,480 | | |
| 706,575 | |
Others | |
| 545,866 | | |
| 1,389,803 | |
| |
$ | 15,646,310 | | |
$ | 13,743,052 | |
Note 13 – Customer Deposits
Customer deposits consist of amounts received
from customers relating to the sale of residential and commercial units. In the PRC, customers generally obtain financing for the
purchase of their residential unit prior to the completion of the project. The lending institutions will provide the funds to the
Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes
them as a liability until the revenue can be recognized. As of June 30, 2014 and December 31, 2013, the Company received $90,763,158
and $87,713,585 deposits from customers, respectively.
Note 14 – Income Taxes
(1) Corporate income tax
The Company is incorporated in the State of
Nevada in the U.S., and is subject to a progressive U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not
impose any corporate state income tax. Kirin China is incorporated in the British Virgin Islands. Under the current
laws of the British Virgin Islands, Kirin China is not subject to tax on income or capital gains. In addition, no British
Virgin Islands withholding tax is imposed upon payments of dividends by Kirin China. Kirin Development is incorporated in Hong
Kong. Kirin Development did not earn any income that was derived in Hong Kong for the period from its date of incorporation
to June 30, 2014 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not
subject to any Hong Kong withholding tax.
The Company’s subsidiaries Spectrum International
Enterprise, LLC, Brookhollow Lake, LLC, Greenfield International Corporation, Kirin Hopkins Real Estate Group, LLC and Newport
Property Holding, LLC were incorporated in State of California, United States of America and are subject to California taxes.
The Company’s subsidiaries and VIEs
in China are subject to PRC Enterprise Income Tax (EIT) on taxable income. According to PRC tax laws and regulations, China subsidiaries
and VIEs are subject to EIT with the tax rate 25%, except that deemed profit method is applied to XingtaiZhongding Construction
Project Management Co., Ltd., which local tax authorities levy income tax based on deemed profit of 8% of revenue. A withholding
income tax rate of 5% is applied if Kirin Management, the wholly-owned foreign enterprise, distributes dividends to its immediate
holding company, Kirin Development. The Company has not recorded tax provision for U.S. tax purposes as they have no assessable
profits arising in or derived from the United States and intends to permanently reinvest accumulated earnings in the PRC operations
in the foreseeable future.
Income tax expenses for the three months and
six months ended June 30, 2014 and 2013 are summarized as follows:
| |
Six Months Ended June 30, | | |
Three Months Ended June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
Current | |
| | |
| | |
| | |
| |
EIT expense | |
$ | 659,994 | | |
$ | 2,098,064 | | |
$ | 446,037 | | |
$ | 831,831 | |
LAT expense | |
| 762,054 | | |
| 122,402 | | |
| 742,559 | | |
| 14,327 | |
Deferred tax expense/( benefit) - EIT | |
| (538,765 | ) | |
| (2,500,589 | ) | |
| 240,247 | | |
| (967,157 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
$ | 883,283 | | |
$ | (280,123 | ) | |
$ | 1,428,843 | | |
$ | (120,999 | ) |
A reconciliation between taxes computed at
the PRC statutory rate of 25% and the Company’s effective tax rate for the six months ended June 30, 2014 and 2013 is as
follows:
| |
Six Months Ended June 30, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
(Unaudited) | |
| |
| | |
| |
EIT at the PRC statutory rate of 25% | |
$ | (117,596 | ) | |
$ | (426,549 | ) |
LAT expense | |
| 762,054 | | |
| (122,402 | ) |
EIT deficit of LAT | |
| (190,514 | ) | |
| 30,601 | |
Deferred tax valuation allowance | |
| 176,336 | | |
| 260,915 | |
Permanent items | |
| 253,003 | | |
| (22,688 | ) |
| |
$ | 883,283 | | |
$ | (280,123 | ) |
(2) Liability for unrecognized tax benefit
A reconciliation of the beginning and ending
amount of liability associated with unrecognized tax benefit for the six months ended June 30, 2014 and 2013 is as follows:
| |
Six Months Ended June 30, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
(Unaudited) | |
| |
| | |
| |
Unrecognized tax benefit, as the January 1 | |
$ | 6,542,362 | | |
$ | 6,333,022 | |
Movement in current year due to foreign exchange rate fluctuation | |
| (46,430 | ) | |
| 130,893 | |
| |
| | | |
| | |
Unrecognized tax benefit, as of June 30 | |
$ | 6,495,932 | | |
$ | 6,463,915 | |
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 June 30, 2014 to be material in the next twelve months.
In accordance with PRC tax administration law
and regulations, tax authorities generally have up to five years to claw back underpaid tax plus penalties and interests. In
the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly,
the Company’s PRC subsidiary and VIEs tax years from 2009 to 2013 remains subject to examination by tax authorities. The
Company’s offshore subsidiaries also are subjected to examination by Internal Revenue Service.
(3) Deferred tax
The tax effects of temporary differences that
give rise to the following approximate deferred tax assets and liabilities as of June 30, 2014 and December 31, 2013 are presented
below.
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
| |
Deferred tax assets | |
| | |
| |
Operating loss carry forward | |
$ | 4,610,449 | | |
$ | 3,540,241 | |
Excess of interest expense | |
| 2,995,367 | | |
| 2,038,513 | |
Revenue recognized based on percentage-of-completion | |
| 1,417,506 | | |
| 2,109,682 | |
| |
| 9,023,322 | | |
| 7,688,436 | |
| |
| | | |
| | |
Valuation allowance | |
| (3,842,524 | ) | |
| (3,012,026 | ) |
| |
| | | |
| | |
Net deferred tax assets | |
$ | 5,180,798 | | |
$ | 4,676,410 | |
Deferred taxes assets and liabilities are evaluated
on individual subsidiary, VIE and subsidiary of VIE basis. In assessing the ability to realize the deferred tax assets,
the Company considers availability of future taxable income during the periods in which those temporary differences become deductible.
The Company records a valuation allowance to reduce deferred tax assets to a net amount that management believes is more-likely-than-not
of being realizable based on the weight of all available evidence.
Deferred taxes assets and liabilities associated
with application of revenue recognized pursuant to percentage-of-completion will reverse when the construction progress of related
projects proceeds to completion, which is expected to be December 2014 for No. 79 Courtyard (Phase I) and Kirin Bay (Phase I)
projects, when the difference between accumulated revenue and cost of sales recognized based on percentage-of-completion method
and enterprise income tax accrued pursuant to tax laws, converges. Enterprise income tax comprises multiple interim
prepayments determined predominately by periodic customer deposits collected and deemed profit ratio when a real estate project
is under construction, followed by a closing to adjust to actual profit realized, after the construction is completed. Deferred
taxes assets and liabilities associated with application of revenue recognized pursuant to percentage-of-completion will also
increase or decrease when the Company reevaluates and makes upward or downward adjustments to a project’s total revenue
or cost estimate. The Company believes deferred tax assets related to revenue recognized based on percentage-of-completion
and excess of interest expense will be fully realizable.
Entities established in the PRC had
total deferred tax assets associated with net operating loss carry forward of $3,409,769 as of June 30, 2014, which will expire
on various dates between December 31, 2014 and December 31, 2019. As of June 30, 2014, the Company provided a valuation allowance
of $2,641,844 based on projected future revenue available to utilize net operating loss carried forward. Entities established out
of the PRC had total deferred tax assets associated with operating loss carry forward of $1,200,680 and a 100% valuation allowance
has been provided.
Note 15 – Other Taxes Payable
Other taxes payable consisted of the following:
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
| |
Business tax and related urban construction tax and education surcharge | |
$ | 2,383,023 | | |
$ | 2,530,769 | |
Land Appreciation Tax | |
| 345,965 | | |
| 354,817 | |
| |
$ | 2,728,988 | | |
$ | 2,885,586 | |
Note 16 – Loans Payable
Loans payable as of June 30, 2014 and December
31, 2013 consisted of the following:
|
|
June 30, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
|
|
(Unaudited) |
|
|
|
|
|
Loan from Hebei Xingtai Rural Commercial Bank(“Credit Union 2013 Short-term loan”) |
|
|
|
|
|
|
|
|
Due April 24, 2014, at 8.55% per annum |
|
|
- |
|
|
|
3,271,181 |
|
|
|
|
|
|
|
|
|
|
Loan from Hebei Xingtai Rural Commercial Bank(“Credit Union 2014 Short-term loan”) |
|
|
|
|
|
|
|
|
Due April 24, 2015, at 12.56% per annum |
|
|
3,247,966 |
|
|
|
- |
|
Loan from Kong Village Committee |
|
|
|
|
|
|
|
|
Origin
loan due December 29, 2013, maturity extended to December 29, 2014 ($2,923,169, or RMB 18,000,000) and September 29, 2014
(1,948,780, or RMB 12,000,000), at 14.4% per annum |
|
|
4,871,949 |
|
|
|
4,906,771 |
|
|
|
|
|
|
|
|
|
Syndicated loans arranged by Xingtai Chengjiao Rural Credit Cooperative Union Association (“Syndicated Loans 2012”) |
|
|
|
|
|
|
|
|
Original loan due March 29, 2014, maturity extended to May 29,2014, at 11.38% per annum |
|
|
- |
|
|
|
2,453,386 |
|
Original loan due April 29, 2014, maturity extended to May 29, 2014, at 11.38% per annum |
|
|
- |
|
|
|
2,453,386 |
|
Due May 29, 2014, at 11.38% per annum |
|
|
- |
|
|
|
3,271,181 |
|
Due June 29, 2014, at 11.38% per annum |
|
|
- |
|
|
|
3,271,181 |
|
Due July 29, 2014, at 11.38% per annum (note (a)) |
|
|
811,992 |
|
|
|
4,906,771 |
|
Due
August 29, 2014, at 11.38% per annum (note (a)) |
|
|
8,119,915 |
|
|
|
8,177,952 |
|
|
|
|
8,931,907 |
|
|
|
24,533,857 |
|
Loans from Industrial and Commercial Bank of China, XingtaiYejin Branch (“ICBC 2013 Loans”) |
|
|
|
|
|
|
|
|
Due January 30, 2015, at 9.84% per annum |
|
|
5,683,940 |
|
|
|
5,724,567 |
|
Due May 30, 2015, at 9.84% per annum |
|
|
4,059,957 |
|
|
|
4,088,976 |
|
Due September 30, 2015, at 9.84% per annum |
|
|
4,059,957 |
|
|
|
4,088,976 |
|
Due January 30, 2016, at 9.84% per annum |
|
|
3,247,966 |
|
|
|
3,271,181 |
|
Due May 30, 2016, at 9.84% per annum |
|
|
2,435,974 |
|
|
|
2,453,386 |
|
Due May 30, 2016, at 9.84% per annum |
|
|
8,119,915 |
|
|
|
8,177,952 |
|
Due May 30, 2016, at 9.84% per annum |
|
|
1,623,983 |
|
|
|
- |
|
Due May 30, 2016, at 9.84% per annum |
|
|
3,247,966 |
|
|
|
- |
|
Due May 30, 2016, at 9.84% per annum |
|
|
1,623,983 |
|
|
|
- |
|
Due May 30, 2016, at 9.84% per annum |
|
|
1,623,983 |
|
|
|
- |
|
Due May 30, 2016, at 9.84% per annum |
|
|
3,247,966 |
|
|
|
- |
|
Due May 30, 2016, at 9.84% per annum |
|
|
3,247,966 |
|
|
|
- |
|
|
|
|
42,223,556 |
|
|
|
27,805,038 |
|
|
|
|
|
|
|
|
|
|
Loans from Industrial and Commercial Bank of China, XingtaiYejin Branch (“ICBC 2012 Loans”) |
|
|
|
|
|
|
|
|
Due September 18, 2015, at 9.225% per annum |
|
|
3,247,966 |
|
|
|
3,271,181 |
|
Due September 18, 2015, at 9.225% per annum |
|
|
3,247,966 |
|
|
|
3,271,181 |
|
Due May 19, 2015, at 9.225% per annum |
|
|
4,871,949 |
|
|
|
4,906,771 |
|
Due January 19, 2015, at 9.225% per annum |
|
|
4,871,949 |
|
|
|
4,906,771 |
|
Due September 19, 2014, at 9.225% per annum |
|
|
4,871,949 |
|
|
|
4,906,771 |
|
Due May 19, 2014, at 9.225% per annum |
|
|
- |
|
|
|
4,906,771 |
|
Due January 31, 2014, at 9.225% per annum |
|
|
- |
|
|
|
2,780,505 |
|
|
|
|
21,111,779 |
|
|
|
28,949,951 |
|
|
|
|
|
|
|
|
|
|
Syndicated loans by Hebei Xingtai Rural Commercial Bank (“Syndicated loans 2014) |
|
|
|
|
|
|
|
|
Due May 8, 2015, at 7.2% per annum |
|
|
8,119,915 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Loan from Hebei Xingtai Rural Commercial Bank (“Short term 2014 Loan”) |
|
|
|
|
|
|
|
|
Due June 26, 2015, at 11.4% per annum |
|
|
3,247,966 |
|
|
|
- |
|
|
|
$ |
91,755,038 |
|
|
$ |
89,466,798 |
|
Note
(a): These loans were repaid in full when they become mature subsequent to balance sheet date.
