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EX-31 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - GOLD HORSE INTERNATIONAL, INC.ex_31-2.htm
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EX-31 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - GOLD HORSE INTERNATIONAL, INC.ex_31-1.htm
EX-32 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - GOLD HORSE INTERNATIONAL, INC.ex_32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2011

 

or

 

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

 

For the transition period from _______ to _________

 

Commission file number: 000-30311

 

GOLD HORSE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Florida 22-3719165
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

No. 31 Tongdao South Road, Hohhot, Inner Mongolia, China   010030
(Address of principal executive offices)   (Zip Code)

 

86 (471) 339 7999

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

 

 Large accelerated filer  o  Accelerated filer  o
 Non-accelerated filer  o  Smaller reporting company  þ

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,989,459 shares at May 23, 2011.


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

FORM 10-Q

QUARTERLY PERIOD ENDED MARCH 31, 2011

 

TABLE OF CONTENTS

 

    Page
PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements.  
  Condensed Consolidated Balance Sheets:  
  As of March 31, 2011 and June 30, 2010 4
  Condensed Consolidated Statements of Income and Comprehensive Income  
  For the Three and Nine Months Ended March 31, 2011 and 2010 5
  Condensed Consolidated Statements of Cash Flows  
  For the Nine Months Ended March 31, 2011 and 2010 6
  Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and  
     Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4T. Controls and Procedures 41
     
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 42
Item 1A. Risk Factors 42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3. Defaults Upon Senior Securities 42
Item 4. (Removed and Reserved) 42
Item 5. Other Information 42
Item 6. Exhibits 42

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the amount of funds owed us by the Jin Ma Companies, the enforceability of our contractual arrangements with the Jin Ma Companies, the risk of doing business in the People’s Republic of China (“PRC”), our ability to implement our strategic initiatives, our access to sufficient capital, our ability to satisfy our obligations as they become due, economic, political and market conditions and fluctuations, PRC government regulations and economic policies, industry regulation, competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control.

 

You should consider the areas of risk described in connection with any forward-looking statements that may be made in our report as filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this quarterly report and our annual report on Form 10-K for the year ended June 30, 2010, including the risks described in Item 1A. - Risk Factors, in their entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this quarterly report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

2


OTHER PERTINENT INFORMATION

 

Our web site is www.goldhorseinternational.com. The information which appears on our web site is not part of this report.

 

All share and per share information in this report gives effect to the 40:1 reverse stock split of our common stock which was effective on September 8, 2010.

 

Our business is conducted in China, using Renminbi (“RMB”), the currency of China, and our financial statements are presented in United States dollars.   In this report, we refer to assets, obligations, commitments and liabilities in our financial statements in United States dollars.   These dollar references are based on the exchange rate of RMB to United States dollars, determined as of a specific date.   Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).

 

Unless specifically set forth to the contrary, when used in this prospectus the terms:

 

  “Gold Horse International,” the “Company,” “we,” “us,” “ours,” and similar terms refers to Gold Horse International, Inc., a Florida corporation,
     
  “Gold Horse Nevada” refers to Gold Horse International, Inc., a Nevada corporation and wholly-owned subsidiary of Gold Horse International,
     
  “Global Rise” refers to Global Rise International, Limited, a Cayman Islands corporation and wholly-owned subsidiary of Gold Horse Nevada,
     
  “IMTD” refers to Inner Mongolia (Cayman) Technology & Development Ltd., a Chinese company and wholly-owned subsidiary of Global Rise,
     
  “Jin Ma Real Estate” refers to Inner Mongolia Jin Ma Real Estate Development Co., Ltd., a Chinese company,
     
  “Jin Ma Construction” refers to Inner Mongolia Jin Ma Construction Co., Ltd., a Chinese company,
     
  “Jin Ma Hotel” refers to Inner Mongolia Jin Ma Hotel Co., Ltd., a Chinese company,
     
  “Jin Ma Companies” collectively refers to Jin Ma Real Estate, Jin Ma Construction and Jin Ma Hotel, which are variable interest entities under contractual arrangements with us and whose financial statements are consolidated with ours, unless the context specifically states or implies otherwise; and
     
  “first quarter of 2011” refers to the three months ended September 30, 2010 and, “first quarter of 2010” refers to the three months ended September 30, 2009, unless the context otherwise defines.
     
  “second quarter of 2011” refers to the three months ended December 31, 2010 and, “second quarter of 2010” refers to the three months ended December 31, 2009, unless the context otherwise defines.
     
  “third quarter of 2011” refers to the three months ended March 31, 2011 and, “third quarter of 2010” refers to the three months ended March 31, 2010, unless the context otherwise defines.

 

3


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

               
    As of  
    March 31,
2011
  June 30,
2010
 
    (Unaudited)      
ASSETS              
               
Cash and cash equivalents   $ 364,047   $ 309,996  
Accounts receivable, net     11,073,753     7,912,119  
Notes receivable on sales type lease - current portion     1,637,460     1,150,333  
Inventories, net     71,487     64,007  
Prepaid expenses     1,757     210,000  
Other receivables, net     112,556     24,969  
Cost and estimated earnings in excess of billings     91,201     93,879  
Real estate held for sale     153,259     367,009  
Deferred tax assets     227,338     267,668  
Construction in progress - current portion     19,771,345      
               
Total Current Assets     33,504,203     10,399,980  
               
Property and equipment, net     8,484,079     8,727,796  
Construction in progress - non-current portion     13,327,498     12,860,646  
Notes receivable on sales type lease - non-current portion     15,588,392     15,853,319  
               
Total Assets   $ 70,904,172   $ 47,841,741  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY              
               
Current Liabilities:              
Loans payable - current portion   $ 3,203,909   $ 3,091,678  
Accounts payable     22,300,216     3,522,030  
Due to related parties     719,675     230,453  
Accrued expenses     560,431     832,597  
Taxes payable     1,541,174     2,374,059  
Advances from customers     201,671     144,670  
Derivative liability     191,701     653,630  
Billings in excess of costs and estimated earnings     735     90,205  
               
Total Current Liabilities     28,719,512     10,939,322  
               
Loans payable - net of current portion     319,630     345,152  
               
Total Liabilities     29,039,142     11,284,474  
               
Commitments (Note 17)          
               
Stockholders’ Equity:              
Preferred stock ($0.0001 par value; 20,000,000 shares authorized; none issued and outstanding)          
Common stock ($0.0001 par value; 300,000,000 shares authorized; 1,989,459 and 1,934,878 shares issued and outstanding at March 31, 2011 and June 30, 2010)     199     193  
Non-controlling interest in variable interest entities     6,095,314     6,095,314  
Additional paid-in capital     7,346,784     7,127,577  
Statutory reserve     2,496,724     2,470,154  
Retained earnings     21,868,424     18,213,466  
Accumulated other comprehensive income     4,057,585     2,650,563  
               
Total Stockholders’ Equity     41,865,030     36,557,267  
               
Total Liabilities and Stockholders’ Equity   $ 70,904,172   $ 47,841,741  

 

See accompanying notes to unaudited consolidated financial statements

 

4


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                           
    For the Three Months Ended
March 31,
  For the Nine Months Ended
March 31,
 
    2011   2010   2011   2010  
    (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)  
NET REVENUES                          
Construction   $ 7,994,860   $ 11,143,476   $ 32,986,009   $ 20,739,488  
Hotel     739,027     749,749     2,304,502     2,262,578  
Real estate     193,661     227,917     907,030     386,898  
                           
Total Revenues     8,927,548     12,121,142     36,197,541     23,388,964  
                           
COST OF REVENUES                          
Construction     6,851,787     9,559,477     28,289,607     17,889,157  
Hotel     414,640     478,135     1,323,695     1,486,994  
Real estate     130,334     168,805     670,548     335,855  
                           
Total Cost of Revenues     7,396,761     10,206,417     30,283,850     19,712,006  
                           
GROSS PROFIT     1,530,787     1,914,725     5,913,691     3,676,958  
                           
OPERATING EXPENSES:                          
Other hotel operating expenses     15,156     (26,052 )   47,116     77,307  
Bad debt recovery     (1,291 )   (109,535 )   (196,903 )   (215,090 )
Salaries and employee benefits     293,197     290,845     711,807     683,280  
Depreciation     200,224     198,081     592,661     583,202  
Selling, general and administrative     97,549     113,126     565,283     365,689  
                           
Total Operating Expenses     604,835     466,465     1,719,964     1,494,388  
                           
INCOME FROM OPERATIONS     925,952     1,448,260     4,193,727     2,182,570  
                           
OTHER INCOME (EXPENSES):                          
Other income (expense)     (38 )       6,804      
Gain on extinguishment of derivative liabilities         270,101         1,893,310  
Gain on change in fair value of derivative liabilities     304,837     (298,283 )   461,929     1,704,654  
Gain on sale of land use rights and property         55         449,528  
Interest income     54,462     731,521     705,322     1,274,716  
Interest expense     (125,722 )   (394,667 )   (377,728 )   (2,711,743 )
                           
Total Other Income     233,539     308,727     796,327     2,610,465  
                           
INCOME BEFORE PROVISION FOR INCOME TAX     1,159,491     1,756,987     4,990,054     4,793,035  
                           
PROVISION FOR INCOME TAXES     288,058     550,772     1,308,526     865,550  
                           
NET INCOME   $ 871,433   $ 1,206,215   $ 3,681,528   $ 3,927,485  
                           
COMPREHENSIVE INCOME:                          
Net income   $ 871,433   $ 1,206,215   $ 3,681,528   $ 3,927,485  
                           
OTHER COMPREHENSIVE INCOME:                          
Unrealized foreign currency translation gain     252,349     4,753     1,407,022     38,613  
                           
COMPREHENSIVE INCOME   $ 1,123,782   $ 1,210,968   $ 5,088,550   $ 3,966,098  
                           
NET INCOME PER COMMON SHARE:                          
Basic   $ 0.44   $ 0.71   $ 1.88   $ 2.57  
Diluted   $ 0.44   $ 0.70   $ 1.86   $ 2.54  
                           
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                          
Basic     1,989,459     1,702,336     1,957,237     1,531,055  
Diluted     1,989,459     1,711,679     1,977,994     1,548,957  

 

See accompanying notes to unaudited consolidated financial statements.

 

5


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

               
    For the Nine Months Ended
March 31,
 
    2011   2010  
    (Unaudited)   (Unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net income   $ 3,681,528   $ 3,927,485  
Adjustments to reconcile net income to net cash used in operating activities:              
Depreciation     592,661     583,202  
Stock-based compensation and fees     116,716     232,500  
Common stock issued for interest         28,039  
Bad debt recovery     (196,903 )   (215,091 )
Interest expense from amortization of debt discount         2,183,000  
Warrants issued for service     31,188      
Gain on sale of land use right         (449,528 )
Gain from debt extinguishment         (1,893,310 )
Gain on change in fair value of derivative liabilities     (461,929 )   (1,704,654 )
Changes in assets and liabilities:              
Accounts receivable     (2,638,012 )   (2,844,223 )
Notes receivable     388,573     313,995  
Inventories     (5,072 )   (23,839 )
Other receivables     (77,655 )   1,182,265  
Advance to suppliers         (123,167 )
Prepaid expenses     208,882      
Costs and estimated earnings in excess of billings     5,986     (35,228 )
Real estate held for sale     223,351      
Construction in progress     (19,447,318 )   (2,724,368 )
Accounts payable and accrued expenses     18,121,600     (721,044 )
Taxes payable     (854,777 )   (876,846 )
Advances from customers     50,901     2,601,870  
Billings in excess of costs and estimated earnings     (91,225 )   27,901  
NET CASH USED IN OPERATING ACTIVITIES     (351,505 )   (531,041 )
               
CASH FLOWS FROM INVESTING ACTIVITIES:              
Proceeds from sale of land use right         2,193,710  
Purchase of property and equipment     (41,304 )   (188,324 )
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES     (41,304 )   2,005,386  
               
CASH FLOWS FROM FINANCING ACTIVITIES:              
Repayment of loans payable     (37,428 )   (1,353,666 )
Proceeds from advances from related party     472,976     1,203,928  
Repayment of convertible debt         (983,550 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     435,548     (1,133,288 )
               
EFFECT OF EXCHANGE RATE ON CASH     11,312     (1,002 )
               
NET INCREASE IN CASH AND CASH EQUIVALENTS     54,051     340,055  
               
CASH AND CASH EQUIVALENTS - beginning of period     309,996     112,134  
               
CASH AND CASH EQUIVALENTS - end of period   $ 364,047   $ 452,189  
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:              
Cash paid for:              
Interest   $ 320,314   $ 869,718  
Income taxes   $ 1,682,059   $ 1,391,109  
               
Non-cash activities:              
Common stock issued for prior and future service   $ 71,309   $ 548,000  
Common stock issued for conversion of convertible debt   $   $ 789,784  
Common stock issued for accrued interest   $   $ 21,830  
Reclassification of warrants and conversion options to derivative liabilities   $   $ 4,680,179  

See accompanying notes to unaudited consolidated financial statements.

 

6


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

Gold Horse International, Inc. (the “Company”, “we”, “us”, “our”) was incorporated on March 21, 2000 under the laws of the State of New Jersey under its former name “Segway III”. Prior to June 29, 2007, the Company was a development stage company attempting to implement its business plan to become a fully integrated online provider that links the supply and demand sides of the ground trucking industry. In November 2007, the Company filed a Certificate of Domestication in the State of Florida whereby the Company domesticated as a Florida corporation under the name Gold Horse International, Inc.