ICBC 2012 Loans, ICBC 2013 Loans and Syndicated
Loans 2012 are floating rate loans whose rates are set at 10% above 1-to-3 year base borrowing rate stipulated by the People’s
Bank of China at the date of each drawdown, and are subject to revision every 12 months. The Company also paid financing
service fees for ICBC 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2012. The financing service fees were paid prior
to financial institution releasing loans to the Company as prepaid interest, and have been included in the determination of respective
loans’ effective interest rates. Credit Union 2014 Short-term Loan was guaranteed by an unrelated company as arranged by
the financial institution.
As of June 30, 2014 and December 31, 2013,
Syndicated loans 2014, ICBC 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2012 were secured by the Company’s real estate
held for development with carrying value of approximately $147,866,000 and $134,340,000, respectively.
The aggregate maturities of loans payable for
each of years subsequent to June 30, 2014 are as follows:
Twelve Months Ending June 30, |
|
Amount |
|
|
|
|
|
2015 |
|
$ |
52,779,447 |
|
2016 |
|
|
38,975,591 |
|
Loans payable |
|
$ |
91,755,038 |
|
Note 17 – Restricted Stock Compensation
In accordance with the Employment Agreements
approved by the Board of the Directors, the Company granted certain employees restricted common stock (“Restricted Stock
Awards”). Restricted Stock Awards are issued to the employees in five even installments at the beginning
or in the interim of each year of five-year employment period. Shares issued under Restricted Stock Awards in each year
of the employment period cannot be disposed of or pledged until they are fully vested, which is the last day of the full service
year and the employment is not terminated. Unvested shares maybe reacquired by the Company for no consideration following
the employee’s termination of service.
The fair value of the Restricted Stock Awards
is based on the market value of the Company’s common stock on the date of grant. Pre-vesting forfeiture is expected to be
nil. The Company records compensation costs for the Restricted Stock Awards on a straight-line basis over the employment period
for the entire award.
Restricted Stock Awards activity as of and
for the six months ended June 30, 2014 is as follows:
| |
Shares | | |
Weighted Average Grant Date Fair Value Per Share | |
| |
| | |
| |
Outstanding at the beginning of the period | |
| 146,120 | | |
$ | 0.12 | |
Granted | |
| - | | |
$ | - | |
Vested | |
| - | | |
$ | - | |
Forfeited | |
| - | | |
$ | - | |
Outstanding at the end of the period | |
| 146,120 | | |
$ | 0.12 | |
The Company recognized $nil and $nil
of share-based compensation expense related to the Restricted Stock Awards for the six months ended June 30, 2014 and 2013, respectively.
Note 18 – Revenue
The Company’s revenue is recognized under
percentage-of-completion methods for the six months and three months ended at June 30, 2014 and 2013 from pre-sale of real
estate projects. Property service revenue is recognized when related service are provided. Revenue recognized for each
real estate project, including adjustments made pursuant to change of estimates for the six months and three months ended June
30, 2014 and 2013 was as follows:
| |
Six Months Ended June 30, | |
Three Months Ended June 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
| |
(Unaudited) | |
(Unaudited) | |
(Unaudited) | |
(Unaudited) |
Kirin County | |
$ | 720,713
| | |
$ | 1,032,974 | | |
$ | 516,681
| | |
$ | 317,220 | |
No.79 Courtyard | |
| 12,704,071 | | |
| 35,373,480 | | |
| 11,738,045 | | |
| 25,715,507 | |
Kirin Bay | |
| 33,992,242 | | |
| 28,700,797 | | |
| 27,901,784 | | |
| 25,028,679 | |
Property Service | |
| 224,805
| | |
| 306,519 | | |
| 73,144
| | |
| 306,519 | |
| |
$ | 47,641,831 | | |
$ | 65,413,770 | | |
$ | 40,229,654 | | |
$ | 51,367,925 | |
Note 19 – Income (Loss) per Share
Basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed
using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential
common shares comprise shares issuable upon the exercise of Series A Warrants, Series B Warrants, Agent Warrants and unvested and
unissued Restricted Stock Award, using the treasury stock method.
| |
Six Months Ended June 30, | |
Three Months Ended June 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
| |
(Unaudited) | |
(Unaudited) | |
(Unaudited) | |
(Unaudited) |
Net income (loss) | |
$ | (1,353,668
| ) | |
$ | (2,359,664 | ) | |
$ | 784,482
| | |
$ | 1,103,447 | |
Basic and diluted income (loss) per share | |
$ | (0.07 | ) | |
$ | (0.11 | ) | |
$ | 0.04 | | |
$ | 0.05 | |
Basic and diluted weighted average shares outstanding | |
| 20,596,546 | | |
| 20,596,546 | | |
| 20,596,546 | | |
| 20,596,546 | |
Series A Warrants, Series B Warrants and Agent
Warrants to acquire 392,090 shares of common stock, and unvested and unissued Restricted Stock Award were not included in the computation
of diluted EPS because the effect would have been anti-dilutive. Series A Warrants, Series B Warrants and Agent Warrants
were still outstanding as of June 30, 2014.
Note 20 – Non-controlling interest
Non-controlling interests represent the non-controlling
interest stockholders’ proportionate share of the equity of Brookhollow Lake, LLC, Greenfield International Corporation and
Newport Property Holding, LLC. The non-controlling interests in the six months ended at June 30, 2014 and 2013 are summarized as
below:
| |
As of June 30 | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
(Unaudited) | |
Brookhollow Lake, LLC | |
| 10.0 | % | |
| 10 | % |
Greenfield International Corporation | |
| 30.0 | % | |
| 0 | % |
Newport Property Holding, LLC | |
| 50.0 | % | |
| 0 | % |
The non-controlling interests in Brookhollow
Lake, LLC, Greenfield International Corporation and Newport Property Holding, LLC that are not owned by the Company are shown as
“non-controlling interests” in the consolidated balance sheets as of June 30, 2014 and “net loss attributable
to non-controlling interests” in the consolidated statements of operations and comprehensive loss for the period ended June
30, 2014.
Note 21 – Related Party Transactions
and Balances
(1) Loan to a related party
In August 2013, Kirin entered into a loan agreement
with HuaxiaHuifeng Ventures Capital Management (Beijing) Co., Ltd. (“HuaxiaHuifeng”), a related company ultimately
controlled by JianfengGuo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According
to the agreement, Kirin made a loan to HuaxiaHuifeng for $35,953,000. On October 15, 2013, the Company signed a supplement loan
agreement in amount of $27,610,000 (RMB 170,000,000) which bears 18% interest rate and has a term of one year.
As of June 30, 2014, the balance of the loan
to HuaxiaHuifeng was $35,433,618 (RMB 196,560,000 for original loan and RMB 21,629,589 for interest income).
(2) Government grant escrowed by Business Investment
In 2008, a VIE of the Company, Xingtai
Zhongding, was entitled to a government grant associated with its development of Kirin County project of RMB 160,000,000 ($22,981,000,
translated at historical exchange rate). Cash representing the grant has been remitted to Business Investment, a trust
equity owner of Xingtai Zhongding in June 2008. Business Investment originally acquired the land use rights of Kirin
County project, and contributed the land use rights to Xingtai Zhongding as paid-in capital to develop the project. Based
on the arrangement between Business Investment and Xingtai Zhongding, which has been sanctioned by local government, the benefit
of the government grant is to be transferred from Business Investment to Xingtai Zhongding. Specifically, Business Investment
acts as an escrow agent but also is nominally responsible for Xingtai Zhongding’s progress. Earned portions of the government
grant become available to Xingtai Zhongding based on percentage of completion.
For the years ended December 31, 2012, 2011,
2010 and 2009, XingtaiZhongding was entitled to receive RMB2,800,000, RMB43,000,000, RMB63,000,000, and RMB51,200,000, respectively
($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at respective years’ historical rates) earned
government grant from Business Investment, representing total amount of the government grant. The Company has the right to determine
how to utilize the earned government grant. As at June 30, 2014 and December 31, 2013, accumulated earned government grant of RMB160,000,000
and RMB160,000,000 ($25,983,728 and $26,169,447, translated at respective historical rates) was used to repay working capital provided
by JianfengGuo for the support of other real estate projects’ development.
(3) Working capital provided by Jianfeng Guo
Jianfeng Guo, the controlling stockholder
of the Company, through various affiliate companies and individuals, provides working capital to the VIEs (hereafter,
including subsidiaries of VIEs) of the Company. In addition to repaying borrowings directly, the Company’s
VIEs may also provide working capital to affiliate companies and individuals as designated by
Jianfeng Guo. Balances received or provided by the Company’s VIEs are unsecured, interest-free and did not
have specific repayment dates.
At each balance sheet date, affiliate
companies and individuals who have working capital transactions with the Company’s VIEs assigned their balances to
Jianfeng Guo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered into between Jianfeng
Guo, related affiliate companies and individuals, and the Company’s VIEs. Xingtai Zhongding also chooses to use its
accumulated government grant receivable from Business Investment, to repay working capital provided by Jianfeng
Guo. As at June 30, 2014 and December 31, 2013, the working capital provided by Jianfeng Guo was RMB142,529,029
and RMB134,029,025 ($23,146,472 and $21,921,659 translated at respective historical rates). Accordingly, the
Company is entitled to present netted balance with Jianfeng Guo on its consolidated balance sheets.
Gross amount of working capital provided
by and to affiliate companies and individuals designated by Jianfeng Guo as at June 30, 2014 and December 31, 2013 were as
follows:
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
| |
Gross of working capital received from affiliate
companies and individuals designated by Jianfeng Guo | |
$ | (41,894,040 | ) | |
$ | (41,521,029 | ) |
Gross of working capital provided to affiliate companies and
individuals designated by Jianfeng Guo | |
| 18,747,568 | | |
| 19,599,370 | |
Gross earned government grant held by a related party | |
| 25,983,728 | | |
| 26,169,447 | |
Receivable from a related party | |
$ | 2,837,256 | | |
$ | 4,247,788 | |
(4) Short-term Loans to Related party
As of December 31, 2013, the ending
balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these are all wired to five related
companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies are ultimately controlled by
Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin.
On December 30, 2013, Hebei Zhongding entered
into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing Cathay Kirin Assets Management Company and
Beijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000. On December 30, 2013, Business Service entered
into loan agreements with Beijing Cathay Kirin Hospitality Management Company, and Cathay Brother (Beijing) Investment Management
Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000, respectively. The maturity date of the loan agreements
is January 2, 2014. On January 2, 2014 the Company received RMB 74,900,000 short-term loans from related party companies.
(5) Prepayment to related party
Please see Note 7 – Prepayments
Note 22 – Contingencies and Commitments
As at June 30, 2014 and December 31, 2013,
the Company provided approximately $104,500,000 and $77,130,000 guarantees to mortgage bank loans granted to homebuyers of
the Company’s real estate properties. Guarantees commence when the banks release mortgage to the Company and end when House
Ownership Certificates are issued and pledged to banks instead. The fair value of the guarantees is insignificant because the possibility
of the homebuyers’ default is remote, and in case of default, the Company can repossess the related properties to cover repayments
of outstanding principal, interest and penalty to mortgage banks, and accordingly, the Company did not recognize fair value of
these guarantees.
Note 23 – Subsequent Events
The Company evaluated subsequent events up
until the time the financial statement were filed with SEC.
In July and August 2014, the Company received
RMB 40,000,000 (approximately $6,496,000) and RMB 10,000,000 (approximately $1,624,000) one-year term loan from Xingtai Rural Commercial
Bank with an annual effective interest rate of 11.4%, respectively.