 

On June 29, 2007, the Company executed a Share Exchange Agreement (“Share Exchange Agreement”) with Gold Horse International, Inc. (“Gold Horse Nevada”), a Nevada corporation, whereby the Company acquired all of the outstanding common stock of Gold Horse Nevada from its stockholders in exchange for newly-issued stock of the Company. Gold Horse Nevada was incorporated on August 14, 2006 in the State of Nevada.

 

Under the Share Exchange Agreement, on June 29, 2007, the Company issued 1,212,500 shares of its common stock to the Gold Horse Nevada Stockholders and their assignees in exchange for 100% of the common stock of Gold Horse Nevada. Additionally, the Company’s prior President, CEO and sole director, cancelled 241,376 of the Company’s common stock he owned immediately prior to the closing. After giving effect to the cancellation of shares, the Company had a total of 37,500 shares of common stock outstanding immediately prior to Closing. After the Closing, the Company had a total of 1,250,000 shares of common stock outstanding, with the Gold Horse Nevada Stockholders and their assignees owning 97% of the total issued and outstanding shares of the Company’s common stock.

 

Gold Horse Nevada became a wholly-owned subsidiary of the Company and Gold Horse Nevada’s former shareholders own the majority of the Company’s voting stock.

 

Gold Horse Nevada owns 100% of Global Rise International, Limited (“Global Rise”), a Cayman Islands corporation incorporated on May 9, 2007. Through Global Rise, Gold Horse Nevada operates, controls and beneficially owns the construction, hotel and real estate development businesses in China under a series of contractual arrangements (the “Contractual Arrangements”) with Inner Mongolia Jin Ma Real Estate Development Co., Ltd. (“Jin Ma Real Estate”), Inner Mongolia Jin Ma Construction Co., Ltd. (“Jin Ma Construction”) and Inner Mongolia Jin Ma Hotel Co., Ltd. (“Jin Ma Hotel”), (collectively referred to as the “Jin Ma Companies”). Other than the Contractual Arrangements with the Jin Ma Companies, the Company, Gold Horse Nevada nor Global Rise are engaged in any business or operations. The Contractual Arrangements are discussed below.

 

On October 10, 2007, the Company established Inner Mongolia (Cayman) Technology & Development Ltd. (“IMTD”), a wholly-foreign owned enterprise incorporated in the PRC and wholly-owned subsidiary of Global Rise.

 

The relationship among the above companies as follows:

 

 

As a result of these Contractual Arrangements, the acquisition of Gold Horse Nevada and the Jin Ma Companies by the Company was accounted for as a reverse merger because on a post-merger basis, the former shareholders of Gold Horse Nevada held a majority of the outstanding common stock of the Company on a voting and fully-diluted basis. As a result, Gold Horse Nevada is deemed to be the acquirer for accounting purposes. Accordingly, the consolidated financial statement data presented are those of the Jin Ma Companies for all periods prior to the Company’s acquisition of Gold Horse Nevada on June 29, 2007, and the financial statements of the consolidated companies from the acquisition date forward.

 

7


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

PRC law currently places certain limitations on foreign ownership of Chinese companies. To comply with these foreign ownership restrictions, the Company, through its wholly-owned subsidiary, Global Rise, operates its business in China through the Jin Ma Companies, each of which is a limited liability company headquartered in Hohhot, the capital city of the Autonomous Region of Inner Mongolia in China, and organized under PRC laws. Each of the Jin Ma Companies has the relevant licenses and approvals necessary to operate its business in China and none of them is exposed to liabilities incurred by the other party. Global Rise has Contractual Arrangements with each of the Jin Ma Companies and their shareholders (collectively, the “Jin Ma Companies Shareholders”) pursuant to which Global Rise provides business consulting and other general business operation services to the Jin Ma Companies. Through these Contractual Arrangements, Global Rise also has the ability to control the daily operations and financial affairs of the Jin Ma Companies, appoint each of their senior executives and approve all matters requiring shareholder approval. As a result of these Contractual Arrangements, which enable Global Rise to control the Jin Ma Companies, the Company is considered the primary beneficiary of the Jin Ma Companies. Accordingly, the Company consolidates the Jin Ma Companies’ results, assets and liabilities in its financial statements.

 

The Contractual Arrangements are comprised of a series of agreements, including a Consulting Services Agreement and an Operating Agreement, through which Global Rise has the right to advise, consult, manage and operate each of the Jin Ma Companies, and collect and own all of their respective net profits. Additionally, under a Shareholders’ Voting Rights Proxy Agreement, the Jin Ma Companies Shareholders have vested their voting control over the Jin Ma Companies to Global Rise. In order to further reinforce the Company’s rights to control and operate the Jin Ma Companies, these companies and their shareholders have granted Global Rise, under an Option Agreement, the exclusive right and option to acquire all of their equity interests in the Jin Ma Companies or, alternatively, all of the assets of the Jin Ma Companies. Further the Jin Ma Companies Shareholders have pledged all of their rights, titles and interests in the Jin Ma Companies to Global Rise under an Equity Pledge Agreement.

 

Gold Horse Nevada entered into the Contractual Arrangements with each of the Jin Ma Companies and their respective shareholders on August 31, 2006. On June 29, 2007, concurrently with the closing of the Share Exchange Transaction, the Contractual Arrangements were amended and restated by and among Gold Horse Nevada and Global Rise, the Company’s wholly-owned subsidiary, and the Company on the one hand, and each of the Jin Ma Companies and their respective shareholders on the other hand, pursuant to which the Company was made a party to the Contractual Arrangements.

 

Inner Mongolia Jin Ma Construction Company Ltd.

 

Jin Ma Construction is an engineering and construction company that offers general contracting, construction management and building design services primarily in Hohhot City, the Autonomous Region of Inner Mongolia in China. In operation since 1980, Jin Ma Construction was formally registered as a limited liability company in Hohhot City in March 2002.

 

Inner Mongolia Jin Ma Real Estate Development Co. Ltd.

 

Jin Ma Real Estate, established in 1999, was formally registered as a limited liability company in Hohhot City in February 2004. Jin Ma Real Estate develops residential and commercial properties in the competitive and growing real estate market in Hohhot.

 

Inner Mongolia Jin Ma Hotel Co. Ltd.

 

Jin Ma Hotel was founded in 1999 and formally registered in April 2004 as a limited liability company in Hohhot City. Jin Ma Hotel presently owns, operates and manages the Inner Mongolia Jin Ma Hotel (the “Hotel”), a 22-room full service hotel with a restaurant and banquet facilities situated in Hohhot City approximately 15 kilometers from the Hohhot Baita Airport.

 

Inner Mongolia (Cayman) Technology & Development Ltd.

 

IMTD, a wholly foreign owned enterprise incorporated in PRC, provides administrative support services to the Jin Ma Companies.

 

8


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basis of preparation

These interim condensed consolidated financial statements are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The (a) condensed consolidated balance sheet as of June 30, 2010, which was derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of the Company for the year ended June 30, 2010.

Principle of consolidation

Pursuant to the Financial Accounting Standards Board Accounting Codification (ASC) Topic 810, the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC Topic 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which the Company, through contractual arrangements, bears the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore the Company is the primary beneficiary of the entity.

 

The Jin Ma Companies are considered VIEs, and the Company is the primary beneficiary. On June 29, 2007, the Company entered into the Contractual Arrangements with the Jin Ma Companies pursuant to which the Company is to receive 100% of the Jin Ma Companies net income. In accordance with these agreements, the Jin Ma Companies are to pay consulting fees equal to 100% of their net income to the Company’s wholly-owned subsidiary, Global Rise, and Global Rise shall supply the technology and administrative services needed to service the Jin Ma Companies.

 

The accounts of the Jin Ma Companies are consolidated in the accompanying financial statements pursuant to ASC Topic 810. As a VIE, the Jin Ma Companies net revenues are included in the Company’s total net revenues, their income from operations is consolidated with the Company’s, and the Company’s net income includes all of the Jin Ma Companies net income. There is no non-controlling interest in net income and accordingly, no net income is subtracted in calculating the net income attributable to the Company. Because of the contractual arrangements, the Company has pecuniary interest in the Jin Ma Companies that requires consolidation of the Jin Ma Companies financial statements with its financial statements.

 

These condensed consolidated financial statements include the financial statements of Gold Horse, its subsidiaries and variable interest entities.  All significant inter-company balances or transactions have been eliminated on consolidation.

 

Financial instruments

 

The accounting standard governing financial instruments adopted by the Company on July 1, 2009, defines financial instruments and requires fair value disclosures about those instruments. It defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. Cash, investments, receivables, payables, short term loans and convertible debt all qualify as financial instruments. Management concluded cash, receivables, payables and short term loans approximate their fair values because of the short period of time between the origination of such instruments and their expected realization and, if applicable, their stated rates of interest are equivalent to rates currently available.

 

The three levels of valuation hierarchy are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
   
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
   
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

9


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Financial instruments (Continued)

 

The Company analyzes all financial instruments with features of both liabilities and equity under the FASB’s accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Depending on the product and the terms of the transaction, the fair value of notes payable and derivative liabilities were modeled using a series of techniques, including closed-form analytic formula, such as the Black-Scholes option-pricing model.

 

The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable input (Level 3) for the nine months ended March 31, 2011:

             
  Warrant liability  
Balance at June 30, 2010 $   653,630  
Exercise of warrants     -  
Change in fair value included in earnings     (461,929 )
Balance at March 31, 2011 $   191,701  

 

The Company did not identify any other non-recurring assets and liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with the relevant accounting standards.

See Note 10 for more information on these financial instruments.

Accounts receivable, notes receivable and other receivables

 

The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing receivables. The Company periodically reviews its receivables to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

At March 31, 2011 and June 30, 2010, the Company has established, based on a review of its outstanding accounts receivable balances, an allowance for doubtful accounts in the amount of $821,522 and $978,455, respectively, on its total accounts receivable. Management believes that the notes receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required at March 31, 2011 and June 30, 2010.

 

Other receivables are primarily related to advances made to various vendors and other parties in the normal course of business and an allowance was established when those parties are deemed to be unlikely to repay the amounts. At March 31, 2011 and June 30, 2010, the Company has established, based on a review of its outstanding other receivable balances, an allowance for doubtful accounts in the amount of $63,950 and $69,171, respectively. At such time as management exhausts all collection efforts, the other receivable balance will be netted against the allowance account. The activities in the allowance for doubtful accounts for accounts receivable and other receivables for the nine months ended March 31, 2011 were as follows:

                     
    Allowance for doubtful accounts for accounts receivable   Allowance for doubtful accounts for other receivable   Total  
Balance – June 30, 2010   $ 978,455   $ 69,171   $ 1,047,626  
Reduction in allowance     (189,298 )   (7,605 )   (196,903 )
Foreign currency translation adjustments     32,365     2,384     34,749  
                     
Balance – March 31, 2011 (Unaudited)   $ 821,522   $ 63,950   $ 885,472  

Inventories

Inventories, consisting of consumable goods related to the Company’s hotel operations are stated at the lower of cost or market utilizing the first-in, first-out method.

10


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Real estate held for sale

The Company capitalizes as real estate held for sale the direct construction and development costs, property taxes, interest incurred on costs related to land under development and other related costs (i.e. engineering, surveying, landscaping, etc.) until the property reaches its intended use. At March 31, 2011 and June 30, 2010, real estate held for sale amounted to $153,259 and $367,009, respectively.

Construction in progress

Properties currently under development are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including land use rights cost, development expenditure, professional fees and the interest expense capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-progress is to be transferred to an appropriate asset such as real estate held for sale. Construction in progress is valued at the lower of cost or market. Management evaluates the market value of its properties on a periodic basis for impairment. Construction in progress are classified in the balance sheets as current or non-current based on whether or not the sale of units of respective projects are expected to take place within 12 months of the balance sheet date. As of March 31, 2011 and June 30, 2010, construction in progress amounted to $33,098,843 and $12,860,646, respectively, of which $19,771,345 and $0, respectively, were included in current portion.

Advances from customers

Advances from customers at March 31, 2011 and June 30, 2010 of $201,671 and $144,670, respectively, consist of prepayments from third party customers to us for construction and real estate transactions to ensure sufficient funds are available to complete the real estate and construction projects. The Company recognizes the deposits as revenue upon transfer of title to the buyer, in compliance with the Company’s revenue recognition policy.

Derivative financial instruments

The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of income. For stock-based derivative financial instruments, the Company uses the Black-Scholes-Merton option-pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheets as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of March 31, 2011 and June 30, 2010, the Company had $191,701 and $653,630, respectively, of warrants liability on the balance sheet.

Revenue recognition

 

The Company follows the guidance of ASC Topic 605 and Topic 360 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for the various revenue streams:

 

Real estate sales which primarily involve the sale of multi-family units and community environments are reported in accordance with the provisions of ASC Topic 360. Generally, profits from the sale of development properties, less 5% business tax, are recognized by the full accrual method when the sale is consummated. A sale is not considered consummated until (1) the parties are bound by the terms of a contract, (2) all consideration has been exchanged, (3) any permanent financing of which the seller is responsible has been arranged, (4) all conditions precedent to closing have been performed, (5) the seller does not have substantial continuing involvement with the property, and (6) the usual risks and rewards of ownership have been transferred to the buyer.

 

11


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue recognition (Continued)

 

In 2007 and 2008, Jin Ma Real Estate entered into agreements to construct new dormitories as follows:

 

a) In November 2007, Jin Ma Real Estate entered into an agreement to construct new dormitories for the Inner Mongolia Electrical Vocational Technical School (the “Vocational School”). Pursuant to the terms of the agreement, Jin Ma Real Estate constructed the buildings and, upon completion, pursuant to a sales-type capital lease, leased the buildings to the Vocational School and will receive payments for a period of 26 years at an amount of 4,800,000 RMB or approximately $730,000 per annum. In November 2008, Jin Ma Real Estate completed the construction. Since the agreement did not have a stated interest rate, the Company used an imputed interest rate of 6.12% and are reflecting payments due under the agreement as a note receivable on the accompanying balance sheets. The property sold had an imputed sales value of 61,691,138 RMB (approximately $9,000,000). The deferred gain on the sale of the property was approximately $52,000 of which $993 and $914 was recognized in the nine months ended March 31, 2011 and 2010, respectively, pursuant to the installment method and was reflected in the accompanying statements of income.

 

b) In 2008, Jin Ma Real Estate and Inner Mongolia Chemistry School entered an oral agreement and on September 29, 2009, formalized a written agreement for the construction of student apartments for the Inner Mongolia Chemistry College (the “Chemistry School”) situated in Inner Mongolia University City, a compound where many higher education institutions are located. Jin Ma Construction began developing the 51,037 square-meter project in July 2008 and completed the construction in October 2009. Jin Ma Real Estate leased the buildings to the Chemistry School for a period of 20 years. The annual lease payments are RMB 10.62 million (approximately $1.55 million) for five years (from fiscal 2010 to fiscal 2014), and the annual lease payment is RMB 5.42 million (approximately $0.79 million) for 15 years (from fiscal 2015 to fiscal 2029). Since the agreement did not have a stated interest rate, the Company used an imputed interest rate of 5.94% and are reflecting payments due under the agreement as a note receivable on the accompanying balance sheets. The property sold had an imputed sales value of 84,196,104 RMB (approximately $12 million). The deferred gain on the sale of the property was approximately $3,900,000 of which $100,122 and $71,989, respectively, was recognized in the nine months ended March 31, 2011 and 2010 pursuant to the installment method and was reflected in the accompanying statements of income.

 

In accordance with ASC Topic 360, the initial gains from the sales of the Vocational School and Chemistry School were deferred because the minimum initial investment by the buyer was less than the required 20% initial investment expressed as a percentage of the sales value (ASC Topic 360). Therefore the gains are being recognized into income as payments are received using the installment method. The installment method apportions each cash receipt and principal payment by the buyer between cost recovered and profit. The apportionment is in the same ratio as total cost and total profit bear to the sales value. Accordingly, revenues and cost of sales are recognized based on the apportionments, and the Company recognized imputed interest income on the accompanying consolidated statements of income as summarized below.

 

As of March 31, 2011, the remaining deferred gains for Vocational School and Chemistry School leases of $51,107 and $3,871,325, respectively, is reflected as a discount of notes receivable in the accompanying balance sheet. As of June 30, 2010, the remaining deferred gains for Vocational School and Chemistry School leases of $50,291 and $3,833,940, respectively, is reflected as a discount of notes receivable in the accompanying balance sheet. The recorded imputed interest discount will be realized as the balances due are collected. In the event of early liquidation, interest is recognized on the simple interest method.

 

The deferred gains were recognized pursuant to the installment method and are reflected in the accompanying consolidated statements of income follows:

                           
    For the Three Months Ended
March 31,
  For the Nine Months Ended
March 31,
 
    2011   2010   2011   2010  
Net revenues   $ 102,210   $ 227,955   $ 489,688   $ 386,936  
Cost of sales     70,275     155,966     388,573     314,033  
Gross profit recognized   $ 31,935   $ 71,989   $ 101,115   $ 72,903  

 

Jin Ma Real Estate receives annual payments of principal and the related imputed interest from the Vocational School and Chemistry School. During the nine months ended March 31, 2011 and 2010, the Company allocated the payments received as follows:

 

12


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue recognition (Continued)

                           
    For the Three Months Ended
March 31,
  For the Nine Months Ended
March 31,
 
    2011   2010   2011   2010  
Amount applied to principal balance of notes receivable   $ 102,210   $ 227,917   $ 489,688   $ 386,898  
                           
Interest income recognized on consolidated statement of income     54,354     731,486     705,102     1,274,406  
Total payment received   $ 156,564   $ 959,403   $ 1,194,790   $ 1,661,304  

 

Revenue from the performance of general contracting, construction management and design-building services is recognized upon completion of the service.

 

Revenue primarily derived from hotel operations, including the rental of rooms and food and beverage sales, is recognized when rooms are occupied and services have been rendered.

 

In accounting for long-term engineering and construction-type contracts, the Company follows the provisions of ASC Topic 605. The Company recognizes revenues using the percentage of completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are reflected in contract revenues and gross profit in the reporting period when such estimates are revised. This method of revenue recognition requires us to prepare estimates of costs to complete contracts in progress. In making such estimates, judgments are required to evaluate contingencies such as potential variances in schedule, the cost of materials and labor, and productivity, and the impact of change orders, liability claims, contract disputes, and achievement of contractual performance standards which may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset, costs and estimated earnings in excess of billings,” represents revenues recognized in excess of amounts billed. The liability, billings in excess of costs and estimated earnings,” represents billings in excess of revenues recognized.

Advertising

 

Advertising is expensed as incurred. Advertising expenses for the nine months ended March 31, 2011 and 2010 were deemed not material.

Warranty policy

 

In accordance with ASC Topic 450, the Company estimates liabilities for construction defect, product liability and related warranty claims based on the possible claim amounts resulting from injury or damage caused by construction defects and expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability is based upon historical information and experience. Based on historical experience, claims made for construction defects and the warranty service calls and any related labor material costs have been minimal. As such, the warranty provision amounts for the nine months ended March 31, 2011 and 2010 were immaterial.

Concentrations of credit risk

 

The Company’s operations through the Jin Ma Companies are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

13


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Concentrations of credit risk (Continued)

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts and notes receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts and notes receivable is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

 

At March 31, 2011 and June 30, 2010, the Company’s bank deposits by geographic area were as follows:

 

    March 31, 2011   June 30, 2010
    (Unaudited)    
Country:                    
United States   $ 4,818   1.3%   $ 1,043   0.3%
China     359,229   98.7%     308,953   99.7%
Total cash and cash equivalents   $ 364,047   100.0%   $ 309,996   100.0%

 

Net income per common share

 

The following table presents a reconciliation of basic and diluted net income per common share:

                           
    Three Months Ended March 31,   Nine Months Ended March 31,  
    2011   2010   2011   2010  
                   
Net income used for basic and diluted net income per common share   $ 871,433   $ 1,206,215   $ 3,681,528   $ 3,927,485  
                           
Weighted average common shares outstanding - basic     1,989,459     1,702,336     1,957,237     1,531,055  
Effect of dilutive securities:                          
Unexercised warrants         9,343     20,757     17,902  
                           
Weighted average common shares outstanding - diluted     1,989,459     1,711,679     1,977,994     1,548,957  
                           
Net income per common share - basic   $ 0.44   $ 0.71   $ 1.88   $ 2.57  
                           
Net income per common share - diluted   $ 0.44   $ 0.70   $ 1.86   $ 2.54  

The diluted earnings per share calculation for the three and nine months ended March 31, 2010 did not include the effect of convertible debentures because their effect was anti-dilutive.

 

The Company's aggregate common stock equivalents at March 31, 2011 and June 30, 2010 include the following:

 

   

March 31, 2011

(Unaudited)

  June 30, 2010
Warrants   204,945   196,195
     Total     204,945   196,195

 

14


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Foreign currency translation and comprehensive income

 

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries and variable interest entities is the RMB. For the subsidiaries and variable interest entities whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter any material transactions in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company. Asset and liability accounts at March 31, 2011 and June 30, 2010 were translated at 6.5701 RMB to $1.00 USD and at 6.8086 RMB to $1.00 USD, respectively. Equity accounts were stated at their historical rate. The average translation rates applied to income statements for the nine months ended March 31, 2011 and 2010 were 6.67957 RMB and 6.83773 RMB to $1.00 USD, respectively. In accordance with ASC Topic 230, cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Recent accounting pronouncements

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. This ASU amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Except for the expanded disclosure requirements, the adoption of this ASU does not have a material impact on the Company’s consolidated financial statements.

 

In December 2010, FASB issued ASU No. 2010-28, Intangibles - Goodwill and Other (ASC Topic 350). Under Topic 350 on goodwill and other intangible assets, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The amendments in this update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. As the Company does not have any significant intangible assets, the impact of adopting this update will not be material on the Company’s consolidated results of operations and financial position.

 

In December 2010, FASB issued Accounting Standards Update (ASU) No. 2010-29, Business Combinations (ASC Topic 805). The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s). The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is permitted. As the Company has not entered into any business combinations since July 1, 2010, the adoption of this update will not have any material impact on the Company’s financial statement disclosures. However, if the Company enters into material business combinations in the future, the adoption of this update may have significant impact on the Company’s financial statement disclosures.

 

15


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent accounting pronouncements (Continued)

 

In January 2011, the FASB issued ASU No. 2011-01- Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. This deferral will have no material impact on the Company’s consolidated financial statements.

 

In January 2011, the FASB issued ASU No. 2011-02- Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this update provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption within those annual periods. Early application is permitted. The adoption of the provisions in ASU 2011-02 will have no material impact on the Company’s consolidated financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

NOTE 2 – NOTES RECEIVABLE, NET

 

Notes receivable, which are attributable to the leasing of the Vocational School and Chemistry School pursuant to a sales-type capital lease, are accounted for using the installment method of accounting as well as original note value. In accordance with ASC Topic 360, a gain was deferred on notes not meeting the minimum initial 20% investment by the buyer expressed as a percentage of the sales value. Management believes that the notes receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required. At March 31, 2011 and June 30, 2010, notes receivable, net consisted of the following:

               
    March 31, 2011   June 30, 2010  
    (Unaudited)      
Due in 12-month periods ending March 31 and June 30, respectively, 2011 ($1,750,318 and $596,371 overdue as of March 31, 2011 and June 30, 2010, respectively)   $ 1,750,318   $ 2,861,153  
2012     2,346,996     2,264,783  
2013     2,346,996     2,264,783  
2014     2,346,996     2,264,783  
2015     1,555,532     1,501,043  
Thereafter     25,430,360     24,539,553  
Notes receivable – gross     35,777,198     35,696,098  
Less: discount on notes receivable     (14,628,914 )   (14,808,215 )
Less: deferred gain on sale     (3,922,432 )   (3,884,231 )
      17,225,852     17,003,652  
Less: Allowance for doubtful accounts          
      17,225,852     17,003,652  
Notes receivable – current portion, net     (1,637,460 )   (1,150,333 )
Notes receivable – long-term, net   $ 15,588,392   $ 15,853,319  

 

Based on the Company’s assessment of collectability, there has been no allowance for doubtful accounts for notes receivable provided as of March 31, 2011 and June 30, 2010.


16


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 3 - INVENTORIES

 

At March 31, 2011 and June 30, 2010, inventories consisted of the following:

             
  March 31, 2011   June 30, 2010
   (Unaudited)    
       
Consumable goods $ 71,487   $ 64,007
           
  $ 71,487   $ 64,007

 

NOTE 4 – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS

 

Costs and estimated earnings in excess of billings at March 31, 2011 and June 30, 2010 consisted of:

 

    March 31, 2011     June 30, 2010
     (Unaudited)      
Costs incurred on uncompleted contracts $ 39,376,570   23,231,942
Estimated earnings   9,031,122     5,325,326
    48,407,692     28,557,268
Less: billings to date   (48,317,226)     (28,553,594)
  $ 90,466   $ 3,674

 

Amounts are included in the accompanying consolidated balance sheets under the following captions:

               
    March 31, 2011   June 30, 2010  
    (Unaudited )      
Costs and estimated earnings in excess of billings   $ 91,201   $ 93,879  
Billings in excess of costs and estimated earnings     (735 )   (90,205 )
               
    $ 90,466   $ 3,674  

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

At March 31, 2011 and June 30, 2010, property and equipment consist of the following:

                     
        March 31, 2011   June 30, 2010  
    Useful Life   (Unaudited )      
Office equipment   5-8 Years   $ 602,122   $ 580,827  
Machinery and equipment   5-15 Years     7,442,003     7,181,316  
Vehicles   10 Years     539,266     480,057  
Building and building improvements   20 – 40 Years     4,047,952     3,906,155  
            12,631,343     12,148,355  
Less: accumulated depreciation           (4,147,264 )   (3,420,559 )
          $ 8,484,079   $ 8,727,796  

 

Depreciation of property and equipment is provided using the straight-line method. For the nine months ended March 31, 2011 and 2010, depreciation expense amounted to $592,661 and $583,202, respectively.