In
the third quarter of 2014, we plan to dissolve two subsidiaries of VIEs, Baoding City Heda Kirin Science and Technology
Park Investment Co., Ltd. (“Heda Kirin”) and Baoding City Heda Kirin Real Estate Development Co., Ltd.
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 six months ended June 30, 2014
and 2013 should be read in conjunction with our financial statements and the notes to those financial statements that are included
elsewhere in this Report. Our discussion includes forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ
materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Forward-Looking
Statements.”
We
are a non-state-owned real estate development company focused on residential and commercial real estate development in “tier-three”
cities in the PRC. Our projects are currently concentrated in Xingtai City, Hebei Province.
We
have completed our Ming Shi Hua Ting, Wancheng New World and Kirin County projects in Xingtai City. Our current projects include
Kirin Plaza, Kirin Bay and No.79 Courtyard, which collectively call for the development of more than 7,000 homes over the next
five years in Xingtai City. We intend to expand into the Bohai Sea Surrounding Area, comprised of Beijing, Tianjin, 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
June 30, 2014, we have the following projects under development:
|
|
POC |
|
|
Construction
beginning |
|
|
Estimated
Completion |
|
Kirin County (including
Kirin Plaza) |
|
98.3% |
|
|
September
2011 |
|
|
Late
2014 |
|
No.79 Courtyard
(Phase I) |
|
95.4% |
|
|
September
2011 |
|
|
Late
2014 |
|
No.79 Courtyard
(Phase II) |
|
70.2% |
|
|
September
2012 |
|
|
Mid-to-late
2015 |
|
No.79 Courtyard
(Phase III) |
|
62.9% |
|
|
April
2013 |
|
|
Mid-to-late
2015 |
|
Kirin Bay (Phase
I) |
|
92.6% |
|
|
October
2011 |
|
|
Late
2014 |
|
Kirin Bay (Phase
II) |
|
74.1% |
|
|
March
2013 |
|
|
Early
2015 |
|
Kirin Bay ( Phase
III) |
|
40.2% |
|
|
May
2013 |
|
|
Mid-to-late
2015 |
|
Kirin Bay (Phase
IV) |
|
9.9% |
|
|
April,
2014 |
|
|
Late
2016 |
|
Furthermore, in the second quarter of 2014, we started the
constructions of No. 79 Courtyard (Phase IV).
Financial
Performance Highlights
The
following summarizes certain key financial information for the six months ended June 30, 2014.
● |
Total revenue was $47.6 million for the six months
ended June 30, 2014, a decrease of $17.8 million, or 27.2%, from $65.4 million for the same period of 2013. Our revenue stream
has shifted from the Kirin County project, which was completed in 2012, to No. 79 Courtyard (Phase I, Phase II and Phase III) and
Kirin Bay (Phase I, Phase II, Phase III and Phase IV), which are expected to generate the majority of our revenue in the upcoming
12 to 18 months; |
|
|
● |
Gross profit was $7.8 million
for the six months ended June 30, 2014, a decrease of $0.1 million, or 0.7%, from $7.9 million for the same period of 2013. Gross
margin ratio was 16.4% for the six months ended June 30, 2014, an increase of 4.3% as compared to the gross margin ratio of 12.1%
for the same period of 2013. The increase of gross margin ratio was contributed by construction progress and sales
of Kirin Bay Phase III and No. 79 Courtyard Phase III for the six months ended June 30, 2014. Kirin Bay Phase III and No. 79 Courtyard
Phase III have higher gross margin ratio than other projects in the first half year of 2013.
|
|
|
● |
Net loss was $1.4 million for the six months
ended June 30, 2014, a decrease of $1.0 million, or approximately 42.6%, from net loss of $2.4 million for the same period of
2013, as a result of the increased gross profit contributed by the sales of Kirin Bay Phase III and No.79 Courtyard Phase III.
|
Factors
Affecting our Operating Results
Growth
of China’s Economy. We operate and derive all of our revenue from sales in China. Economic conditions in China,
therefore, affect our operations, including the demand for our properties and the availability and prices of our raw materials
among other expenses. China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 9.2%
in 2011, 7.8% in 2012 and 7.7% in 2013. China is expected to experience continued growth in all areas of investment and consumption.
However, if the Chinese economy were to become significantly affected by a negative stimulus, China’s growth rate would
likely to fall and our revenue could correspondingly decline.
Government
Regulations. Our business and results of operations are subject to PRC government policies and regulations regarding the
following:
● |
Land
Use Right — According to the Land Administration Law of the PRC and Interim Regulations of the People’s Republic
of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas, individuals
and companies are permitted to acquire rights to use urban land or land use rights for specific purposes, including residential,
industrial and commercial purposes. We acquire land use rights from local governments and/or other entities for development
of residential and commercial real estate projects. |
● |
Land
Development — According to the Urban Real Estate Development and Operation Administration Regulation, the Urban
Real Estate Development and Operation Administration Rules of Hebei Province promulgated by the government of the Hebei Province,
and the Real Estate Development Enterprise Qualification Administration Regulation, a real estate development enterprise shall
obtain a Real Estate Development Enterprise Qualification Certificate. We obtained the related certificates and seek to ensure
that each phase of our projects complies with our certificates. |
● |
Project
Financing — According to the Land Administration Law and the Property Law of the PRC, the land use rights, residential
housing and other buildings still in process of construction may be pledged and mortgaged. From time to time, we pledge and
mortgage our land use rights and real properties to lenders in order to obtain project financing. |
● |
Property
Sales and Transfers — For each project we develop, pursuant to the Commodity Houses Sale Administration Regulation,
effective of June 1, 2001, we are required to obtain permits before commencing project sales or presales of such project.
Local governments act on the region’s interests by helping private companies streamline such projects and often coordinate
with regional housing developers to allow for preliminary presales while Pre-Sales Permits are being processed. The local
government in Xingtai has recognized the financial cost the Company assumed in administering the resident removal process
and offered us permission to collect non-refundable deposits. This is a local practice enacted by the Xingtai local government
to encourage project development. By collecting deposits from this type of buyer, we can offer a contractually fixed price
to our consumers and ensure them a preference in housing selection. We may not obtain such approval in other cities
if we expand beyond Xingtai. |
Government
Controls on Real Estate Industry. The State Council on March 1, 2013 issued five policies and measures to regulate and
control the country's soaring real estate market, of which the most significant and also the most controversial point is that
20-percent individual income tax would be levied on capital gains by home sellers whose families own more than one apartment.
The
five policies and measures are designed to: 1) Improve and maintain the stability of house prices. Municipalities under the auspices
of central government, cities specifically designated in the State plan, and provincial capital cities excluding Lhasa must follow
the principle of maintaining basic price stability. They must also compile and publish annual new commercial house price control
targets and establish an effective system of accountability for assessing price stability; 2) Curb speculative investments seen
in the housing market and implement strict commercial housing purchase limitation measures. For those municipalities under the
auspices of the central government, cities specifically designated in the State plan and provincial capital cities that have already
implemented housing purchase limitation measures, they must improve limitation measures in the fields of housing areas, housing
types, and purchase qualification examinations according to the unified criteria. As for those cities where house prices continue
to rise too rapidly, provincial-level governments should request that local-level officials implement purchase limitation measures,
as well as enforce differential housing credit policies and expand the range of experimental areas for individual housing property
tax reform. An individual income tax of 20 percent would be levied on capital gains made by those home sellers whose families
own more than one apartment. 3) Increase the supply of ordinary commercial housing and land and accelerate the supply of land,
construction and listing of small- and medium-sized ordinary commercial housing projects, rapidly ensuring an effective supply.
In 2013, the total supply of land for housing is lower than the average supply over the past five years in principle. 4) Accelerate
the planning and construction of affordable housing projects and ensure the projects to build 4.7 million sets of affordable housing
and begin the construction of 6.3 million sets. Supporting facilities should be planned, constructed, and delivered for use within
the same time frame as the affordable housing projects. The entry and exit system should also be improved in order to ensure equal
distribution. By the end of 2013, prefecture-level cities and above must include into local housing guarantee coverage those migrant
workers who meet the requirements. 5) Strengthen market supervision. Strengthen the management of commercial housing sales in
advance, strictly implement a clear house price system, tighten enterprise credit management, and severely punish any illegal
behavior among intermediaries. The urban individual housing information system should also be promoted and, in addition, market
monitoring and publishing management should be strengthened.
The
State Council also emphasized the importance of accelerating the implementation of an enduring and effective mechanism to guide
the healthy development of the real estate market.
Interest
Rate and Inflation Challenges. We are subject to market risks due to fluctuations in interest rates and refinancing of
mid-term debt. Higher interest rates may also affect our revenues, gross profits and our ability to raise and service debt and
to finance our developments.
According
to the National Bureau of Statistics of China, China’s national inflation rate was 5.4% in 2011, 2.6% in 2012 and 2.6% in
2013. Inflation could result in increases in the price of raw materials and labor costs. We do not believe that inflation or deflation
has affected our business materially.
Acquisitions
of Land Use Rights and Associated Costs. We acquire land for development through the governmental auction process and
by obtaining land use rights from third parties through negotiation, acquisition of entities, co-development or other joint venture
arrangements.
Our
ability to secure sufficient financing for land use rights acquisitions and property development depends on internal cash flows
in addition to lenders’ perceptions of our credit reliability, market conditions in the capital markets, investors’
perception of our securities, the PRC economy and the PRC government regulations that affect the availability and cost of financing
real estate companies or property purchasers.
Significant
Accounting Policies
There have been no significant changes in
our critical accounting policies and estimates during the six months ended June 30, 2014 compared with those contained in
Item 7, “Management’s Discussion and Analysis of Financial Condition and Result of operations” included in our
Annual Report on Form 10-K for the year ended December 31, 2013.
Recently
Issued Accounting Pronouncements
The Company does not believe recently issued
but not yet effective accounting standards from ASU 2014-01 to ASU 2014-12, if currently adopted, would have a material effect
of the consolidated financial position, results of operation and cash flows.
Results
of Operations
Comparison
of Six and Three Months Ended June 30, 2014 and 2013
| |
Six Months Ended June 30, | |
Three Months Ended June 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
| |
| |
% of Revenue | |
| |
% of Revenue | |
| |
% of Revenue | |
| |
% of Revenue |
| |
| |
| |
| |
| |
| |
| |
| |
|
Revenue from real estate sales, net | |
$ | 47,641,831 | | |
| 100 | % | |
$ | 65,413,770 | | |
| 100 | % | |
$ | 40,229,654 | | |
| 100 | % | |
$ | 51,367,925 | | |
| 100 | % |
Cost of real estate sales | |
| 39,809,623 | | |
| 83.6 | % | |
| 57,523,380 | | |
| 87.9 | % | |
| 34,043,637 | | |
| 84.6 | % | |
| 45,053,693 | | |
| 87.7 | % |
Gross profit | |
| 7,832,208 | | |
| 16.4 | % | |
| 7,890,390 | | |
| 12.1 | % | |
| 6,186,017 | | |
| 15.4 | % | |
| 6,314,232 | | |
| 12.3 | % |
Selling expenses | |
| 1,665,126 | | |
| 3.5 | % | |
| 2,194,408 | | |
| 3.4 | % | |
| 885,298 | | |
| 2.2 | % | |
| 1,276,950 | | |
| 2.5 | % |
Operating and administrative expenses | |
| 4,619,838 | | |
| 9.7 | % | |
| 4,569,038 | | |
| 7.0 | % | |
| 1,894,335 | | |
| 4.7 | % | |
| 1,930,037 | | |
| 3.8 | % |
Income from operations | |
| 1,547,244 | | |
| 3.2 | % | |
| 1,126,944 | | |
| 1.7 | % | |
| 3,406,384 | | |
| 8.5 | % | |
| 3,107,245 | | |
| 6.0 | % |
Investment
income (Loss) | |
| 504,548 | | |
| 1.1 | % | |
| 115,238 | | |
| 0.2 | % | |
| (2,000 | ) | |
| 0.0 | % | |
| 694 | | |
| 0.0 | % |
Interest expense | |
| (2,522,177 | ) | |
| -5.3 | % | |
| (3,881,969 | ) | |
| -5.9 | % | |
| (1,191,059 | ) | |
| -3.0 | % | |
| (2,125,491 | ) | |
| -4.1 | % |
Total other expenses | |
| (2,017,629 | ) | |
| -4.2 | % | |
| (3,766,731 | ) | |
| -5.8 | % | |
| (1,193,059 | ) | |
| -3.0 | % | |
| (2,124,797 | ) | |
| -4.1 | % |
Income (loss) before income taxes expense | |
| (470,385 | ) | |
| -1.0 | % | |
| (2,639,787 | ) | |
| -4.0 | % | |
| 2,213,325 | | |
| 5.5 | % | |
| 982,448 | | |
| 1.9 | % |
Income taxes expense (benefit) | |
| 883,283
| | |
| 1.9 | % | |
| (280,123 | ) | |
| -0.4 | % | |
| 1,428,843
| | |
| 3.6
| % | |
| (120,999 | ) | |
| -0.2 | % |
Net income (loss) | |
$ | (1,353,668
| ) | |
| -2.8
| % | |
$ | (2,359,664 | ) | |
| -3.6 | % | |
$ | 784,482
| | |
| 2.0
| % | |
$ | 1,103,447 | | |
| 2.1 | % |
Our
net loss for the six months ended June 30, 2014 was $1.4 million, a decrease of $1.0 million, from net loss of $2.4 million for
the six months ended June 30, 2013. Net Loss decreased because of the following reasons: 1) in the first half year of 2014, Kirin
Bay Phase III and No.79 Courtyard Phase III became the main revenue resource and contributed most of the increased gross profit;
2) for the six months ended June 30, 2014, the interest expenses decreased substantially due to the interest income of
$2.5 million in the first half year of 2014; 3) in the first half year of 2014, the company received more investment income from
Xingtai Rural commercial bank.