 

17


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 6 – CONSTRUCTION IN PROGRESS

 

At March 31, 2011 and June 30, 2010, construction in progress consists of the following:

               
    March 31, 2011   June 30, 2010  
    (Unaudited)      
Prepaid land use rights and buildings built for Procuratorate Housing Estates (located in Yuquan District, Hohhot City, Inner Mongolia)   $ 917,823   $ 885,672  
Prepaid land use rights and buildings built for Shuian Renjia project     19,771,345      
Prepaid land use rights for Wusutu Village land – JinWu project     2,516,371     2,428,224  
Prepaid land use rights for Fu Xing Ying land – Beiyuan project     9,893,304     9,546,750  
               
Total construction in progress     33,098,843     12,860,646  
               
Less: current portion     (19,771,345 )    
               
Long term construction in progress   $ 13,327,498   $ 12,860,646  

 

Construction in progress are classified in the balance sheets as current or non-current based on whether or not the sale of units of respective projects are expected to take place within 12 months of the balance sheet date.

 

NOTE 7 – ACCRUED EXPENSES

 

At March 31, 2011 and June 30, 2010, accrued expenses consist of the following:

               
    March 31, 2011   June 30, 2010  
    (Unaudited)      
Accrued interest payable   $ 301,086   $ 234,214  
Accrued payroll and employees benefit     53,021     152,332  
Refundable construction performance deposit     149,161     440,619  
Other     57,163     5,432  
    $ 560,431   $ 832,597  

 

NOTE 8 – LOANS PAYABLE

 

Loans payable consisted of the following at March 31, 2011 and June 30, 2010:

               
    March 31, 2011   June 30, 2010  
    (Unaudited)      
Loans from various credit unions, due on May 10, 2011 with annual interest of 13.92% and secured by the assets of Jin Ma Hotel (1)   $ 3,013,653   $ 2,908,087  
Loans from various unrelated parties, due in September 2010 with annual interest of 18% and unsecured and repaid in October 2010         36,718  
Loans from various unrelated parties, due in April 2012 with annual interest of 18% and unsecured     197,866     190,936  
Loans from various unrelated parties, due in August 2011 with annual interest of 18% and unsecured     38,051     36,718  
Loans from various unrelated parties, due in September 2012 with annual interest of 18% and unsecured     121,764     117,498  
Loan from one unrelated individual, due in March 2012 with annual interest of 24% and unsecured.     152,205     146,873  
               
Total loans payable     3,523,539     3,436,830  
               
Less: current portion     (3,203,909 )   (3,091,678 )
               
Long term liability   $ 319,630   $ 345,152  

 

18


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 8 – LOANS PAYABLE (CONTINUED)

 

(1):    The Company did not repay the loan on due date and the Company is negotiating with the credit union to extend the loan for another year.

 

For the nine months ended March 31, 2011 and 2010, interest expense related to these loans amounted to $377,728 and $460,852, respectively. At March 31, 2011, future maturities of debt are as follows:

 

2012 (current liability) $ 3,203,909
2013 $ 319,630

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

Due to related parties

 

From time to time, companies related through common ownership advanced funds to the Company for working capital purposes.  These advances are non interest bearing, unsecured and payable on demand.  At March 31, 2011 and June 30, 2010, due to related parties consisted of the following:

                     
          March 31, 2011   June 30, 2010  
Name        Relationship   (Unaudited)        
Inner Mongolia Jin Ma Group Ltd and its subsidiaries        Owned by Yang Liankuan   $ 719,675   $ 230,453  

 

Other

 

During the nine months ended March 31, 2011 and 2010, the Company paid rent of $39,245 and $38,338 to Inner Mongolia Jin Ma Group Ltd., respectively.

 

NOTE 10 – CONVERTIBLE DEBT AND DERIVATIVE LIABILITIES

 

Under the terms of a Securities Purchase Agreement, on the closing date which occurred on November 30, 2007, the Company issued $2,183,000 principal amount 10% Secured Convertible Debentures to the purchasers together with the common stock purchase warrants to purchase an aggregate of 238,009 shares of the Company’s common stock. The Company paid Next Generation Equity Research, LLC (“Next”), a broker dealer and member of FINRA, a commission of $174,640 and issued Next common stock purchase warrants to purchase an aggregate of 12,692 shares of the Company’s common stock at $20.00 per share. Additionally, the Company reimbursed one of the investors $30,000 to defer its legal fees in connection with the financing. The Company used the balance of the proceeds for general working capital.

 

The debentures, aggregating $2,183,000, which prior to March 31, 2009 accrued interest at 10% per annum, were originally due on March 31, 2009.  The Company failed to repay the debentures on the due date.  During May 2009, the Company entered into negotiations with the debenture holders to restructure the payment terms and reached an understanding, subject to the execution of definitive documents, to extend the due date of the debentures and cure the default. On May 18, 2009, the Company and the debenture holders signed a Debenture and Warrant Amendment Agreement (the “Amendment Agreement”) and an Amended and Restated 14% Secured Convertible Debenture (the “Exchanged Debentures”).  The Jin Ma Companies, however, had been unable to consummate this restructure due to delays caused by China’s State Administration of Foreign Exchange (“SAFE”), the agency that the Jin Ma Companies must get approval from to wire the funds to the debenture holders. On June 30, 2009, the Company and the debenture holders executed an Amendment to the Amendment Agreement effectively consummating the Amendment Agreement and issuing the Exchanged Debentures thereby ceasing any written or non-written declarations of an event of default under its Securities Purchase Agreement and the related 10% secured convertible debentures and any process to foreclose upon the pledged shares in accordance with the terms of the pledge agreement executed in connection Securities Purchase Agreement. The exercise price per share of common stock for the original 250,701 warrants issued pursuant to the Securities Purchase Agreement was lowered from $20.00 to $4.00.

 

19


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 10 – CONVERTIBLE DEBT AND DERIVATIVE LIABILITIES (CONTINUED)

 

On May 14, 2010, the Company entered into a further Debenture and Warrant Amendment Agreement with the remaining debenture holders which:

 

  waived all existing defaults under the June 2009 Amendment and the debentures,
  reduced the conversion price of the 14% secured convertible debentures and the exercise price of 238,009 warrants to $3.20 per share,
  converted all remaining principal amount of $409,667, all accrued interest due under the 14% secured convertible debentures of $48,074 together with the penalties owed the debenture holders of $168,333 into 195,648 shares of the Company’s common stock,
  contained an agreement by the debenture holder that individually they would not sell any shares of our common stock acquired upon the conversion of the 14% debentures or the exercise of the warrants in an amount which was more than 7% of the daily trading volume of the Company’s common stock on any given day for a one year period, 
  The Company agreed not to issue shares of Common Stock at a price, or options, warrants or convertible securities with an exercise or conversion price that is less than the conversion price of the then outstanding convertible debt or the exercise price of the then outstanding warrants, as the case may be, with the intent of eliminating the provisions for a reduction in the exercise price of the warrants in the event that the Company issues stock at a price which is less than the exercise price of the warrants.

 

During the year ended June 30, 2010, Company repaid all of its convertible debt by issuing 325,467 shares of its common stock for the principal balance of $1,199,450 and repaid the remaining principal balance of $983,550 using cash.

 

In accordance with the FASB authoritative guidance, the conversion feature of the convertible debt was separated from the host contract and recognized as a derivative instrument. Both the conversion feature of the debt and the related warrants have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the consolidated statement of income. The common stock purchase warrants do not trade in an active securities market, and as such, the Company estimates the fair value of the warrants as of March 31, 2011 and June 30, 2010 using a probability-weighted Black-Scholes-Merton option-pricing model using the following assumptions:

               
    March 31, 2011   June 30, 2010  
Warrants:              
Risk-free interest rate     0.80 %   1.00 %
Expected volatility     149.87 %   179.74 %
Expected life (in years)     1.67 years     2.42 years  
Expected dividend yield          
               
Fair Value:   $ 191,701   $ 653,630  

 

Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond to the term of the warrants. The Company’s management believes this method produces an estimate that is representative of the expectations of future volatility over the expected term of these warrants. The Company has no reason to believe future volatility over the expected remaining life of these warrants will likely differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the financial instruments.

 

As of March 31, 2011 and June 30, 2010, the outstanding numbers of warrants related to the convertible debentures were 196,195. At March 31, 2011 and June 30, 2010, the Company recorded a derivative liability of $191,701 and $653,630, respectively, related to the warrants. When the debentures converted or repaid, the derivative liability was extinguished and a gain on extinguishment of the derivative was recorded. For the nine months ended March 31, 2011 and 2010, gains from the change in fair value of derivative liabilities were $461,929 and $1,704,654, respectively. For the nine months ended March 31, 2011 and 2010, gains from the extinguishment of derivative liabilities were $0 and $1,893,310, respectively.

 

20


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 11 – INCOME TAXES

 

The Company accounts for income taxes under ASC Topic 740. ASC Topic 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards.  ASC Topic 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carryforwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain. Accordingly, the net deferred tax asset related to the U.S. net operating loss carryforward has been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the United States.

 

The operations of the Company are in China and are governed by the Income Tax Law of the People's Republic of China and local income tax laws (the "PRC Income Tax Law"). The Company is subject to income tax at a rate of 25%.

 

At March 31, 2011 and June 30, 2010, taxes payable are as follows:

               
    March 31, 2011   June 30, 2010  
    (Unaudited)      
Income taxes payable   $ 202,519   $ 610,173  
Other taxes payable:              
- land appreciation tax     1,117,056     1,273,698  
- business tax     139,565     395,426  
- others     82,034     94,762  
Total   $ 1,541,174   $ 2,374,059  

 

As of March 31, 2011 and June 30, 2010, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three months and nine months ended March 31, 2011 and 2010, and no provision for interest and penalties is deemed necessary as of March 31, 2011 and June 30, 2010.

 

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.

 

NOTE 12 – STOCKHOLDERS’ EQUITY

 

Common stock

 

On December 10, 2010, the Company issued an aggregate of 50,000 shares of its common stock to its chief executive officer and its chief financial officer for services rendered by them.  The shares were valued at $3.45 per share based on the fair value on the date of grant.  In connection with the issuance of these shares, the Company recorded compensation expenses of $115,000 and reduced accrued expenses of $57,500.

 

On December 10, 2010, the Company issued 3,750 shares of its common stock to its five directors for services rendered by them. The shares were valued at $3.45 per share based on the fair value on the date of grant. In connection with the issuance of these shares, the Company reduced accrued expenses of $12,938.

 

On December 10, 2010, the Company issued 750 shares of its common stock to a director for services rendered and to be rendered by him. The shares were valued at $3.45 per share based on the fair value on the date of grant. In connection with the issuance of these shares, the Company recorded compensation expenses of $1,716, reduced accrued expenses of $250 and recorded prepaid expenses of $621 which will be amortized over the remaining service period.

 

21


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 12 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

Warrants

 

On August 18, 2010, the Company entered into a six-month consulting agreement with Rodman & Renshaw, LLC (“Rodman”) for financial advisor services. In connection with the consulting agreement, the Company issued to Rodman warrants to purchase 8,750 shares on the Company’s common stock at a price per share of $6.00. The warrants are exercisable at any time in whole or in part during the four year period commencing one year from the date of this agreement. The Company valued these warrants utilizing the Black-Scholes options pricing model using the following assumptions at approximately $3.56 per warrant or $31,188 in total and recorded as stock-based professional fees.

         
Warrants:   At grant date  
Risk-free interest rate     0.18 %
Expected volatility     175.4 %
Expected life (in years)     5 years  
Expected dividend yield      
Fair Value:   $ 31,188  

 

Warrant activities for the nine months ended March 31, 2011 were summarized as follows:

               
    Number of Warrants   Weighted Average Exercise
Price
 
Balance at June 30, 2010     196,195   $ 3.25  
Granted     8,750     6.00  
Exercised          
Forfeited          
Balance at March 31, 2011 (Unaudited)     204,945   $ 3.37  
               
Warrants exercisable at March 31, 2011     196,195   $ 3.25  

 

The following table summarizes the Company's stock warrants outstanding at March 31, 2011:

                                           
  Warrants Outstanding   Warrants Exercisable  
  Range of
Exercise
Price
  Number
Outstanding
at March 31,
2011
  Weighted
Average
Exercise
Price
  Aggregate
Intrinsic
Value (1)
  Weighted
Average
Remaining
Contractual
Life
  Number
Exercisable
at
March 31,
2011
  Weighted
Average
Exercise
Price
 
  $ 3.20     183,503   $ 3.20   $     1.67 Years     183,503   $ 3.20  
  $ 4.00     12,692   $ 4.00   $     1.67 Years     12,692   $ 4.00  
  $ 6.00     8,750   $ 6.00   $     4.39 Years       $  
    Total     204,945   $ 3.37   $     1.79 Years     196,195   $ 3.25  

 

(1) The intrinsic value of warrants at March 31, 2011 is zero since the market value of the Company’s common stock of $1.60 as of March 31, 2011 is lower than the exercise price of the warrants.

 

22


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 13 – SEGMENT INFORMATION

 

ASC Topic 280 requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. During the nine months ended March 31, 2011 and 2010, the Company operated in three reportable business segments - (1) the Construction segment (2) Hotel segment and (3) Real estate development segment. The Company's reportable segments are strategic business units that offer different products. The Company's reportable segments, although integral to the success of the others, offer distinctly different products and services and require different types of management focus. As such, these segments are managed separately.

 

Condensed information with respect to these reportable business segments for the three and nine months ended March 31, 2011 and 2010 is as follows:

                           
    For the three months ended March 31,   For the nine months ended March 31,  
    2011
(Unaudited)
  2010
(Unaudited)
  2011
(Unaudited)
  2010
(Unaudited)
 
Revenues:                          
Construction   $ 7,994,860   $ 11,143,476   $ 32,986,009   $ 20,739,488  
Real Estate     193,661     227,917     907,030     386,898  
Hotel     739,027     749,749     2,304,502     2,262,578  
      8,927,548     12,121,142     36,197,541     23,388,964  
Depreciation:                          
Construction     117,830     112,996     348,700     340,986  
Real Estate     11,232     10,776     33,239     30,827  
Hotel     71,162     74,309     210,722     211,389  
      200,224     198,081     592,661     583,202  
Interest expense:                          
Construction     125,722     120,915     377,728     460,852  
Other         273,752         2,250,891  
      125,722     394,667     377,728     2,711,743  
Net income (loss):                          
Construction     595,024     988,505     2,947,949     1,778,111  
Real Estate     29,842     515,785     512,437     840,585  
Hotel     48,806     144,869     265,704     266,069  
Other (a)     197,761     (442,944 )   (44,562 )   1,042,720  
    $ 871,433   $ 1,206,215   $ 3,681,528   $ 3,927,485  

 

               
    March 31, 2011   June 30, 2010  
    (Unaudited)      
Identifiable long-lived tangible assets at March 31, 2011 and June 30, 2010:              
Construction   $ 6,199,184   $ 6,283,804  
Real Estate     325,423     346,430  
Hotel     1,959,472     2,097,562  
    $ 8,484,079   $ 8,727,796  

 

(a) The Company does not allocate its general and administrative expenses of its U.S. activities and the fair value changes of its derivative liabilities to its reportable segments, because these activities are managed at a corporate level. 

 

23


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 14 - STATUTORY RESERVES

 

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital or members’ equity. Appropriations to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to a welfare fund. In accordance with the Chinese Company Law, the Company allocated 10% of income after taxes to the statutory surplus reserve for the nine months ended March 31, 2011. For the nine months ended March 31, 2011, statutory reserve activity is as follows:

         
    Statutory Reserve  
Balance – June 30, 2010   $ 2,470,154  
Addition to statutory reserves     26,570  
Balance – March 31, 2011 (Unaudited)   $ 2,496,724  

 

NOTE 15 – MAJOR CUSTOMERS AND VENDORS

 

The nature of the Company’s construction segment is that at any given time, the Company will have a concentration of significant customers depending upon the number and scope of construction projects. These significant customers may not be the same from period to period depending upon the percentage of completion of the specific projects. For the nine months ended March 31, 2011, three construction projects accounted for 91.1% of the Company’s total revenues. For the nine months ended March 31, 2010, four construction projects accounted for 89.2% of the Company’s total revenues. Major customers are summarized as follows:

                           
Project Name   For the Nine Months
Ended March 31, 2011
(Unaudited)
  %   For the Nine Months
Ended March 31, 2010
(Unaudited)
  %  
Lanyu Garden No. 3 residential apartment project   $     0.0   $ 3,439,758     14.7  
Fu Xing Bath Center project         0.0     3,054,935     13.1  
Fuhengyuan residential project     5,791,319     16.0         0.0  
Tiantixingyuan No. 1 – No. 7 project     11,223,429     31.0         0.0  
Jianhe Garden residential project     15,973,781     44.1     8,310,519     35.5  
Tuzuoqi (Chasuqi) Low-rent House project             6,051,725     25.9  

 

At March 31, 2011, the Company had $8,622,243 of accounts receivable due from its major customers. Any disruption in the relationships between the Company’s construction segment and one or more of these customers, or any significant variance in the magnitude or the timing of construction projects from any one of these customers, may result in decreases in the Company’s results of operations, liquidity and cash flows.

 

The Company uses five to seven subcontractors to perform its construction services and to develop its real estate projects. Management is aware of similar subcontractors that are available to perform construction services if required and management has plans to engage their services.

 

NOTE 16 – RESTRICTED NET ASSETS

 

Schedule I of Article 5-04 of Regulation S-X requires that the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant's proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.).

 

24


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 16 – RESTRICTED NET ASSETS (CONTINUED)

 

The parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries of Gold Horse International, Inc. exceed 25% of the consolidated net assets of Gold Horse International, Inc. The ability of the Company’s Chinese operating affiliates to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because a significant portion all of the Company’s operations and revenues are conducted and generated in China through the Jin Ma Companies, all of the Company’s revenues being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict the Company’s ability to convert RMB into US Dollars.

 

The following condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.

 

GOLD HORSE INTERNATIONAL, INC.

CONDENSED PARENT COMPANY BALANCE SHEETS

             
    As of March 31,
2011
  As of June 30,
2010
    (Unaudited)    
ASSETS        
Cash and cash equivalents   $ 4,818   $ 1,043
Prepaid expenses     621     210,000
Total Current Assets     5,439     211,043
Investments in subsidiaries at equity     41,394,369     36,261,257
Due from subsidiaries     749,638     849,638
Total Assets   $ 42,149,446   $ 37,321,938
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
Accounts payable   $ 17,027   $ 48,916
Derivative liabilities     191,701     653,630
Accrued expenses     75,688     62,125
Total Current Liabilities     284,416     764,671
Stockholders' equity:            
Common stock ($0.0001 par value; 300,000,000 shares authorized;
1,989,459 and 1,934,878 shares issued and outstanding at
March 31, 2011 and June 30, 2010 respectively)
    199     193
Non-controlling interest in variable interest entities     6,095,314     6,095,314
Additional paid-in capital     7,346,784     7,127,577
Statutory reserve     2,496,724     2,470,154
Retained earnings     21,868,424     18,213,466
Other comprehensive income     4,057,585     2,650,563
Total Stockholders' Equity     41,865,030     36,557,267
Total Liabilities and Stockholders' Equity   $ 42,149,446   $ 37,321,938

 

25


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 16 – RESTRICTED NET ASSETS (CONTINUED)

 

GOLD HORSE INTERNATIONAL, INC.

CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS

               
    For the Nine Months Ended March 31,  
    2011   2010  
    (Unaudited)   (Unaudited)  
               
REVENUES   $   $  
OPERATING EXPENSES:              
Salaries and employee benefits     217,633     214,125  
General and administrative     288,858     90,228  
Total Operating Expenses     506,491     304,353  
LOSS FROM OPERATIONS     (506,491 )   (304,353 )
               
OTHER INCOME (EXPENSES):              
Gain on extinguishment of derivative liabilities         1,893,310  
Gain on change in fair value of derivative liabilities     461,929     1,704,654  
Interest expense         (2,250,891 )
Total Other Income     461,929     1,347,073  
(LOSS) GAIN ATTRIBUTABLE TO PARENT ONLY     (44,562 )   1,042,720  
EQUITY INCOME EARNINGS OF SUBSIDIARIES     3,726,090     2,884,765  
               
NET INCOME   $ 3,681,528   $ 3,927,485  

 

26


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 16 – RESTRICTED NET ASSETS (CONTINUED)

 

GOLD HORSE INTERNATIONAL, INC.

CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS

               
    For the Nine Months Ended March 31,  
    2011   2010  
    (Unaudited)   (Unaudited)  
               
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net income   $ 3,681,528   $ 3,927,485  
Adjustments to reconcile net income to net cash used in operating activities:              
Equity in earnings of subsidiary     (3,726,090 )   (2,884,765 )
Common stock issued for services     116,716                   232,500  
Common stock issued for interest         28,039  
Interest expense from amortization of debt discount                       2,183,000  
Warrants issued for services     31,188      
Gain on extinguishment of derivative liabilities         (1,893,310 )
Gain on change in fair value of derivative liabilities     (461,929 )   (1,704,654 )
Changes in assets and liabilities:              
Prepaid expenses     210,000      
Accounts payable     (31,889 )                  (9,654 )
Accrued expenses     84,251                   (124,901 )
NET CASH USED IN OPERATING ACTIVITIES     (96,225 )               (246,260)  
               
CASH FLOWS FROM INVESTING ACTIVITIES:              
Proceeds from subsidiaries     100,000                   1,192,504  
NET CASH PROVIDED BY INVESTING ACTIVITIES     100,000                   1,192,504  
               
CASH FLOWS FROM FINANCING ACTIVITIES:              
Repayment for convertible debt         (983,550 )
NET CASH USED IN FINANCING ACTIVITIES         (983,550 )
               
NET INCREASE (DECREASE) IN CASH     3,775                    (37,306 )
               
CASH - beginning of period     1,043     39,956  
               
CASH - end of period   $ 4,818   $ 2,650  

 

NOTE 17 – COMMITMENTS

 

Other than in the normal course of business, the Company did not have significant capital and other commitments, or significant guarantees as of March 31, 2011.

 

27


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 18 – RESTATEMENT OF INTERIM FINANCIAL RESULTS

 

The Company’s consolidated financial statements have been restated for the three and nine months ended March 31, 2010 to properly record certain common stock purchase warrants and conversion options related to convertible debt as derivative liabilities in accordance with Derivative and Hedging Topic of the FASB Accounting Standards Codification Topic 815 (“ASC 815”), which has been effective for the Company since July 1, 2009, and to record the subsequent accounting for the changes in the fair value of the associated liabilities at March 31, 2010. Accordingly, the Company’s unaudited interim consolidated balance sheets, statements of income, and statements of cash flows at March 31, 2010 have been restated herein. All the respective restatement adjustments are non-cash in nature and not related to the operations of the Jin Ma Companies. The effect of correcting these errors in the Company’s (a) unaudited consolidated balance sheets at March 31, 2011; (b) unaudited consolidated statements of income for the three and nine months ended March 31, 2010; and (c) unaudited consolidated statements of cash flows for the nine months ended March 31, 2010 are shown in the tables as follows:

                       
Consolidated Balance Sheet data   March 31, 2010 (Unaudited)  
    As Previously
Filed
  Adjustments
to Restate
    Restated  
Total Assets   $ 49,326,183   $     $ 49,326,183  
                       
Derivative liabilities         924,132   (a)   924,132  
Total Current Liabilities     16,644,892     924,132       17,569,024  
Total Liabilities     16,988,655     924,132       17,912,787  
                       
Stockholders’ Equity                      
Preferred stock ($0.0001 par value; 20,000,000 shares authorized; none issued and outstanding)                
Common stock ($0.0001 par value; 300,000,000 shares authorized;
1,739,230 shares issued and outstanding)
    174           174  
Non-controlling interest in variable interest entities     6,095,314           6,095,314  
Additional paid-in capital     8,503,411     (2,183,000 ) (b)   6,478,495  
            158,084   (d)      
Statutory reserve     2,330,446           2,330,446  
Retained earnings     12,906,816     1,100,784   (c)   14,007,600  
Accumulated other comprehensive income     2,501,367           2,501,367  
Total Stockholders’ Equity     32,337,528     (924,132 )     31,413,396  
Total Liabilities and Stockholders’ Equity   $ 49,326,183   $     $ 49,326,183  
   
(a) To record conversion feature and warrant derivative liability
(b) To reverse effect on additional paid-in capital as a result of the reclassification of warrants as derivative liability
(c) To adjust retained earnings for the adoption of ASC 815 accounting in (a) and (b)
(d) To reclassify warrant derivative liabilities upon exercise of warrants

 

28


GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

 

NOTE 18 – RESTATEMENT OF INTERIM FINANCIAL RESULTS (CONTINUED)

 

Consolidated Statement of Income Data  

For the Three Months Ended

March 31, 2010 (Unaudited)

   

For the Nine Months Ended

March 31, 2010 (Unaudited)

 
    As previously
filed
  Adjustments
to Restate
  Restated     As Previously
Filed
  Adjustments
to Restate
  Restated  
Income from Operations (*)   $ 1,448,260       $ 1,448,260     $ 2,182,570       $ 2,182,570  
                                         
Other Income (Expenses):                                        
Change in fair value of derivative liabilities         (298,283 )   (298,283 ) (e)       1,704,654     1,704,654  
Gain from debt extinguishment         270,101     270,101   (f)       1,893,310     1,893,310  
Gain on sale of land use rights (*)     55         55       449,528         449,528  
Interest income     731,521         731,521       1,274,716         1,274,716  
Interest expense     (394,667 )       (394,667 )     (2,711,743 )       (2,711,743 )
Total Other Income (Expenses)     336,909     (28,183 )   308,727       (987,499 )   3,597,964     2,610,465  
                                         
Income (Loss) before Provision for Income Taxes     1,785,169     (28,183 )   1,756,987       1,195,071     3,597,964     4,793,035  
Provision for Income Taxes     550,772         550,772       865,550         865,550  
Net Income (Loss)   $ 1,234,397   $ (28,183 ) $ 1,206,215     $ 329,521   $ 3,597,964   $ 3,927,485  
                                         
Comprehensive Income (Loss)   $ 1,239,150   $ (28,183 ) $ 1,210,968     $ 368,134   $ 3,597,964   $ 3,966,098  
                                         
Net Income (Loss) per Common Share:                                        
Basic   $ 0.73   $ (0.02 ) $ 0.71     $ 0.22   $ 2.35   $ 2.57  
Diluted   $ 0.68   $ 0.02   $ 0.70     $ 0.20   $ 2.34   $ 2.54  
Weighted Average Common Shares Outstanding:                                        
Basic     1,702,336           1,702,336       1,531,055           1,531,055  
Diluted     1,814,095           1,711,679       1,648,004           1,548,957  
   
(e) To reflect change in fair value of derivative liabilities
(f) To reflect extinguishment of conversion feature derivative liability upon conversion of debt to equity
(*) Gain on sale of land use rights has been reclassified from income from operations to other income to conform to the current period’s presentation

 