Our net income for the three months ended June 30, 2014 was $0.8 million, a decrease of $0.3 million, from
net income of $1.1 million for the three months ended June 30, 2013. Net income decreased because in the three months ended June
30, 2014, the gross profit decreased by $0.1 million and income tax increased by $ 1.5 million, meanwhile, selling expense decreased
by $0.4 million, interest expense decreased by $0.9 million as compared with the same period ended June 30, 2013.
A
project’s revenue and cost estimates are of inherent nature of uncertainty throughout its multiple-year development period.
Factors that potentially affect a project’s total revenue and cost estimates (including a salable unit’s allocated
cost), include, but are not limited to: (1) changes in government’s land-use planning, building density, plot ratio and
other quotas; which lead to changes of total gross floor area available for sale and per-unit cost estimate; (2) the Company’s
voluntary modification of design to enhance attractiveness and competiveness of an on-going project; (3) fluctuation of commodity
prices and government-regulated labor cost rates; (4) contractors’ request to renegotiate consideration of fixed-price agreements,
for which the Company’s preference of complete the discussion early to avoid unfavorable impact on construction progress;
(5) unforeseeable geological and engineering difficulties causing modifications of a project’s construction plan; (6) government
agencies’ compliance inspections in the late stage of the construction, which may lead to modification of design; (7) major
prospective property buyers’ request to alter specifications of the property to be delivered; and (8) contractors’
claims throughout the construction period.
The
Company enters into non-cancellable, fixed-price pre-sale contracts with homebuyers. Under certain circumstances, for example,
changes in floor size or floor plan of a property due to legal compliance requirements, or change of deliverable standards upon
request of major customers, we may agree to revise the pre-sale contract price to match conditions of the properties to be delivered
to customers. Furthermore, the Company is subject to a penalty payable to homebuyers in the event the property is delivered later
than the date specified in the pre-sale contracts, and usually such penalty usually constitutes only an insignificant amount compared
to the contract value. These adjustments to contract price are recorded as reduction of revenue in the current period on a cumulative
catch-up basis.
With
regard to a project’s cost estimate, the Company’s in-house cost estimating staffs, work in collaboration with a committee
comprising the Company’s engineers, project managers, financial professionals, and senior management staff, prepare at least
two versions of cost estimate. The first version is Preliminary Cost Estimate, prepared in schematic design stage, which is before
commencement of excavation and recognition of revenue. Preliminary Cost Estimate utilizes top-down approach. It projects major
cost components at higher level using a project’s planned parameters (e.g., building density, by-category gross floor area)
and standard per-unit cost from past experience (e.g., concrete cost, measured at US$ per square meter). Preliminary Cost Estimate
is intrinsically less accurate; it heavily relies on the Company’s historical information accumulated in the development
of similar types of construction in similar municipal region. The second version is Detailed Cost Estimate, prepared after receiving
construction documents from the architect. Ideally Detailed Cost Estimate can be available before commencement of excavation and
recognition of revenue; however, in order to suit the pre-sale progress and to maximize flexibility, construction documents are
provided in several batches as the construction processes. It is likely that a project’s Detailed Cost Estimate is finalized
only in late stage of the construction. Detailed Cost Estimate utilizes bottom-up approach. Based on construction documents and
assisted by the Company’s computerized Building Information Modeling system, Detailed Cost Estimate is able to sum up cost
at element level of a real estate property, taking into consideration of quantitative consumption and on-going rate of materials,
labor, machinery and overheads. For the purpose of preparing the Company’s consolidated financial statements; a project’s
cost estimate is reviewed by in-house cost estimators at each year-end and adjusted for material developments in the interval.
Changes in estimates of a project’s revenue and cost of sales are recognized on a cumulative catch-up basis, which recognizes
in the current period the cumulative effect of the changes on current and prior periods based on a project’s percentage
of completion. When a project’s total cost estimate to be incurred exceeds total estimated revenue to be earned, a provision
for the entire loss on the project is recorded in the period the loss is determined. In addition to our existing monthly detailed
cost estimated upon receiving construction data from the architects, we have hired additional competent professionals to ensure
early identification of variances from prior estimated project revenue and cost, to reduce the likelihood of significant changes
to the estimates.
Revenues
and Gross Profit
| |
Six Months Ended June 30, | |
Three Months Ended June 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
| |
| |
% of Revenue | |
| |
% of Revenue | |
| |
% of Revenue | |
| |
% of Revenue |
| |
| |
| |
| |
| |
| |
| |
| |
|
Revenue from real estate, net | |
$ | 47,641,831 | | |
| 100 | % | |
$ | 65,413,770 | | |
| 100 | % | |
$ | 40,229,654 | | |
| 100 | % | |
$ | 51,367,925 | | |
| 100 | % |
-No.79 Courtyard (Phase I) | |
| 1,233,400 | | |
| 2.6 | % | |
| 28,019,787 | | |
| 42.8 | % | |
| 1,129,915 | | |
| 2.8 | % | |
| 18,361,814 | | |
| 35.7 | % |
-No.79 Courtyard (Phase II) | |
| 4,062,993 | | |
| 8.5 | % | |
| 7,353,693 | | |
| 11.2 | % | |
| 4,019,394 | | |
| 10.0 | % | |
| 7,353,693 | | |
| 14.3 | % |
-No.79 Courtyard (Phase III) | |
| 7,407,678 | | |
| 15.5 | % | |
| - | | |
| - | | |
| 6,588,736 | | |
| 16.4 | % | |
| - | | |
| - | |
-Kirin Bay (Phase I) | |
| 9,315,855 | | |
| 19.6 | % | |
| 14,053,998 | | |
| 21.5 | % | |
| 7,686,051 | | |
| 19.1 | % | |
| 10,381,880 | | |
| 20.2 | % |
-Kirin Bay (Phase II) | |
| 10,297,884 | | |
| 21.6 | % | |
| 14,646,799 | | |
| 22.4 | % | |
| 8,442,688 | | |
| 21.0 | % | |
| 14,646,799 | | |
| 28.5 | % |
-Kirin Bay (Phase III) | |
| 13,099,974 | | |
| 27.5 | % | |
| - | | |
| - | | |
| 10,494,516 | | |
| 26.1 | % | |
| - | | |
| - | |
-Kirin Bay (Phase IV) | |
| 1,278,529 | | |
| 2.7 | % | |
| - | | |
| - | | |
| 1,278,529 | | |
| 3.2 | % | |
| - | | |
| - | |
-Kirin County | |
| 720,713
| | |
| 1.5
| % | |
| 1,032,974 | | |
| 1.6 | % | |
| 516,681
| | |
| 1.3
| % | |
| 317,220 | | |
| 0.6 | % |
-Property Service | |
| 224,805
| | |
| 0.5 | % | |
| 306,519 | | |
| 0.5 | % | |
| 73,144
| | |
| 0.2
| % | |
| 306,519 | | |
| 0.6 | % |
Cost of real estate sales | |
| 39,809,623 | | |
| 83.6 | % | |
| 57,523,380 | | |
| 87.9 | % | |
| 34,043,637 | | |
| 84.6 | % | |
| 45,053,693 | | |
| 87.7 | % |
-No.79 Courtyard (Phase I) | |
| 889,853 | | |
| 1.9 | % | |
| 22,925,947 | | |
| 35.0 | % | |
| 801,594 | | |
| 2.0 | % | |
| 14,818,772 | | |
| 28.8 | % |
-No.79 Courtyard (Phase II) | |
| 4,112,603 | | |
| 8.6 | % | |
| 7,563,180 | | |
| 11.6 | % | |
| 4,089,983 | | |
| 10.2 | % | |
| 7,563,180 | | |
| 14.7 | % |
-No.79 Courtyard (Phase III) | |
| 4,571,593 | | |
| 9.6 | % | |
| - | | |
| - | | |
| 3,933,768 | | |
| 9.8 | % | |
| - | | |
| - | |
-Kirin Bay (Phase I) | |
| 7,931,307 | | |
| 16.6 | % | |
| 13,256,967 | | |
| 20.3 | % | |
| 7,392,101 | | |
| 18.4 | % | |
| 9,658,765 | | |
| 18.8 | % |
-Kirin Bay (Phase II) | |
| 9,396,763 | | |
| 19.7 | % | |
| 12,478,517 | | |
| 19.1 | % | |
| 7,682,018 | | |
| 19.1 | % | |
| 12,478,517 | | |
| 24.3 | % |
-Kirin Bay (Phase III) | |
| 10,386,022 | | |
| 21.8 | % | |
| - | | |
| - | | |
| 8,324,260 | | |
| 20.7 | % | |
| - | | |
| - | |
-Kirin Bay (Phase IV) | |
| 1,140,090 | | |
| 2.4 | % | |
| - | | |
| - | | |
| 1,140,090 | | |
| 2.8 | % | |
| - | | |
| - | |
-Kirin County | |
| 1,112,658 | | |
| 2.3 | % | |
| 1,087,956 | | |
| 1.7 | % | |
| 535,121 | | |
| 1.3 | % | |
| 323,646 | | |
| 0.6 | % |
-Property Service | |
| 268,734 | | |
| 0.6 | % | |
| 210,813 | | |
| 0.3 | % | |
| 144,702 | | |
| 0.4 | % | |
| 210,813 | | |
| 0.4 | % |
Gross profit | |
| 7,832,208 | | |
| 16.4 | % | |
| 7,890,390 | | |
| 12.1 | % | |
| 6,186,017 | | |
| 15.4 | % | |
| 6,314,232 | | |
| 12.3 | % |
-No.79 Courtyard (Phase I) | |
| 343,547 | | |
| 0.7 | % | |
| 5,093,840 | | |
| 7.8 | % | |
| 328,321 | | |
| 0.8 | % | |
| 3,543,042 | | |
| 6.9 | % |
-No.79 Courtyard (Phase II) | |
| (49,610 | ) | |
| -0.1 | % | |
| -209,487 | | |
| -0.3 | % | |
| -70,589 | | |
| -0.2 | % | |
| -209,487 | | |
| -0.4 | % |
-No.79 Courtyard (Phase III) | |
| 2,836,085 | | |
| 6.0 | % | |
| - | | |
| - | | |
| 2,654,968 | | |
| 6.6 | % | |
| - | | |
| - | |
-Kirin Bay (Phase I) | |
| 1,384,548 | | |
| 2.9 | % | |
| 797,031 | | |
| 1.2 | % | |
| 293,950 | | |
| 0.7 | % | |
| 723,115 | | |
| 1.4 | % |
-Kirin Bay (Phase II) | |
| 901,121 | | |
| 1.9 | % | |
| 2,168,282 | | |
| 3.3 | % | |
| 760,670 | | |
| 1.9 | % | |
| 2,168,282 | | |
| 4.2 | % |
-Kirin Bay (Phase III) | |
| 2,713,952 | | |
| 5.7 | % | |
| - | | |
| - | | |
| 2,170,256 | | |
| 5.4 | % | |
| - | | |
| - | |
-Kirin Bay (Phase IV) | |
| 138,439 | | |
| 0.3 | % | |
| - | | |
| - | | |
| 138,439 | | |
| 0.3 | % | |
| - | | |
| - | |
-Kirin County | |
| (391,945
| ) | |
| -0.8
| % | |
| -54,982 | | |
| -0.1 | % | |
| (18,440
| ) | |
| 0.0
| % | |
| -6,426 | | |
| -0.0 | % |
-Property Service | |
| (43,929
| ) | |
| -0.1
| % | |
| 95,706 | | |
| 0.1 | % | |
| (71,558
| ) | |
| -0.2
| % | |
| 95,706 | | |
| 0.2 | % |
Profit margin | |
| 16.4 | % | |
| | | |
| 12.1 | % | |
| | | |
| 15.4 | % | |
| | | |
| 12.3 | % | |
| | |
-No.79 Courtyard (Phase I) | |
| 27.9 | % | |
| | | |
| 18.2 | % | |
| | | |
| 29.1 | % | |
| | | |
| 19.3 | % | |
| | |
-No.79 Courtyard (Phase II) | |
| -1.2 | % | |
| | | |
| -2.8 | % | |
| | | |
| -1.8 | % | |
| | | |
| -2.8 | % | |
| | |
-No.79 Courtyard (Phase III) | |
| 38.3 | % | |
| | | |
| - | | |
| | | |
| 40.3 | % | |
| | | |
| - | | |
| | |
-Kirin Bay (Phase I) | |
| 14.9 | % | |
| | | |
| 5.7 | % | |
| | | |
| 3.8 | % | |
| | | |
| 7.0 | % | |
| | |
-Kirin Bay (Phase II) | |
| 8.8 | % | |
| | | |
| 14.8 | % | |
| | | |
| 9.0 | % | |
| | | |
| 14.8 | % | |
| | |
-Kirin Bay (Phase III) | |
| 20.7 | % | |
| | | |
| - | | |
| | | |
| 20.7 | % | |
| | | |
| - | | |
| | |
-Kirin Bay (Phase IV) | |
| 10.8 | % | |
| | | |
| - | | |
| | | |
| 10.8 | % | |
| | | |
| - | | |
| | |
-Kirin County | |
| -54.4
| % | |
| | | |
| -5.3 | % | |
| | | |
| -3.6
| % | |
| | | |
| -2.0 | % | |
| | |
-Property Service | |
| -19.5
| % | |
| | | |
| 31.2 | % | |
| | | |
| -97.8
| % | |
| | | |
| 31.2 | % | |
| | |
Revenue
from Real Estate, net. Real estate sales represent revenue from the pre-sale of properties under development. For the
six months and three months ended June 30, 2014 and 2013, revenue was derived from the pre-sale of No.79 Courtyard (Phase I, Phase
II, and Phase III), Kirin Bay (Phase I, Phase II, Phase III and Phase IV) and Kirin County (including adjacent shopping arcade)
and property service. Under the percentage-of-completion method, revenue is the percentage of completed construction at a point
in time is multiplied by total value of contracts signed up to that same point.