             
Consolidated Statement of Cash Flows  

For the Nine Months Ended

March 31, 2010 (Unaudited)

    As previously filed   Adjustments
to Restate
  Restated
Net Income $ 329,521   $ 3,597,964   $ 3,927,485  
Adjustments to reconcile net income to net cash used in operating activities:            
Gain on change in fair value of derivative liabilities   —     (1,704,654) (e) (1,704,654)
Gain from debt extinguishment   —     (1,893,310) (f) (1,893,310)
Cash Used in Operating Activities   (531,041)   —     (531,041)

 

29


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

 

The following discussion of our financial condition and results of operation should be read in conjunction with the financial statements and the notes to those 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, We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Overview

 

We are not engaged in any business or operations other than pursuant to the terms of the various Contractual Arrangements with the Jin Ma Companies as described elsewhere in this report. As such, we are completely dependent on the Contractual Arrangements. We do not generate any revenues. Pursuant to the requirements of ASC Topic 810, under generally accepted accounting principles the Jin Ma Companies are deemed to be variable interest entities (“VIEs”) and we are required to consolidate the financial statements of the Jin Ma Companies with our financial statements. Accordingly, and as described elsewhere in this report, the assets and liabilities at March 31, 2011 and June 30, 2010 and the results of operations for the three and nine months ended March 31, 2011 and 2010 are primarily those of the Jin Ma Companies. All of those assets and operations are located in the PRC and the Contractual Arrangements are subject to enforcement under the laws of the PRC. There are no assurances we will be able to enforce these agreements if necessary. If we are unable to enforce any legal rights we may have under these contracts or otherwise, our ability to continue as a going concern is in jeopardy. In addition, the terms of these contracts expire in August 2016 and there are no assurances these agreements will be renewed. If the Contractual Arrangements are not renewed or are significantly modified, unless we have developed business and operations which are independent of the Jin Ma Companies, of which there are no assurances, we will in all likelihood be forced to cease our operations.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including the allowance for doubtful accounts, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, the calculation of costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings, provisions for estimated losses on uncompleted contracts, the fair value of conversion options embedded in convertible debt, and the fair values of warrants granted in connection with the issuance of the convertible debt. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of net revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. These critical accounting policies are discussed in more detail in the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June 30, 2010 and in Note 1 to the unaudited consolidated financial statements contained herein.

 

Recent Accounting Pronouncements

 

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. This ASU amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Except for the expanded disclosure requirements, the adoption of this ASU does not have a material impact on the Company’s consolidated financial statements.

 

In December 2010, FASB issued ASU No. 2010-28, Intangibles - Goodwill and Other (ASC Topic 350). Under Topic 350 on goodwill and other intangible assets, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The amendments in this update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more

 

30


likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. As we do not have any significant intangible assets, we believe that the impact of adopting this update will not be material on our consolidated results of operations and financial position.

 

In December 2010, FASB issued Accounting Standards Update (ASU) No. 2010-29, Business Combinations (ASC Topic 805). The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s). The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is permitted. As we did not enter into any business combinations in fiscal year 2010, we believe that the adoption this update will not have any material impact on our financial statement disclosures. However, if we enter into material business combinations in the future, the adoption of this update may have significant impact on our financial statement disclosures.

 

In January 2011, the FASB issued ASU No. 2011-01- Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. This deferral will have no material impact on our consolidated financial statements.

 

In January 2011, the FASB issued ASU No. 2011-02- Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this update provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption within those annual periods. Early application is permitted. The adoption of the provisions in ASU 2011-02 will have no material impact on our consolidated financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

 

RESULTS OF OPERATIONS

 

Three and Nine Months Ended March 31, 2011 Compared to the Three and Nine Months Ended March 31, 2010

                                                   
    For the Three Months Ended March 31,   For the Nine Months Ended March 31,  
    2011   % of
Total Net
Revenues
  2010   % of
Total Net
Revenues
  2011   % of
Total Net
Revenues
  2010   % of
Total Net
Revenues
 
NET REVENUES                                                  
Construction   $ 7,994,860     89.6   $ 11,143,476     91.9   $ 32,986,009     91.1   $ 20,739,488     88.6  
Hotel     739,027     8.3     749,749     6.2     2,304,502     6.4     2,262,578     9.7  
Real estate     193,661     2.2     227,917     1.9     907,030     2.5     386,898     1.7  
Total Revenues     8,927,548     100.0     12,121,142     100.0     36,197,541     100.0     23,388,964     100.0  
COST OF REVENUES                                                  
Construction     6,851,787     85.7*     9,559,477     85.8*     28,289,607     85.8*     17,889,157     86.3*  
Hotel     414,640     56.1*     478,135     63.8*     1,323,695     57.4*     1,486,994     65.7*  
Real estate     130,334     67.3*     168,805     74.1*     670,548     73.9*     335,855     86.8*  
Total Cost of                                                  
Revenues     7,396,761     82.9     10,206,417     84.2     30,283,850     83.7     19,712,006     84.3  
GROSS PROFIT                                                  
Construction     1,143,073     14.3*     1,583,999     14.2*     4,696,402     14.2*     2,850,331     13.7*  
Hotel     324,387     43.9*     271,614     36.2*     980,807     42.6*     775,584     34.3*  
Real estate     63,327     32.7*     59,112     25.9*     236,482     26.1*     51,043     13.2*  
Total Gross Profit   $ 1,530,787     17.1   $ 1,914,725     15.8   $ 5,913,691     16.3   $ 3,676,958     15.7  

 

   *   Represents percentage of respective segments total net revenues

 

31


Net Revenues. For the nine months ended March 31, 2011, our overall net revenues increased 54.8% from the nine months ended March 31, 2010. For the three months ended March 31, 2011, our overall net revenues decreased 26.3% from the three months ended March 31, 2010. The fluctuation in overall net revenues was mainly due to the fluctuation in activity in our construction and real estate operations caused by the timing of our construction projects as well as the timing of the sale real estate units held for sale. We believe that the Hohhot real estate market, a Tier 3 city, remains strong and has not been effected by any real estate bubble or restriction that have been seen in Tier 1 cities. However, changes in national and regional economic conditions, as well as local economic conditions where we conduct our operations and where prospective purchasers of our homes live, may result in more caution on the part of homebuyers and consequently fewer home purchases. Reference to Tier 1, Tier 2 and Tier 3 cities refer to the categories set forth as the below.  We refer to cities that meet the following criteria as Tier 1 cities:

 

·    Gross Domestic Product, or GDP, over RMB 200 billion (US$29 billion);

 

·    Population with permanent residency in urban area over 5 million;

 

Tier 2 cities are cities that generally meet the following criteria,

 

·    Gross Domestic Product, or GDP, over RMB 150 billion (US$23 billion) and below RMB 200 billion (US$29 billion);

 

·    Population with permanent residency in urban area over 3 million;

 

Tier 3 cities are the cities that do not meet one or more criteria listed above.

 

For the three months ended March 31, 2011 and 2010, net revenues from our construction segment operations are summarized as follows:

                           
Project Name   For the Three Months
Ended March 31, 2011
  %
(*)
  For the Three Months
Ended March 31, 2010
  %
(*)
 
Ai Bo Garden residential apartment project (Phase I and II)   $     0.0   $ (14 )   0.0  
Lanyu Garden project         0.0     423     0.0  
Fu Xing Committee Bath Center project         0.0     375     0.0  
Jianhe Garden residential project     104,771     1.3     5,977,284     53.6  
Tuzuoqi (Chasuqi) Low-rent House project     (17 )   0.0     5,165,408     46.4  
Fuhengyuan residential project     2,995,806     37.5          
Tiantixingyuan No. 1 – No. 7 project     4,894,300     61.2          
Total construction segment revenues   $ 7,994,860     100.0   $ 11,143,476     100.0  

 

For the nine months ended March 31, 2011 and 2010, net revenues from our construction segment operations are summarized as follows:

                           
Project Name   For the Nine Months
Ended March 31, 2011
  %
(*)
  For the Nine Months
Ended March 31, 2010
  %
(*)
 
Ai Bo Garden residential apartment project (Phase I and II)   $     0.0   $ (117,449 )   (0.6 )
Lanyu Garden project         0.0     3,439,758     16.6  
Fu Xing Committee Bath Center project         0.0     3,054,935     14.7  
Jianhe Garden residential project     15,973,782     48.4     8,310,519     40.1  
Tuzuoqi (Chasuqi) Low-rent House project     (2,521 )   0.0     6,051,725     29.2  
Fuhengyuan residential project     5,791,319     17.6          
Tiantixingyuan No. 1 – No. 7 project     11,223,429     34.0          
Total construction segment revenues   $ 32,986,009     100.0   $ 20,739,488     100.0  

 

   *   Represents percentage of construction segment net revenues.

 

32


At March 31, 2011, the percentage completed for each respective job is as follows:

         
    % Complete
Tuzuoqi Low-rent project     100.0 %
Jianhe Garden residential project     100.0 %
Fuhengyuan residential project     35.0 %
Tiantixingyuan No. 1 – No. 7 project     42.5 %

 

As of March 31, 2011, Jin Ma Construction had two uncompleted third party construction projects in progress:

 

  the Fuhengyuan residential project, a project consisting of ten residential buildings with a total construction area of 110,129 square meters that began construction in October 2010 with an expected completion date of December 2011 was 35.0% complete at March 31, 2011, and 
     
  the Tiantixingyuan Housing Project, a project consisting of seven residential buildings with a total construction area of 90,607 square meters that began construction at the end of September 2010 and was 42.5% complete at March 31, 2011.

 

The fluctuation in Jan Ma Construction’s revenue for the three and nine months ended March 31, 2011 as compared to the three and nine months ended March 31, 2010 was attributable to a the timing of construction work performed. As of March 31, 2011, we had two construction projects in process and compared to three as of March 31, 2010. At any given time Jin Ma Construction will have a concentration of significant customers depending upon the number and scope of construction projects. These significant customers may not be the same from period to period depending upon the percentage of completion of the specific projects. Any disruption in the relationships between Jin Ma Construction and one or more of these customers, or any significant variance in the magnitude or the timing of construction projects from any one of these customers, may result in decreases in our results of operations, liquidity and cash flows. In addition, if Jin Ma Construction does not successfully manage its business so that it has new projects ready to start as current projects are completed its revenues will decline which will materially adversely impact our liquidity and operations in future periods. In addition to the third-party construction projects outlined above, Jin Ma Construction has been acting as general contractor for Jin Ma Real Estate to construct residential real estate development projects as discussed below and Jin Ma Construction is now focusing on acting as general contractor for Jin Ma Real Estate in order to vertically integrate all development processes from construction management to the sale of real estate units to customers.

 

Net revenues for Jin Ma Hotel’s operations increased 1.9% for the nine months ended March 31, 2011 from the nine months ended March 31, 2010 primarily due to the increased sales at the hotel’s banquet and catering facility offset by a decrease in revenue from lodging. Net revenues from Jin Ma Hotel’s operations decreased 1.4% for the three months ended March 31, 2011 from the three months ended March 31, 2010 mainly due to a small decrease in sales at the hotel’s banquet and catering facility and a decrease in revenue from lodging due to normal market fluctuations. We continue to focus on our marketing efforts to increase traffic to the hotel, to target new tour groups and local traffic to the banquet facilities.

 

For the three and nine months ended March 31, 2011 and 2010, net revenues from real estate development operations are summarized as follows:

               
Project Name   For the Three Months
Ended March 31, 2011
  For the Three Months
Ended March 31, 2010
 
Building 1 to 4 of Procuratorate Housing Estates   $ 91,451   $  
Inner Mongolia Electrical Vocational Technical School     1,132     19  
Inner Mongolia Chemistry College     101,078     227,898  
               
Total real estate segment net revenues   $ 193,661   $ 227,917  

 

               
Project Name   For the Nine Months
Ended March 31, 2011
  For the Nine Months
Ended March 31, 2010
 
Building 1 to 4 of Procuratorate Housing Estates   $ 417,342   $  
Inner Mongolia Electrical Vocational Technical School     172,726     159,000  
Inner Mongolia Chemistry College     316,962     227,898  
               
Total real estate segment net revenues   $ 907,030   $ 386,898  

 

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In 2010 the focus of Jin Ma Construction was changed from acting as a general contractor for third party projects to building projects for Jin Ma Real Estate. Accordingly, Jin Ma Construction does not report revenues from work completed for Jin Ma Real Estate. In fiscal 2011 and beyond, we expect Jin Ma Real Estate’s revenues and gross profits to increase significantly from the sale of real estate units from internally developed projects. Through the nine months ended March 31, 2011, our results reflected these expectations, and we expect this trend to continue during the balance of fiscal 2011. During the third quarter of 2011, real estate segment net revenues decreased by $34,256 or 15.0% as was attributable to a decrease in revenues recognized from the collections of funds from the Inner Mongolia Chemistry College on the installment method of $126,820 due to timing of collections offset by an increase of revenues from the sale of units at Building 1 to 4 of Procuratorate Housing Estates of $91,451. We did not have such sales of units during the third quarter of 2010.

 

At March 31, 2011, we have acquired land use rights and/or began developing the following residential projects in cooperation with Jin Ma Construction that acts as the general contractor, an example of projects under the Jin Ma Companies new integrated business model. The timing of any revenues from those projects is presently undeterminable and while we expect to fully sell out each project, there are no assurances these expectations are correct. If we sell less than 100% of any project, our estimates of revenues from that project will decline from those set forth below.   

 

 

 

 

Total construction in progress at

March 31, 2011

(Unaudited)

 

Prepaid land use rights and construction costs for building 6 of the

Procuratorate Housing Estates (Jiari Residential Building)

$ 917,823 (a)
Prepaid land use rights and construction costs for Shuian Renjia project   19,771,345 (b)
Prepaid land use rights for the Jinwu residential project          2,516,371 (c)
Prepaid land use rights for the Beiyuan residential building project         9,893,304 (d)

 

Total construction in progress

$ 33,098,843  

 

  (a) Building 6 of the Procuratorate Housing Estates (Jiari Residential Building) is located in Yuquan District, Hohhot City, Inner Mongolia, has a construction area of 38,000 square meters and is expected to be completed in January 2012. The successful sell out of this project is expected to yield revenues of 180 million RMB or $27.7 million during fiscal 2012.
     
  (b) The Shuian Renjia residential project is located at the south part of East Xinhua Street in Hohhot, and will consist of two buildings each with 17 floors and a total of 364 apartments. The total development area will be 56,841.2 square meters.  The Shuian Renjia project is expected to be completed by May 2011 and requires a total investment of 140 million RMB or about $22 million. The successful completion of this project is expected to yield revenues of 227 million RMB or $32.9 million during the fourth quarter of 2011. On January 10, 2011, Jin Ma Real Estate signed a sales agreement with a local company. Jin Ma Real Estate will sell the Shuian Renjia residential units to employees of a local company pursuant to a sales agreement. As a result, Jin Ma Real Estate will collect approximately $20 million by the end of May 2011 and collect approximately $13 million when the sales transaction is completed. 
     
  (c) The Jinwu residential project will have a construction area of 53,000 square meters and is expected to be completed in December 2012. The successful sell out of this project is expected to yield revenues of 237.5 million RMB or $36.5 million during fiscal 2013.
     
  (d) The Beiyuan residential project will have a construction area of 70,000 square meters and is expected to be completed in fiscal 2013. The successful sell out of this project is expected to yield revenues of 250.0 million RMB or $38.5 million during fiscal 2013.

 

Virtually all purchasers of our homes finance their acquisitions through lenders providing mortgage financing. A substantial increase in mortgage interest rates or unavailability of mortgage financing would adversely affect the ability of prospective homebuyers to obtain the financing they would need in order to purchase our homes, as well as adversely affect the ability of prospective move-up homebuyers to sell their current homes. For example, if mortgage financing became less available, demand for our homes could decline. A reduction in demand could also have an adverse effect on the pricing of our homes because we (and our competitors) may reduce prices in an effort to better compete for home buyers. A reduction in pricing could result in a decline in revenues and in our margins. We do not expect any substantial change of current mortgage policies or the prevailing mortgage rate in the near future. The People's Daily (in PRC.) reported: "As with much of China, economic growth has led to a boom in construction, including new commercial development and large apartment complexes. The nominal GDP of Inner Mongolia in 2009 was 970 billion RMB (US$142 billion), a growth of 16.9% from 2008, with an average annual increase of 20% from the period 2003-2007." The New York Times reported in May 2009: "Not long ago, residents of this region 350 miles west of Beijing lived in elaborate tents called yurts. Now, with a population of 1.5 million, many live in homes that would make New Yorkers jealous. According to Bao Chongming, the regional vice-mayor, they have the second highest per-capita income in China (trailing only Shanghai, the country's financial capital) and an annual economic growth

 

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rate of 40 percent." Based on historical events, we believe that real estate development in Hohhot, Inner Mongolia, as a third-tier city, and its surrounding areas will remain strong and should not feel the effects of the slower real estate markets occurring in tier-one cities such as Beijing and Shanghai.

 

Jin Ma Real Estate will continue to record revenues from the Chemistry School during the rest of fiscal 2011 upon collection of the annual payment due. 

 

Cost of Revenues. Overall, cost of revenues as a percentage of net revenues decreased from 84.3% for nine months ended March 31, 2010 to 83.7% for the nine months ended March 31, 2011. Our overall cost of revenues as a percentage of our overall net revenues decreased from 84.2% for the three months ended March 31, 2010 to 82.9% for the three months ended March 31, 2011. This overall change included the following segment changes:

 

  Cost of revenues as a percentage of net revenues from Jin Ma Construction’s operation for the nine months ended March 31, 2011 decreased to 85.8% from 86.3% for the nine months ended March 31, 2010. Cost of revenues as a percentage of net revenues from Jin Ma Construction’s operation for the three months ended March 31, 2011 decreased to 85.7% from 85.8% for the three months ended March 31, 2010. The slight decrease was mainly attributable to normal business fluctuations. We expect our cost of revenues as a percentage of net revenues from Jin Ma Construction will remain at its current level with minimal increase for the rest of fiscal 2011. 
     
  Cost of revenues as a percentage of net revenues for Jin Ma Hotel’s operation for the nine months ended March 31, 2011 decreased to 57.4% from 65.7% for the nine months ended March 31, 2010. Cost of revenues as a percentage of net revenues from Jin Ma Hotel’s operation for the three months ended March 31, 2011 decreased to 56.1% from 63.8% for the three months ended March 31, 2010. The decrease in cost of revenues as a percentage of net revenues was primarily attributable to the better management of raw material costs. We expect the cost of revenues as a percentage of net revenues for our hotel operation will remain at its current level in the near future.
     
  Cost of revenues for Jin Ma Real Estate’s operation as a percentage of net real estate revenues for the nine months ended March 31, 2011 decreased to 73.9% from 86.8% for the nine months ended March 31, 2010. Cost of revenues for Jin Ma Real Estate’s operation as a percentage of net real estate revenues for the three months ended March 31, 2011 decreased to 67.3% from 74.1% for the three months ended March 31, 2010. For the nine months ended March 31, 2011, 19.0% of revenues from our real estate development operations were attributable to the Vocational School, 35.0% of revenues from our real estate development operation were attributable to the Chemistry School, and 46.0% were attributable to the sale of remaining units of real estate held for sale. For the nine months ended March 31, 2010, 41.1% of revenues from our real estate development operations were attributable to the Vocational School and 58.9% of revenues were attributable to the Chemistry School which were both recognized on the installment method which apportions each cash receipt and principal payment by the buyer between cost recovered and profit. The different revenue mix for the nine months ended March 31, 2011 had an effect of lowering cost of revenues as a percentage of net revenues as compared to the nine months ended March 31, 2010. In the third quarter of 2011, 0.6% of revenues for our real estate development operation related to the Vocational School, 52.2% of revenues related to the Chemistry School and the remaining 47.2% was attributable to the cost of our remaining units of real estate held for sale. In the third quarter of 2010, 100% of revenues for our real estate development operation was attributable to the Chemistry School and was recognized on the installment method which apportions each cash receipt and principal payment by the buyer between cost recovered and profit. The different revenue mix in the third quarter of 2011 had an effect of lowering cost of revenues as a percentage of net revenues as compared to the third quarter of 2010. We expect gross margins on Jin Ma Real Estate development projects to range from 30% to 40% in future periods.

 

Gross Profit. Gross profit increased 60.8% for the nine months ended March 31, 2011 from the nine months ended March 31, 2010. Gross profit decreased 20.1% for the three months ended March 31, 2011 from the three months ended March 31, 2010. Gross profit margin increased from 15.7% for the nine months ended March 31, 2010 to 16.3% for the nine months ended March 31, 2011. Gross profit margin increased from 15.8% for the three months ended March 31, 2010 to 17.1% for the three months ended March 31, 2011. The changes in gross profit were attributable to the changes in revenues generated from Jin Ma Construction and Jin Ma Real Estate.

 

Total Operating Expenses. For the nine months ended March 31, 2011, overall operating expenses increased 15.1% from the nine months ended March 31, 2010, which was mainly attributable to a decrease in bad debt recovery, an increase in salaries and employee benefits and an increase in selling, general and administrative offset by a decrease in other hotel operating expenses. For the three months ended March 31, 2011, overall operating expenses increased 29.7% from the three months ended March 31, 2010, which was mainly due to an increase in other hotel operating expenses and a decrease in bad debt recovery, offset by a decrease in selling, general and administrative expenses. We expect that operating expenses will maintain at their current level with minimal increases in the near future. We do not expect any substantial change in total operating expenses caused by inflation in the near future.

 

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Other Hotel Operating Expenses. Other hotel operating expenses represent costs and expenses associated with operating Jin Ma Hotel's restaurant and banquet facilities and hotel operating expenses except for food and beverage costs which have been included in cost of revenues. Other hotel operating expenses decreased 39.1% for the nine months ended March 31, 2011 from the nine months ended March 31, 2010. Other hotel operating expenses increased 158.2% for the three months ended March 31, 2011 from the three months ended March 31, 2010. Other hotel operating expenses were 2.0% of hotel revenues for the nine months ended March 31, 2011 as compared to 3.4% for the nine months ended March 31, 2010. Other hotel operating expenses were 2.1% of hotel revenues for the three months ended March 31, 2011 as compared to -3.5% for the three months ended March 31, 2010. The decrease in other hotel operating expenses for the nine months ended March 31, 2011 was primarily attributable to a decrease in expenditures related to the purchase of low cost items such as plates, glasses which were expensed in the 2010 period, the period these items were put in use. The increase in other hotel operating expenses for the three months ended March 31, 2011 was mainly due to the capitalization of low cost items such as chairs, tables and other items in the third quarter of fiscal 2010 that were previously expensed in the prior quarter of fiscal 2010 and reclassified to property and equipment during the third quarter of fiscal 2010.

 

Bad Debt Recovery. For the nine months ended March 31, 2011, bad debt recovery income amounted to $196,903 as compared to $215,090 for the nine months ended March 31, 2010, a decrease of 8.5% and relates to the collection of aged receivable balances previously written off. For the three months ended March 31, 2011, bad debt recovery income amounted to $1,291 as compared to $109,535 for the three months ended March 31, 2010, a decrease of 98.8% and relates to the collection of aged receivable balances previously written off. We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in the Jin Ma Companies existing accounts and other receivables. We periodically review the Jin Ma Companies’ accounts receivable and other receivables to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

Salaries and Employee Benefits. For the nine months ended March 31, 2011, salaries and employee benefits increased 4.2% from the nine months ended March 31, 2010. For the three months ended March 31, 2011, salaries and employee benefits increased 0.8% from the three months ended March 31, 2010. This increase is primarily related to the increase in employee salaries. We expect that salaries and employee benefits will remain at the current level with minimal increase in the near future.

 

Depreciation. For the nine months ended March 31, 2011, depreciation increased 1.6% as compared to the nine months ended March 31, 2010. For the three months ended March 31, 2011, depreciation increased 1.1% as compared to the three months ended March 31, 2010. This slight increase was primarily due to our newly purchased fixed assets for which we began the depreciation in the nine months ended March 31, 2011.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of selling, office expenses and supplies, utilities, insurance, telephone and communications, maintenance and automobile expense incurred by the Jin Ma Companies as well as expenses incurred by us which primarily consist of professional and other fees. Selling, general and administrative expenses increased 54.6% for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010. Selling, general and administrative expenses decreased 13.8% for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. For the nine months ended March 31, 2011, the increase for selling, general and administrative expenses was primarily attributable to the increase in the amortization of stock-based professional fees for business development and planning of $150,000 and warrants issued for service of approximately $31,000 and the increase in fees paid for auditors’ service of approximately $10,000. We expect to incur similar expenses in future periods. For the three months ended March 31, 2011, the decrease for selling, general and administrative expenses was mainly due to the decrease in the amortization of stock-based professional fees for business development and planning of $30,000 offset by the increase in travel expenses of approximately $10,000.

 

Total Other Income (Expenses). For the nine months ended March 31, 2011, we recorded other income of $796,327 as compared to other income of $2,610,465 in the nine months ended March 31, 2010. For the three months ended March 31, 2011, we recorded other income of $233,539 as compared to other income of $308,727 in the three months ended March 31, 2010. For the three and nine months ended March 31, 2011 and 2010, total other income (expenses) primarily consisted of the following:

 

  For the three and nine months ended March 31, 2011, we did not record any gain on extinguishment of derivative liabilities as compared to a gain of $270,101 and $1,893,310 related to the conversion and repayment of convertible debt during the three and nine months ended March 31, 2010;
     
  For the nine months ended March 31, 2011, we recorded a gain on change in fair value of derivative liabilities of $461,929 related to the change in fair value of derivative liabilities associated with warrants as compared to $1,704,654 related to the change in fair value of derivative liabilities associated with warrants and the embedded conversion option on convertible debt during the nine months ended March 31, 2010. For the three months ended March 31, 2011, we recorded a gain on change in fair value of derivative liabilities of $304,837 related to the change in fair value of derivative liabilities associated with warrants as compared to a loss on change in fair value of derivative liabilities of $298,283 related to the change in fair value of derivative

 

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    liabilities associated with warrants and the embedded conversion option on convertible debt during the three months ended March 31, 2010;
     
  For the nine and three months ended March 31, 2011, we did not dispose any assets. For the nine and three months ended March 31, 2010, Jin Ma Construction recognized a gain from the sale of land use rights and property of $449,528 and $55, respectively.
     