Our revenue from the pre-sale of real estate
properties for the six months ended June 30, 2014 was $47.6 million, a decrease of $17.8 million, or approximately 27.2%, compared
to $65.4 million for the same period of year 2013. The revenue decreased mainly because of the revenue derived from No. 79 Courtyard
decreased by $22.7 million, meanwhile, the revenue of Kirin Bay increased by $5.3 million. The revenue of No. 79 Courtyard decreased
for the six months ended June 30, 2014 as compared to the same period ended June 30, 2013 due from the following two reasons:
1) As announced by Housing and Construction Department of Hebei Province in September 2013, 15 Rules of Construction Dust Control
Regulation (‘Construction Dust Control Regulation’) is applied for construction industry since October 1, 2013 in
Hebei Province of People’s Republic of China. According to the Construction Dust Control Regulation, all construction sites
in urban area must be closed when the weather condition is not favorable as a result of the construction dust. No. 79 Courtyard
is located in urban area of Xingtai City, Hebei province, as a result of the Construction Dust Control Regulation, No. 79 Courtyard
was not permitted by local government to return to work until March 25, 2014; 2) Phase I of No. 79 Courtyard was almost completed
in year 2013, the POC is 95.3% as of December 31, 2013, thus only $1.2 million revenue was recognized in the first half year of
2014, whilst $28.0 million was recognized in the first half year of 2013. Phase III of No. 79 Courtyard which started in the second
half year of 2013, generated $7.4 million revenue in the first half year of 2014.
Revenue
from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), Kirin Bay (Phase I),
Kirin Bay (Phase II), Kirin Bay (Phase III) and Kirin Bay (Phase IV) was $1.2 million, $4.1 million, $7.4 million, $9.3 million,
$10.3 million, $13.1 million and $1.3 million respectively, representing 2.6%, 8.5%, 15.5%, 19.6%, 21.6%, 27.5% and 2.7% of total
revenue earned in the six months ended June 30, 2014. For the six months ended June 30, 2014, Hebei Zhongding Property Service
Co., Ltd. began to provide property service and recognized revenue of $0.2 million.
Our revenue from the pre-sale of real estate
properties for the three months ended June 30, 2014 was $40.2 million, a decrease of $11.2 million, or approximately 21.7%, compared
to $51.4 million for the same period of year 2013. Revenue from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase
II), No.79 Courtyard (Phase III), Kirin Bay (Phase I), Kirin Bay (Phase II), Kirin Bay (Phase III) and Kirin Bay ( Phase IV) was
$1.1 million, $4.0 million, $6.6 million, $7.7 million, $8.4 million, $10.5 million and $1.3 million respectively, representing
2.8%, 10.0%, 16.4%, 19.1%, 21.0%, 26.1% and 3.2% of total revenue earned in the three months ended June 30, 2013.
Our revenue from the pre-sale of real estate
properties for the three months ended June 30, 2014 was $40.2 million, an increase of $32.9 million, compared to $7.4 million for
the three months ended March 31, 2014. The revenue increased because of the following reasons: (1) As announced by Housing and
Construction Department of Hebei Province in September 2013, 15 Rules of Construction Dust Control Regulation (‘Construction
Dust Control Regulation’) is applied for construction industry since October 1, 2013 in Hebei Province of People’s
Republic of China. According to the Construction Dust Control Regulation, all construction sites in urban area must be closed when
the weather condition is not favorable as a result of the construction dust, which mostly happens in winter. No. 79 Courtyard is
located in urban area of Xingtai City, Hebei province, No. 79 Courtyard was not permitted by local government to return to work
until March 25, 2014; (2) No construction of No. 79 Courtyard and Kirin Bay during the Chinese New Year holidays in the first quarter
of 2014. Therefore there was no significant revenue recognized on NO.79 Courtyard and Kirin Bay in the first quarter of 2014.
The
following tables set forth the percentage-of-completion (POC) by project for the period ended June 30, 2014 and 2013 and year
ended December 31, 2013 and 2012:
| |
As at June 30, 2014 | | |
As at December 31, 2013 | | |
As at June 30, 2013 | | |
As at December 31, 2012 | |
No.79 Courtyard Phase I | |
| 95.4 | % | |
| 95.3 | % | |
| 80.3 | % | |
| 65.5 | % |
No.79 Courtyard Phase II | |
| 70.2 | % | |
| 59.1 | % | |
| 25.6 | % | |
| - | |
No.79 Courtyard Phase III | |
| 62.9 | % | |
| 53.6 | % | |
| - | | |
| - | |
Kirin Bay Phase I | |
| 92.6 | % | |
| 85.0 | % | |
| 61.1 | % | |
| 56.1 | % |
Kirin Bay Phase II | |
| 74.1 | % | |
| 61.0 | % | |
| 42.8 | % | |
| - | |
Kirin Bay Phase III | |
| 40.2 | % | |
| 35.9 | % | |
| - | | |
| - | |
Kirin Bay Phase IV | |
| 9.9 | % | |
| - | | |
| - | | |
| - | |
Kirin County | |
| 98.3 | % | |
| 98.1 | % | |
| 97.5 | % | |
| 96.1 | % |
Kirin
Bay is a three-phase, master-planned community built on a land of approximately 660,000 square meters. Positioned as a mid-market
residential development, Kirin Bay also features kindergarten, a primary school, hotel, office buildings and apartments. As of
this Report, we have obtained necessary government approvals. For Kirin Bay (Phase I), we acquired Land Use Rights Certificates
(issued on July 7, 2011), Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued
on August 10, 2011), Work Commencement Permit (issued on September 29, 2011) and Pre-Sales Permit (issued on September 30, 2011;
for Kirin Bay (Phase II), we acquired Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit
(issued on July 31, 2012), Work Commencement Permit (issued on November 22, 2012) and Pre-Sales Permit (issued on March 26, 2013);
for Kirin Bay (Phase III), we obtained Construction Land Planning permit (issued on June 9, 2011), Construction Work Planning
Permit (issued on January 15, 2013), Work Commencement Permit (issued on March 26, 2013) and Pre-sales Permit (issued on September
18, 2013); and for Kirin Bay (Phase IV), we obtained Construction Land Planning permit (issued on June 9, 2011), Construction
Work Planning Permit (issued on September 22, 2013), Work Commencement Permit (issued on April 9, 2014) and Pre-sales Permit (issued
on May 27, 2014).
No.
79 Courtyard is positioned as a high-end residential development with some mixed commercial use, which covers a land of over 290,000
square meters and a total building area of approximately 520,000 square meters. As of this Report, we have obtained necessary
government approvals. For No.79 Courtyard (Phase I), we acquired Land Use Rights Certificate (issued on November 9, 2010), Construction
Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on September 1, 2011), Work Commencement
Permit (issued on November 2, 2011) and Pre-Sales Permit (issued on November 2, 2011); for No.79 Courtyard (Phase II), we acquired
Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on July 20, 2012), Work
Commencement Permit (issued on September 1, 2012) and Pre-Sales Permit (issued on September 27, 2012); and for No.79 Courtyard
(Phase III), we obtained Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued
on January 16, 2013), Work Commencement Permit (issued on April 3, 2013) and Pre-sales Permit (August 12, 2013).
We
bought the land use right of No. 79 Courtyard in 2007 and incurred land use right acquisition cost from year 2008 to 2011. We
also started the land cleanup preparation work such as the demolishment and relocation in 2010 and early 2011, which resulted
relevant cost as well. We also incurred cost related to the planning of the project as well as government levied tax and fees
prior to the fourth quarter of 2011.
We have obtained necessary government approvals, including Land Use Rights Certificates, Construction
Land Planning Permits, Construction Work Planning Permits, Work Commencement Permits and Pre-Sales Permits, for our No. 79 Courtyard
(Phase I, Phase II, Phase III and Phase IV) and Kirin Bay (Phase I, Phase II, Phase III and Phase IV). We also commenced to construct
Kirin County’s shopping arcade from year 2011, which is supposed to complement Kirin County project, and provide convenience
to the residents of Kirin County. However, due to the regional planning by the local authority, we have not obtain the Construction
Land Planning Permits in a timely manner so far, and therefore, the construction shopping arcade part of Kirin County, is suspended
temporarily from January 2012. We have communicated with the competent authority and received a notice called “Xingtai City
Administrative Notice of Punishment” from the competent authority. According to the Notice, the government will issue the
necessary approvals and permits for the shopping arcade in the near future, and we expect to receive the related permits in late
2014. 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 June 30, 2014 | | |
Cumulative Customer deposits collected as of June 30, 2014 | | |
Contract value of pre-sale for the six months ended June 30, 2014 | | |
Customer deposits collected for the six months ended June 30, 2014 | |
No.79 Courtyard Phase I | |
$ | 128,796 | | |
$ | 130,461 | | |
$ | 1,242 | | |
$ | 2,099 | |
No.79 Courtyard Phase II | |
| 37,521 | | |
| 37,167 | | |
| 289 | | |
| 2,609 | |
No.79 Courtyard Phase III | |
| 46,098 | | |
| 42,855 | | |
| 5,728 | | |
| 12,770 | |
No. 79 Courtyard Phase IV | |
| - | | |
| 3,403 | | |
| - | | |
| 1,880 | |
Kirin Bay Phase I | |
| 91,935 | | |
| 93,512 | | |
| 3,843 | | |
| 3,651 | |
Kirin Bay Phase II | |
| 65,135 | | |
| 63,469 | | |
| 5,576 | | |
| 10,097 | |
Kirin Bay Phase III | |
| 65,050 | | |
| 57,111 | | |
| 24,063 | | |
| 20,877 | |
Kirin Bay Phase IV | |
| 12,902 | | |
| 6,895 | | |
| 12,902 | | |
| 6,910 | |
Kirin County | |
| 108,546 | | |
| 116,671 | | |
| 797 | | |
| 832 | |
Cost of Real Estate Sales. Cost
of real estate sales consist of land use rights costs, construction and installation costs. Our costs of real estate sales for
the six months ended June 30, 2014 were $39.8 million, a decrease of $17.7 million, or approximately 30.8%, compared to $57.5 million
for the same period of year 2013. Our total cost of real estate sales decreased as a result of the decrease of the revenue derived
from No. 79 Courtyard, which decreased by $22.7 million in the first half year of 2014 as compared with the same period of year
2013.
Our costs of real estate sales for the
three months ended June 30, 2014 were $34.0 million, a decrease of $11.1 million, or approximately 24.4%, compared to $45.1 million
for the same period of year 2013. Our total cost of real estate sales decreased as a result of the decrease of the revuenue derived
from No. 79 Courtyard, which decreased by $14.0 million for the three months ended June 30, 2014 as compared with the same period
of year 2013.
Gross Profit Gross profit
was $7.8 million for the six months ended June 30, 2014, a decrease of $0.1 million, or approximately 0.7%, compared to gross profit
of $7.9 million for the same period of last year. Gross margin ratio was 16.4% for the six months ended June 30, 2014, an increase
of 4.3% as compared to the gross margin ratio of 12.1% for the same period of last year. The increase of gross margin ratio was
contributed by construction progress and sales of Kirin Bay Phase III and No.79 Courtyard Phase III, which have higher gross margin
ratio than other projects.
Gross income for the three months ended
June 30, 2014 was $6.2 million (gross income ratio: 15.4%), is nearly the same as compared with gross income of $6.3 million (gross
income ratio: 12.3%) for the same period of year 2013, due to the higher gross margin ratio of Kirin Bay Phase III and No.79 Courtyard
Phase III.
The
following tables set forth the aggregate Gross Floor Area (GFA) and the percentage-of-completion (POC) and Contract sold by project
for the six months ended June 30, 2014 and 2013:
| |
Total GFA | | |
POC cumulative accomplished
for the
six months
ended
June 30, | | |
Contract value of units sold for the six months ended June 30, | | |
Revenue recognized for the six months ended June 30, | |
| |
| | |
2014 | | |
2013 | | |
2014 | | |
2013 | | |
2014 | | |
2013 | |
No.79 Courtyard (Phase I) | |
| 130,067 | | |
| 95.4 | % | |
| 80.3 | % | |
$ | 1,241,795 | | |
$ | 17,952,106 | | |
$ | 1,233,400 | | |
$ | 28,019,787 | |
No.79 Courtyard (Phase II) | |
| 45,122 | | |
| 70.2 | % | |
| 25.6 | % | |
| 289,274 | | |
| 30,529,363 | | |
| 4,062,993 | | |
| 7,353,693 | |
No.79 Courtyard (Phase III) | |
| 47,960 | | |
| 62.9 | % | |
| - | | |
| 5,728,422 | | |
| - | | |
| 7,407,678 | | |
| - | |
Kirin Bay (Phase I) | |
| 163,652 | | |
| 92.6 | % | |
| 61.1 | % | |
| 3,842,813 | | |
| 18,111,455 | | |
| 9,315,855 | | |
| 14,053,998 | |
Kirin Bay (Phase II) | |
| 92,043 | | |
| 74.1 | % | |
| 42.8 | % | |
| 5,576,264 | | |
| 35,345,729 | | |
| 10,297,884 | | |
| 14,646,799 | |
Kirin Bay (Phase III) | |
| 131,384 | | |
| 40.2 | % | |
| - | | |
| 24,063,303 | | |
| - | | |
| 13,099,974 | | |
| - | |
Kirin Bay (Phase IV) | |
| 21,953 | | |
| 9.9 | % | |
| - | | |
| 12,901,598 | | |
| - | | |
| 1,278,529 | | |
| - | |
Kirin County | |
| 183,034 | | |
| 98.3 | % | |
| 97.5 | % | |
| 797,371 | | |
| 188,570 | | |
| 720,713 | | |
$ | 1,032,974 | |
Total | |
| 815,215 | | |
| | | |
| | | |
$ | 54,440,840 | | |
$ | 102,127,223 | | |
$ | 47,417,026 | | |
$ | 65,107,251 | |
The
following tables set forth the consolidated square meters sold and average selling price per square meter by each project for
the six months ended June 30, 2014 and 2013:
| |
Six Months Ended June 30, | |
| |
2014 | | |
2013 | |
| |
Contract Sales(1) | | |
Square Meters Sold(2) | | |
Average Selling Price(3) | | |
Contract Sales(1) | | |
Square Meters Sold(2) | | |
Average Selling Price(3) | |
No.79 Courtyard Phase I | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
$ | 822,694 | | |
| 545 | | |
$ | 1,510 | | |
$ | 14,604,719 | | |
| 13,538 | | |
$ | 1,079 | |
-commercial | |
| - | | |
| - | | |
| | | |
| 1,048,869 | | |
| 194 | | |
| 5,407 | |
-garage | |
| 419,101 | | |
| 657 | | |
| 638 | | |
| 2,298,518 | | |
| 3,631 | | |
| 633 | |
No.79 Courtyard Phase II | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-One elevator and four suites | |
| 184,133 | | |
| 143 | | |
| 1,288 | | |
| 28,943,560 | | |
| 35,510 | | |
| 815 | |
-Parking lots | |
| 105,141 | | |
| 72 | | |
| 1,460 | | |
| 1,585,803 | | |
| 1,284 | | |
| 1,235 | |
No.79 Courtyard Phase III | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 4,946,171 | | |
| 3,458 | | |
| 1,430 | | |
| - | | |
| - | | |
| - | |
-commercial | |
| 474,363 | | |
| 123 | | |
| 3,857 | | |
| - | | |
| - | | |
| - | |
-garage | |
| 307,888 | | |
| 281 | | |
| 1,096 | | |
| - | | |
| - | | |
| - | |
Kirin Bay Phase I | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 701,220 | | |
| 742 | | |
| 945 | | |
| 17,458,000 | | |
| 24,417 | | |
| 715 | |
-commercial | |
| 1,388,353 | | |
| 500 | | |
| 2,777 | | |
| | | |
| - | | |
| - | |
-garage | |
| 1,753,240 | | |
| 3,101 | | |
| 565 | | |
| 653,455 | | |
| 1,801 | | |
| 363 | |
Kirin Bay Phase II | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 5,228,198 | | |
| 4,180 | | |
| 1,251 | | |
| 34,675,837 | | |
| 35,671 | | |
| 972 | |
-garage | |
| 348,066 | | |
| 557 | | |
| 625 | | |
| 669,892 | | |
| 1,044 | | |
| 642 | |
Kirin Bay Phase III | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 23,369,411 | | |
| 25,994 | | |
| 899 | | |
| - | | |
| - | | |
| - | |
-commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
-garage | |
| 693,892 | | |
| 951 | | |
| 730 | | |
| - | | |
| - | | |
| - | |
Kirin Bay Phase IV | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 12,901,598 | | |
| 14,657 | | |
| 880 | | |
| - | | |
| - | | |
| - | |
-commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
-garage | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Kirin County | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
-commercial | |
| 632,563 | | |
| 794 | | |
| 797 | | |
| 102,662 | | |
| 77 | | |
| 1,333 | |
-garage | |
| 164,808 | | |
| 738 | | |
| 223 | | |
| 85,908 | | |
| 215 | | |
| 400 | |
Total | |
$ | 54,440,840 | | |
| 57,493 | | |
$ | 947 | | |
$ | 102,127,223 | | |
| 117,382 | | |
$ | 870 | |
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 June 30, 2014 and 2013:
| |
Three Months Ended June 30, | |
| |
2014 | | |
2013 | |
| |
Contract Sales(1) | | |
Square Meters Sold(2) | | |
Average Selling Price(3) | | |
Contract Sales(1) | | |
Square Meters Sold(2) | | |
Average Selling Price(3) | |
No.79 Courtyard Phase I | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
$ | 819,786 | | |
| 545 | | |
$ | 1,504 | | |
$ | 5,587,059 | | |
| 4,428 | | |
$ | 1,262 | |
-commercial | |
| - | | |
| - | | |
| - | | |
| 711,367 | | |
| 117 | | |
| 6,029 | |
-garage | |
| 286,745 | | |
| 339 | | |
| 848 | | |
| 1,135,742 | | |
| 1,759 | | |
| 646 | |
No.79 Courtyard Phase II | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-One elevator and four suites | |
| 183,716 | | |
| 143 | | |
| 1,285 | | |
| 28,943,560 | | |
| 35,510 | | |
| 815 | |
-Parking lots | |
| - | | |
| - | | |
| - | | |
| 1,585,803 | | |
| 1,284 | | |
| 1,235 | |
No.79 Courtyard Phase III | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 3,467,427 | | |
| 2,240 | | |
| 1,548 | | |
| - | | |
| - | | |
| - | |
-commercial | |
| 329,554 | | |
| 89 | | |
| 3,703 | | |
| - | | |
| - | | |
| - | |
-garage | |
| 96,249 | | |
| 86 | | |
| 1,119 | | |
| - | | |
| - | | |
| - | |
Kirin Bay Phase I | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 357,204 | | |
| 380 | | |
| 940 | | |
| 16,047,034 | | |
| 22,547 | | |
| 712 | |
-commercial | |
| 1,388,353 | | |
| 500 | | |
| 2,777 | | |
| - | | |
| - | | |
| - | |
-garage | |
| 292,269 | | |
| 553 | | |
| 529 | | |
| 268,199 | | |
| 713 | | |
| 376 | |
Kirin Bay Phase II | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 3,348,954 | | |
| 2,857 | | |
| 1,172 | | |
| 34,675,837 | | |
| 35,671 | | |
| 972 | |
-garage | |
| 237,255 | | |
| 372 | | |
| 638 | | |
| 669,892 | | |
| 1,044 | | |
| 642 | |
Kirin Bay Phase III | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 18,955,468 | | |
| 21,180 | | |
| 895 | | |
| - | | |
| - | | |
| - | |
-commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
-garage | |
| 371,125 | | |
| 516 | | |
| 719 | | |
| - | | |
| - | | |
| - | |
Kirin Bay Phase IV | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| 12,901,598 | | |
| 14,657 | | |
| 880 | | |
| - | | |
| - | | |
| - | |
-commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
-garage | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Kirin County | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
-residential | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
-commercial | |
| 529,591 | | |
| 678 | | |
| 781 | | |
| 18,491 | | |
| 45 | | |
| 411 | |
-garage | |
| 49,995 | | |
| 254 | | |
| 197 | | |
| 58,863 | | |
| 140 | | |
| 420 | |
Total | |
$ | 43,615,289 | | |
| 45,389 | | |
$ | 961 | | |
$ | 89,701,847 | | |
| 103,258 | | |
$ | 869 | |
(1) |
This
column reflects the aggregate amount of all contracts entered into as of the end of the applicable period. |
(2) |
This column reflects
the total square meters sold during the applicable period. |
(3) |
This
column reflects the average price per square meter for all properties sold during the applicable period. |
Operating Expenses. Operating
expenses for the six months ended June 30, 2014 were 6.3 million, a decrease of $0.5 million, or 7.1%, from $6.8 million for the
six months ended June 30, 2013. The decrease was because our administration expenses decreased by $0.8 million and advertising
expenses decreased by $0.2 million, meanwhile, overall operating expenses in staff salaries increased by $0.1 million and professional
fee increased by $0.4 million for the six months ended June 30, 2014 as compared to the same period of year 2013.
Operating expenses for the three months ended June 30, 2014
were $2.8 million, a decrease of $0.4 million, or 13.3%, from $3.2 million for the three months ended June 30, 2013.
We
expect our selling and marketing expenses to increase in the near future in connection with pre-sale and construction of Kirin
Bay and No.79 Courtyard’s new phases and development of new projects.
| |
Six Months Ended June 30, | |
Three Months Ended June 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
| |
| |
% of Expenses | |
| |
% of Expenses | |
| |
% of Expenses | |
| |
% of Expenses |
Operating expenses | |
$ | 6,284,964 | | |
| 100 | % | |
$ | 6,763,446 | | |
| 100 | % | |
$ | 2,779,633 | | |
| 100 | % | |
$ | 3,206,987 | | |
| 100 | % |
Selling expenses | |
| 1,665,126 | | |
| 26.5 | % | |
| 2,194,408 | | |
| 32.4 | % | |
| 885,298 | | |
| 31.8 | % | |
| 1,276,950 | | |
| 39.8 | % |
Advertising expense | |
| 997,724 | | |
| 15.9 | % | |
| 1,218,095 | | |
| 18.0 | % | |
| 517,761 | | |
| 18.6 | % | |
| 817,385 | | |
| 25.5 | % |
Staff salaries | |
| 218,659 | | |
| 3.5 | % | |
| 414,779 | | |
| 6.1 | % | |
| 136,880 | | |
| 4.9 | % | |
| 225,123 | | |
| 7.0 | % |
Office and Administrative expenses | |
| 448,743 | | |
| 7.1 | % | |
| 561,534 | | |
| 8.3 | % | |
| 230,657 | | |
| 8.3 | % | |
| 234,442 | | |
| 7.3 | % |
General and administrative expenses | |
| 4,619,838 | | |
| 73.5 | % | |
| 4,569,038 | | |
| 67.6 | % | |
| 1,894,335 | | |
| 68.2 | % | |
| 1,930,037 | | |
| 60.2 | % |
Staff salaries | |
| 1,740,919 | | |
| 27.7 | % | |
| 1,422,701 | | |
| 21.0 | % | |
| 770,005 | | |
| 27.7 | % | |
| 708,796 | | |
| 22.1 | % |
Professional expenses | |
| 1,720,795 | | |
| 27.4 | % | |
| 1,287,042 | | |
| 19.0 | % | |
| 499,279 | | |
| 18.0 | % | |
| 701,876 | | |
| 21.9 | % |
Office and Administrative expenses | |
| 1,158,124 | | |
| 18.4 | % | |
| 1,859,295 | | |
| 27.5 | % | |
| 625,051 | | |
| 22.5 | % | |
| 519,365 | | |
| 16.2 | % |
● |
Advertising Expenses. Our advertising
expenses decreased from $1.2 million for the six months ended June 30, 2013 to $1.0 million for the same period of year 2014. The
advertising expenses contained marketing facilities, advertisement fee, promotion fee and sales agency fee. The decrease of the
revenue derived from No. 79 Courtyard resulted in the decrease of $0.1 million of the sales agency fee.
Our advertising expenses decreased from $0.8 million for the three months ended June 30, 2013 to $0.5 million
for the same period of year 2014, also is a result of the decrease of revenue derived from No. 79 Courtyard.
|
● |
Staff
Salaries. For the six months ended June 30, 2014 and 2013 our selling and administrative staff expenses were $2.0
million and $1.8 million respectively. This increase is mostly related to more sales champion for our No.79 Courtyard
and Kirin Bay projects. As we gradually increase the scope and size of our projects, there is an increasing demand for
more administrative and sales staff necessary for meeting satisfactory operation standards. We also recruited several
professional managers to help with project management and sales.
For
the three months ended June 30, 2014 and 2013 our selling and administrative staff expenses were $0.9 million and $0.9 million
respectively.
|
● |
Office
and Administrative Expenses. Office and administrative expenses decreased from $2.4 million for the six months ended
June 30, 2013 to $1.6 million for the six months ended June 30, 2014, that’s because the Company recorded tax expense
for prior years in the first quarter of 2013.
Office and administrative expenses increased slightly from $0.8 million to $0.9 million for the three months
ended June 30, 2013 to 2014.
|
Interest
Expense. Our interest expense was $2.5 million for the six months ended June 30, 2014, a decrease of $1.4 million, or 35.0%,
from $3.9 million for the same period of year 2013. Our interest expense was $1.2 million for the three months ended June 30,
2014, a decrease of $0.9 million, or 44.0%, from $2.1 million for the same period of year 2013. The decrease was primarily due
to the interest income of $2.4 million in the first half year of 2014 and interest income of $1.2 million for the three months
ended June 30, 2014.
Income Taxes. Income taxes
expense for the six months ended June 30, 2014 totaled $0.9 million, an increase of $1.2 million or 415.3% from income taxes
benefit of $0.3 million for the six months ended June 30, 2013. Income taxes expense for the three months ended June 30, 2014
totaled $1.4 million, an increase of $1.5 million from income taxes benefit of $0.1 million for the three months ended June
30, 2013. The increase was mainly due to less loss before income tax was generated in year 2014 as compared with the same
period of year 2013.
Net Loss/Income. Net loss
for the six months ended June 30, 2014 was $1.4 million, a decrease of $1.0 million, from net loss of $2.4 million for the six
months ended June 30, 2013. Net Loss decreased because of the following reasons: 1) in the first half year of 2014, Kirin Bay Phase
III and No.79 Courtyard Phase III became the main revenue resource and contributed most of the increased gross profit; 2) for the
six months ended June 30, 2014, the interest expenses decreased substantially due to the interest income of $2.5 million in the
first half year of 2014; 3) in the first half year of 2014, the company received more investment income from Xingtai Rural commercial
bank.
Our net income for the three months
ended June 30, 2014 was $0.8 million, a decrease of $0.3 million, from net income of $1.1 million for the three months ended June
30, 2013. Net income decreased because in the three months ended June 30, 2014, the gross profit decreased by $0.1 million and
income tax increased by $ 1.5 million, meanwhile, selling expense decreased by $0.4 million, interest expense decreased by $0.9
million as compared with the same period ended June 30, 2014.
Liquidity
and Capital Resources
The
following table sets forth a summary of our cash flows for the periods indicated:
| |
Six Months Ended June 30, |
| |
2014 | |
2013 |
Net cash generated from (used in)
operating activities | |
$ | (15,512,537
| ) | |
$ | 5,032,698 | |
Net cash provided by investing activities | |
| 10,176,683
| | |
| 6,878,024 | |
Cash flows provided by financing activities | |
| 2,929,635 | | |
| 10,583,428 | |
Effect of exchange rate changes on cash and cash equivalent | |
| (282,048 | ) | |
| 660,611 | |
Net increase(decrease) in cash and cash equivalents | |
| (2,688,267 | ) | |
| 23,154,761 | |
Cash and cash equivalents - beginning of period | |
| 23,407,551 | | |
| 24,098,688 | |
Cash and cash equivalents - end of period | |
| 20,719,284 | | |
| 47,253,449 | |
We had a balance of cash and cash equivalents
of $20.7 million as of June 30, 2014 compared with a balance $47.3 million as of June 30, 2013. We have historically funded our
working capital needs through advance payments from customers and bank borrowings. Our working capital requirements are influenced
by the state and level of our operations, and the timing of capital needed for projects.
Operating Activities.
Net cash outflow from operating activities was $15.5 million for the six months ended June 30, 2014, compared to net cash provided
from operating activities of $5.0 million for the six months ended June 30, 2013, an increase of $20.5 million in cash outflow.
The increase in net cash flows used in operating activities was primarily due to the following:
● |
We received $7.2 million from customers as
down payments and subsequent installments (combination of revenue in excess of billings and customer deposits) in the six months
ended June 30, 2014, compared to $31.2 million received in the six months ended June 30, 2013, which led to a $24.0 million decrease
in net cash inflow from operating activities;
|
● |
We invested $2.0 million in real properties
and land lots under development (combination of accounts payable) in the six months ended June 30, 2014. In the same period of
2013, we saved $6.2 million on our projects in the six months ended June 30, 2013. This accounted for $8.2 million increase in
the net cash outflow from operating activities;
|
●
|
Changes
in other receivable provided $24.5 million cash outflow for the six months ended June 30, 2014. In the same period of
2013, changes in other receivable contributed $9.9 million cash outflow, which led to a $14.6 million increase in net
cash outflow from operating activities.
|
● |
Changes in other
payable provided $5.7 million cash inflow for the six months ended June 30, 2014. In the same period of 2013, changes
in other payable contributed $1.9 million cash outflow, which led to a $7.6 million increase in net cash inflow from operating
activities. |
● |
Changes in Prepayment (combination of
Receivable from a trust equity owner) provided $1.8 million cash outflow for the six months ended June 30, 2014. In the same period
of 2013, changes in prepayment contributed $11.6 million cash outflow, which led to a $9.8 million decrease in net cash outflow
from operating activities.
|
● |
Changes
in Restricted cash contributed $1.5 million cash inflow for the six months ended June 30, 2014. In the same period of 2013, changes
in restricted cash provided $5.4 million cash outflow, which led to a $6.9 million increase net cash inflow from operating activities. |
Investing
Activities. Net cash inflow provided by investing activities was $10.2 million for the six months ended June 30, 2014,
compared to net cash inflow of $6.9 million provided from investing activities for the six months ended June 30, 2013, represented
an increase of $3.3 million.
Financing Activities.
Net cash inflow from financing activities was $2.9 million for the six months ended June 30, 2014, compared to $10.6 million cash
inflows for the six months ended June 30, 2013, a decrease of cash inflows of $7.7 million. This was mainly due to repayment of
financial institution loan of $26.4 million and $12.0 million for the six months ended June 30, 2014 and 2013 respectively, meanwhile,
we received financial institution loan of $29.3 million and $22.4 million for the six months ended June 30, 2014 and 2013, respectively.
Contractual
Obligations
Long-term
debt obligations, costs of land use rights and non-cancellable construction contract obligations for the six months ended of June
30, 2014.
| |
Payments due by period | |
| |
| | |
less than | | |
1-3 | |
in thousands of US Dollars | |
Total | | |
1 year | | |
years | |
Loans payable | |
$ | 91,755 | | |
$ | 52,779 | | |
$ | 38,976 | |
Costs of land use rights | |
| 3,802 | | |
| 3,802 | | |
| - | |
Non-cancellable construction contract obligations | |
| 85,989 | | |
| 85,508 | | |
| 481
| |
Total | |
| 181,546 | | |
| 142,089 | | |
| 39,457 | |
Customers’
down payments and installments provide a significant portion of our cash inflows. We may also acquire additional cash by raising
funds through new borrowings, refinancing of existing borrowings, public or private sales of equity securities, or a combination
of one or more of the above; however, there can be no absolute assurance that our internally generated cash flows and external
financing will be sufficient to meet our contractual and financing obligations in a timely manner.
As
of June 30, 2014, we entered into non-cancellable agreements with several suppliers for our on-going business of constructing
residential and commercial properties. The total amount we committed to pay contractors as outlined in these non-cancellable construction
agreements aggregates approximately $86.0 million.
Material
Financial Obligations
Loans
Payable
As
of June 30, 2014 our total loan balance was $91.8 million.
● |
In
August 2012 one of the wholly-owned subsidiaries of our variable interest entity, XingtaiZhongding
Kirin Real Estate Development Co., Ltd., entered into a long-term loan contract totaling
RMB 150,000,000 (approximately $24,360,000) with XingtaiChengjiao Rural Credit Cooperative
Union Association. The loan provides terms ranging from maximums of 18 to 24 months and
is designated for propagating the development of the Kirin Bay Project. The loan is collateralized
with the Kirin Bay land use rights. As of June 30, 2014, these loans’ effective
interest rate was 11.38% per annum. The company repaid RMB 95,000,000 to the financial
institution in the first half of 2014. As of June 30, 2014, the balance of loan is RMB
55,000,000 (approximately 8,932,000).
|
● |
On
September 17, 2012, one of the wholly-owned subsidiaries of our variable interest entity,
HebeiZhongding Real Estate Development Co., Ltd. entered into a loan contract with Industrial
and Commercial Bank of China, XingtaiYejin branch for a series of loans with a maximum
principle amount of RMB180,000,000 (approximately $29,200,000). These loans were collateralized
by partial of the Company’s No. 79 Courtyard land use rights and properties under
development, due in several installments through January 31, 2014 to September 18, 2015,
and borne an annual interest rate of 9.225%. The company repaid RMB 3,000,000 on December
27, 2013 and RMB 47,000,000 in the first half year of 2014 to the financial institution.
As of June 30, 2014, the balance of loan is RMB 130,000,000 (approximately $21,112,000).
|
● |
In
December 2013, one of the wholly-owned subsidiaries of our variable interest entity XingtaiZhongding
Kirin Real Estate Development Co., Ltd. entered into a loan contract to totaling RMB
30,000,000 (approximately $4,872,000) with Kong Village Committee with 6 to 9 months
term, with an interest rate of 14.4% per annum. This loan is not collateralized.
|
● |
On
April 25, 2014, one of our group companies, XingtaiZhongding Kirin Real Estate Development
Co., Ltd entered into a loan contract with Xingtai Rural Commercial Bank with amount
of RMB 20,000,000 (approximately $3,248,000) through HebeiYouerma Business Service Co.,Ltd
(a third party company). This loan was credit loan, and borne an annual effective interest
rate of 12.56%. The principal amount of the loan is due on April 24, 2015.
|
● |
On
May 15, 2013, HebeiZhongding Real Estate Development Co., our subsidiary, entered into
a loan contract with Industrial and Commercial Bank of China, XingtaiYejin Branch for
a series of loans with a maximum principle amount of RMB270,000,000 (approximately $43,800,000).
These loans were partially collateralized by the Company’s No. 79 Courtyard land
use, and borne an annual effective interest rate of 9.84%. As of June 30, 2014, the Company
has drawn RMB 260,000,000 (approximately $42,224,000) from the bank. The term of the
loan is for 36 months, which will start from the actual withdrawal date. RMB 70,000,000
shall be repaid by January 30, 2014. RMB 50,000,000 shall be repaid by March 30, 2015.
RMB 50,000,000 shall be repaid by January 30, 2016. RMB 50,000,000 shall be repaid by
May 30, 2016. The subsidiary agreed to pay RMB 3,800,000 to the lender as a financing
service charge under the loan.
|
● |
On
May 13, 2014, HebeiZhongding Real Estate Development Co., Ltd, our subsidiary, entered
into a loan contract totaling RMB 50,000,000 (approximately $8,120,000) with HebeiXingtai
Rural Commercial Bank, the loan is collateralized with the properties under development,
and borne an annual effective interest rate of 7.2%. The principal amount of the loan
is due on May 8, 2015.
|
● |
On
June 28, 2014, Cathay Kirin (Beijing) Garden construction Co.,Ltd, our subsidiary, entered into a loan contract totaling RMB
20,000,000 (approximately 3,248,000) with HebeiXingtai Rural Commercial Bank, the loan is credit loan, and borne an annual
effective interest rate 11.4%. The principal amount of the loan is due on June 26, 2015. |
Related
Party Transactions and Balances
(1)
Loan to a related party
In
August 2013, Kirin entered into a loan agreement with Huaxia Huifeng Ventures Capital Management (Beijing) Co., Ltd. (“Huaxia
Huifeng”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and
the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to Huaxia Huifeng for $35,953,000. On October
15, 2013, the Company signed a supplement loan agreement in amount of $27,610,000 (RMB 170,000,000) which bears 18% interest rate
and has a term of one year.
As
of June 30, 2014, the balance of the loan to Huaxia Huifeng was $35,433,618 (RMB 196,560,000 for original loan and RMB 21,629,589
for interest income).
(2)
Government grant escrowed by Business Investment
In
2008, a VIE of the Company, Xingtai Zhongding, was entitled to a government grant associated with its development of Kirin County
project of RMB 160,000,000 ($22,981,000, translated at historical exchange rate). Cash representing the grant has been remitted
to Business Investment, a trust equity owner of Xingtai Zhongding in June 2008. Business Investment originally acquired the land
use rights of Kirin County project, and contributed the land use rights to Xingtai Zhongding as paid-in capital to develop the
project. Based on the arrangement between Business Investment and Xingtai Zhongding, which has been sanctioned by local government,
the benefit of the government grant is to be transferred from Business Investment to Xingtai Zhongding. Specifically, Business
Investment acts as an escrow agent but also is nominally responsible for Xingtai Zhongding’s progress. Earned portions of
the government grant become available to Xingtai Zhongding based on percentage of completion.
For
the years ended December 31, 2012, 2011, 2010 and 2009, XingtaiZhongding was entitled to receive RMB 2,800,000, RMB 43,000,000,
RMB 63,000,000, and RMB 51,200,000, respectively ($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at
respective years’ historical rates) earned government grant from Business Investment, representing total amount of the government
grant. The Company has the right to determine how to utilize the earned government grant. As at June 30, 2014 and December 31,
2013, accumulated earned government grant of RMB 160,000,000 and RMB160,000,000 ($25,983,728 and $26,169,447, translated at respective
years’ historical rates) was used to repay working capital provided by JianfengGuo for the support of other real estate
projects’ development.
(3)
Working capital provided by Jianfeng Guo
Jianfeng
Guo, the controlling stockholder of the Company, through various affiliate companies and individuals, provides working capital
to the VIEs (hereafter, including subsidiaries of VIEs) of the Company. In addition to repaying borrowings directly, the Company’s
VIEs may also provide working capital to affiliate companies and individuals as designated by Jianfeng Guo. Balances received
or provided by the Company’s VIEs are unsecured, interest-free and did not have specific repayment dates.
At
each balance sheet date, affiliate companies and individuals who have working capital transactions with the Company’s VIEs
assigned their balances to Jianfeng Guo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered
into between Jianfeng Guo, related affiliate companies and individuals, and the Company’s VIEs. Xingtai Zhongding also chooses
to use its accumulated government grant receivable from Business Investment, to repay working capital provided by Jianfeng Guo.
As at June 30, 2014 and December 31, 2013, the working capital provided by Jianfeng Guo was RMB 142,529,029 and RMB 134,029,025
($23,146,472 and $21,921,659 translated at respective historical rates). Accordingly, the Company is entitled to present netted
balance with Jianfeng Guo on its consolidated balance sheets.
Gross
amount of working capital provided by and to affiliate companies and individuals designated by JianfengGuo as at June 30, 2014
and December 31, 2013 were as follows:
| |
June
30, | | |
December
31, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
| |
Gross
of working capital received from affiliate companies and individuals designated by Jianfeng Guo | |
$ | (41,894,040 | ) | |
$ | (41,521,029 | ) |
Gross
of working capital provided to affiliate companies and individuals designated by Jianfeng Guo | |
| 18,747,568 | | |
| 19,599,370 | |
Working
capital provided by Jianfeng Guo in total | |
| (23,146,472 | ) | |
| (21,921,659 | ) |
Gross earned
government grant held by a related party | |
| 25,983,728 | | |
| 26,169,447 | |
Receivable
from a related party | |
$ | 2,837,256 | | |
$ | 4,247,788 | |
(4) Short-term
Loans to Related party
As
of December 31, 2013, the ending balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these
are all wired to five related companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies
are ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of
Kirin.
On
December 30, 2013, Hebei Zhongding entered into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing
Cathay Kirin Assets Management Company and Beijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000.
On December 30, 2013, Business Service entered into loan agreements with Beijing Cathay Kirin Hospitality Management Company,
and Cathay Brother (Beijing) Investment Management Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000,
respectively. The maturity date of the loan agreements is January 2, 2014. On January 2, 2014 the Company received RMB 74,900,000
short-term loans from related party companies.
(5)
Prepayment to related party
Please see
financial statements Note 7 – Prepayments
Relocation
Program of Kong Village
Local
government did not have enough funds to pay for the relocation and new accommodations of Kong Village’s residents prior
to the sale of the village’s land-use right. Consequently, the Company funded the local government by building new complexes
and compensating and accommodating the villagers for and during the relocation. The government will repay our costs (a form of
financing provided to government) when it sells the land use rights on which the previous villagers were removed. In exchange
for such financing, the Company is assured the vacated land use right in public auction; (we will be refunded according to the
sale price of the land so the bidding process is noncompetitive). We will construct 1,818 units for Kong Village, or about 280,000
square meters in housing. We will get repaid as the parcels of land use rights are sold. We will attend all the auction and bidding
process and acquire the vacated land.
Off-Balance
Sheet Arrangements
We
do not have any off balance sheet arrangements.
Recently
Issued Accounting Pronouncements
FASB
issued several ASUs during the period, which are not expected to have a material impact on the consolidated financial statements
upon adoption.
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk. |
Smaller
reporting companies are not required to provide the information required by this item.
Item
4. |
Controls
and Procedures. |
Evaluation
of Disclosure Controls and Procedures
Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Company carried out
an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer
(“CEO”) (the Company’s principal executive officer) and Chief Financial Officer (“CFO”) (the Company’s
principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as
defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation,
for the reasons set forth below, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures
were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or
submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s
CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not
be prevented or detected on a timely basis. For the material weaknesses described below, management concluded that our internal
controls over financial reporting were not effective as of June 30, 2014.
● |
We
do not have a functional audit committee; and |
● |
We
have substantial related party transactions and have no corporate governance policies in place to review, authorize and approve
such transactions. |
The
Company is still determining what steps it will take to remedy these material weaknesses.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART
II—OTHER INFORMATION
Item
1. |
Legal
Proceedings. |
To
the best of our knowledge, there are no material pending legal proceedings to which we are a party or of which any of our property
is the subject. However, from time to time, we may become involved in various lawsuits and legal proceedings which arise in the
ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters
may arise from time to time that may harm our business.
Smaller
reporting companies are not required to provide the information required by this item.
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds. |
None.
Item
3. |
Defaults
Upon Senior Securities. |
None.
Item
4. |
Mine
Safety Disclosures. |
Not
applicable.
Item
5. |
Other
Information. |
None.
Exhibit
Number |
|
Description |
|
|
|
31.1 |
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of Sarbanes-Oxley Act
of 2002. |
31.2 |
|
Certification
of Principal Financial Office and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of Sarbanes-Oxley Act of 2002. |
32.1 |
|
Certification
of Principal Executive Officer and Principal Financial Officer and Principal Accounting Officer pursuant to 18 U.S.C Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS |
|
XBRL Instance
Document |
101.SCH |
|
XBRL Taxonomy
Schema |
101.CAL |
|
XBRL Taxonomy
Calculation Linkbase |
101.DEF |
|
XBRL Taxonomy
Definition Linkbase |
101.LAB |
|
XBRL Taxonomy
Label Linkbase |
101.PRE |
|
XBRL Taxonomy
Presentation Linkbase |
In accordance
with SEC Release 33-8238, Exhibits 32.2 are being furnished and not filed.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
KIRIN
INTERNATIONAL HOLDING, INC. |
|
|
Dated:
August 19, 2014 |
By: |
/s/
Longlin Hu |
|
|
Longlin
Hu |
|
|
President
and Chief Executive Officer
(Principal
Executive Officer) |
|
|
|
Dated:
August 19, 2014 |
By: |
/s/
Cindy Zheng |
|
|
Cindy
Zheng |
|
|
Chief
Financial Officer
(Principal
Financial Officer and
Principal
Accounting Officer) |
19
Exhibit
31.1
CERTIFICATION
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 302 OF
THE
SARBANES-OXLEY ACT OF 2002
I,
Longlin Hu, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Kirin International Holding, Inc. (the “registrant”):
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13-a13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed
such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated:
August 19, 2014 |
By: |
/s/
Longlin Hu |
|
|
Longlin
Hu |
|
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
Exhibit
31.2
CERTIFICATION
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 302 OF
THE
SARBANES-OXLEY ACT OF 2002
I,
Cindy Zheng, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Kirin International Holding, Inc. (the “registrant”):
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13-a13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed
such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated:
August 19, 2014 |
By: |
/s/
Cindy Zheng |
|
|
Cindy
Zheng |
|
|
Chief
Financial Officer
(Principal
Financial Officer and
Principal
Accounting Officer) |
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U. S. C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Kirin International Holding, Inc. (the “Company”) on Form 10-Q for the period
ended June 30, 2014 (the “Report”), each of the undersigned officers of the Company, certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The
Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934;
and
2. The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Dated:
August 19, 2014 |
By: |
/s/
Longlin Hu |
|
|
Longlin
Hu |
|
|
President
and Chief Executive Officer
(Principal
Executive Officer) |
|
|
|
Dated:
August 19, 2014 |
By: |
/s/
Cindy Zheng |
|
|
Cindy
Zheng |
|
|
Chief
Financial Officer
(Principal
Financial Officer and
Principal
Accounting Officer) |
A
signed original of this written statement has been provided to Kirin International Holding, Inc. and will be retained by Kirin
International Holding, Inc. and furnished to the Securities and Exchange Commission or its staff upon request
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