  For the nine months ended March 31, 2011, we recorded interest income of $705,322 as compared to $1,274,716 for the nine months ended March 31, 2010, a decrease of $569,394 or 44.7%, which was primarily attributable to the decrease in the recording of interest income from the collection of the payments from the Chemistry School. For the three months ended March 31, 2011, we recorded interest income of $54,462 as compared to $731,521 for the three months ended March 31, 2010, a decrease of $677,059 or 92.6%, which was mainly attributable to the decrease in the recording of interest income from the collection of payments from the Chemistry School.
     
  For the nine months ended March 31, 2011, we recorded interest expense of $377,728 as compared to $2,711,743 for the nine months ended March 31, 2010, a decrease of $2,334,015 or 86.1%, which was attributable to a decrease in interest expense from the amortization of debt discount of approximately $2,183,000, a decrease in interest of approximately $118,000 attributable to the repayment of convertible debt, and a decrease in interest of approximately $83,000 from the repayment of loan payable offset by the decrease in interest expenses caused by the write-off of a penalty of $50,000 in the 2010 period. For the three months ended March 31, 2011, we recorded interest expense of $125,722 as compared to $394,667 for the three months ended March 31, 2010, a decrease of $268,945 or 68.1%, which was primarily attributable to a decrease in interest expense from the amortization of debt discount of approximately $251,000 and a decrease in interest of approximately $22,000 attributable to the repayment of convertible debt.

 

Provision for Income Taxes. Total provision for income taxes increased 51.2% for the nine months ended March 31, 2011 (26.2% of income before income taxes) from the nine months ended March 31, 2010 (18.1% of income before income taxes). Total provision for income taxes decreased 47.7% for the three months ended March 31, 2011 (24.8% of income before income taxes) from the three months ended March 31, 2010 (31.3% of income before income taxes). The change in the provision for income taxes was mainly attributable to a change in income before income taxes related to our Chinese subsidiaries and VIEs offset by the effect of our U.S. net gains (losses). The change in the provision for income taxes as a percentage of income before income taxes was attributable to the effect of our U.S. net gains (losses) on our overall effective tax rate.

 

Net Income. Net income decreased 6.3% for the nine months ended March 31, 2011 from the nine months ended March 31, 2010. Net income decreased 27.8% for the three months ended March 31, 2011 from the three months ended March 31, 2010. For the nine months ended March 31, 2011, this decrease in net income was attributable to an increase in operating expenses, a decrease in other income and an increase in provision for income taxes, offset by an increase in revenues and related gross profits. For the three months ended March 31, 2011, this decrease in net income was primarily attributable to a decrease in revenues and related gross profits, a decrease in other income and an increase in operating expenses, offset by a decrease in provision for income taxes. This translates to basic net income per common share of $1.88 and $2.57, and diluted net income per common share of $1.86 and $2.54, for the nine months ended March 31, 2011 and 2010, respectively, and basic net income per common share of $0.44 and $0.71, and diluted net income per common share of $0.44 and $0.70, for the three months ended March 31, 2011 and 2010, respectively.

 

Comprehensive Income. For the nine months ended March 31, 2011, we reported unrealized gain on foreign currency translation of $1,407,022 as compared to $38,613 for the nine months ended March 31, 2010 which reflects the effect of the declining value of the U.S. dollar. These gains are non-cash items. For the three months ended March 31, 2011, we reported unrealized gain on foreign currency translation of $252,349 as compared to $4,753 for the three months ended March 31, 2010. As described elsewhere herein, the functional currency of our China subsidiaries and variable interest entities is the Chinese Renminbi. The accompanying consolidated financial statements have been translated and presented in U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange for the period for net revenues, costs, and expenses. Net gains resulting from foreign exchange transactions, if any, are included in the consolidated statements of income and do not have a significant effect on our consolidated financial statements. As a result of this non-cash foreign currency translation gain, we reported comprehensive income of $5,088,550 and $1,123,782 for the nine and three months ended March 31, 2011, respectively, as compared to comprehensive income of $3,966,098 and $1,210,968 for the nine and three months ended March 31, 2010, respectively.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash. Our principal liquidity demands are based on the capital needs of the Jin Ma Companies related to the development of new properties, land use right acquisitions, and our general corporate purposes. We do not have any external sources of liquidity. The Jin Ma Companies have historically relied on bank loans and advances from related parties to supplement their working capital.

 

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At March 31, 2011, we had a cash balance of $364,047, substantially all of which is located in financial institutions in China under the control of the Jin Ma Companies.

 

Our working capital increased by $5,324,033 to $4,784,691 at March 31, 2011 from a working capital deficit balance of $539,342 at June 30, 2010. This increase in working capital is primarily attributable to:

 

        An increase in cash and cash equivalents of $54,051,

        An increase in accounts receivable, net of allowance for doubtful accounts, of $3,161,634,

        An increase in notes receivable on sales type lease – current portion of $487,127,

        An increase in other receivables, net of allowance for doubtful accounts, of $87,587,

        An increase in construction in progress – current portion of $19,771,345,

        A decrease in accrued expenses of $272,166,

        A decrease in taxes payable of $832,885,

        A decrease in derivative liability of $461,929,

        A decrease in billings in excess of costs and estimated earnings of $89,470,

Offset by:

        A decrease in prepaid expenses of $208,243,

        A decrease in real estate held for sale of $213,750,

        A decrease in deferred tax assets of $40,330,

        An increase in loans payable – current portion of $112,231,

        An increase in accounts payable of $18,778,186 associated with the increase in construction in progress,

        An increase in due to related parties of $489,222,

        An increase in advances from customers of $57,001.

 

Our balance sheet at March 31, 2011 reflects loans payable to third parties of $3,523,539 due through September 2012 which were working capital loans made to the Jin Ma Companies by third parties. These loans bear annual interest rates ranging from 11.16% to 24.00% and are due between May 2011 and September 2012. Of this amount, approximately $3.0 million is secured by the assets of the Jin Ma Hotel which matures in May 2011 and the remaining balances are unsecured. These loans generally can be renewed with the respective parties when the loans mature.

 

The Jin Ma Companies intend to meet their liquidity requirements, including capital expenditures related to the purchase of land for the development of future projects, through cash flow provided by operations, from the collection of outstanding accounts and notes receivable balances and from the sale of units at the Shuian Renjia residential project. Through March 31, 2011, we have capitalized construction in progress consisting of the acquisition of land use rights and construction costs related to the Shuian Renjia project of approximately $19.8 million. In connection with the acquisition of land use rights and for construction costs, pursuant to agreements with Jin Ma Construction’s sub-contractors, we will only partially pay subcontractors until such time as we begin selling units of real estate held for sale and accordingly, accounts payable has increased substantially. Subcontractors are willing to extend us credit due to their long-term relationship with the Jin Ma Companies. During the fourth quarter of 2011, we expect to sell all of our units in Shuian Renjia and we expect to collect approximately $33,000,000 from these sales which will be used to pay subcontractors and other accounts payable balances and will be used for working capital purposes.

 

We are confident that we will collect all outstanding accounts and notes receivable on a timely basis.

 

During the nine months ended March 31, 2011, the Jin Ma Companies received advances from a company owned by our chief executive officer of approximately $473,000 which was used for working capital purposes. Upon acquiring land for future developments, the Jin Ma Companies intend to raise funds to develop its projects by the presale of units and by obtaining financing mainly from local banking institutions with which it has done business in the past. We also expect to fund projects through related party advances, from the collection of previous accounts receivable and from progress billings.

 

We believe that the relationships with these banks are in good standing and that the Jin Ma Companies’ real estate will secure the loans needed. According to the National Bureau of Statistics of China, in the first four months of 2011 as indicated at http://www.stats.gov.cn/english/newsandcomingevents/t20110511_402725066.htm, the sources of funds for real estate development enterprises from current year reached 2,536.2 billion RMB (or approximately $386.0 billion), up by 17.4% year-on-year. Of this total, capital from domestic loans was 480.0 billion RMB (or approximately $73.1 billion), up by 5.4%; that from foreign investment stood at 22.2 billion RMB (or approximately $3.4 billion), up by 62.3%; that from self-raising funds was 948.6 billion RMB (or approximately $144.4 billion), up by 27.2% and that from other sources was 1,085.3 billion RMB (or approximately $165.2 billion), up by 14.8%. In other sources of funds, down payment and prepayment reached 644.9 billion RMB (or approximately $98.2 billion), up by 23.1% and individual mortgage was 275.3 billion RMB (or approximately $41.9 billion), down by 6.8%.

 

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We estimate that the Jin Ma Companies will have sufficient cash flow from operations to satisfy their working capital needs and to fund their operations for the next 12 months from the collection of their outstanding accounts and notes receivable, and from the sale of units at the Shuian Renjia residential project. However, any delay in the collection of the receivables or from collections from the sale of completed real estate units held for sale would have an adverse effect on their ability to fund their working capital requirements.

 

The Jin Ma Companies have $3.0 million of debt which becomes due in May 2011 and the majority of which is collateralized by the assets of the Jin Ma Hotel. The Jin Ma Companies do not presently have sufficient capital to satisfy this obligation. While the Jin Ma Companies believe they will be able to restructure this debt to extend the due date and are currently negotiating with the lender on the terms of such an extension, if they are unable to do so, or to otherwise refinance the amount, a risk exists that this debt could be foreclosed upon which would deprive the Jin Ma Companies of revenue associated with this company and would materially adversely impact our results of operations in future periods.

 

We require working capital to pay general and administrative expense, including audit, legal and related fees, associated with our reporting obligations under the Securities Exchange Act of 1934. Other than the management fees which are due us by the Jin Ma Companies, we do not presently have any other source of working capital. At March 31, 2011, we were owed approximately $25.3 million by the Jin Ma Companies. We continue to be reliant on the Jin Ma Companies to pay the service fees due us and/or to repay all or a portion of the funds advanced to the Jin Ma Companies. Even if the Jin Ma Companies pay all the past due amounts to us, it is possible that the Jin Ma Companies will continue to fail to timely pay our management fees. Although we have received funds from the Jin Ma Companies to fund our operation during the nine months ended March 31, 2011, if the quarterly service fees due us under the Contractual Arrangement are not paid to us on a timely basis, it is possible that we will not have sufficient funds to pay our operating expenses in future periods, our ability to continue as a going concern is in jeopardy and investors could lose their entire investment in our company.

 

Operating Activities

 

Net cash flow used in operating activities was $351,505 for the nine months ended March 31, 2011 as compared to net cash used in operating activities of $531,041 for the nine months ended March 31, 2010, a decrease in outflow of $179,536.

 

For the nine months ended March 31, 2011, net cash flow used in operating activities was primarily attributable to:

       
    · changes in operating assets and liabilities consisting of an increase in accounts receivable of $2,638,012, an increase in other receivables of $77,655, an increase in construction in progress of $19,447,318, a decrease in taxes payable of $854,777 and a decrease in billings in excess of costs and estimated earnings of $91,225, and the effect of non-cash items such as bad debt recovery of $196,903, a gain on change in fair value of derivative liabilities of $461,929;

 

Offset by:

       
    · net income of $3,681,528 and adjustments to net income for the add back of non-cash items such as depreciation of $592,661, stock-based compensation of $116,716, and warrants issued for service of $31,188, and
       
    · changes in operating assets and liabilities consisting of a decrease in notes receivable of $388,573, a decrease in prepaid expenses of $208,882, a decrease in real estate held for sale of $223,351, an increase in accounts payable and accrued expenses of $18,121,600 and an increase in advance from customers of $50,901.

 

For the nine months ended March 31, 2010, net cash flow used in operating activities was primarily due to:

       
    · changes in operating assets and liabilities consisting of an increase in accounts receivable of $2,844,223, an increase in advance to suppliers of $123,167, an increase in construction in progress of $2,724,368, a decrease in accounts payable and accrued expenses of $721,044, and a decrease in taxes payable of $876,846 and the effect of non-cash items such as bad debt recovery of $215,091, a gain from changes in fair value of derivative liabilities of $1,704,654, a gain from debt extinguishment related to derivative liabilities of $1,893,310, and a gain on disposal of land use right of $449,528;

 

Offset by:

       
    · net income of $3,927,485 and adjustments to net income for the add back of non-cash items such as depreciation of $583,202, stock-based compensation of $232,500, and interest expense from amortization of debt discount of $2,183,000, and
       
    · changes in operating assets and liabilities consisting of a decrease in note receivable of $313,995, a decrease in other receivables of $1,182,265 and an increase in advances from customers of $2,601,870.

 

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Investing Activities

 

Net cash flow used in investing activities was $41,304 for the nine months ended March 31, 2011 as compared to cash provided by investing activities of $2,005,386 for the nine months ended March 31, 2010. For the nine months ended March 31, 2011, we spent cash of $41,304 on purchase of property and equipment. For the nine months ended March 31, 2010, cash provided by investing activities consisted of proceeds from sale of land use right of $2,193,710 offset by $188,324 cash used for purchase of property and equipment.

 

Financing Activities

 

Net cash flow provided by financing activities was $435,548 for the nine months ended March 31, 2011 which was attributable to proceeds from advances from related party of $472,976 offset by repayment of loans payable of $37,428. Net cash flow used in financing activities was $1,133,288 for the nine months ended March 31, 2010 which was attributable to repayment of loan payable of $1,353,666 and repayment of convertible debt of $983,550 offset by proceeds from advances from related party of $1,203,928.  

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

Jin Ma Real Estate guarantees a customer’s mortgage until the home and the title of ownership are delivered to the customer. If a property buyer defaults under the loan, Jin Ma Real Estate is required, during the guarantee period, to repay all debt owed by the defaulting property buyer to the mortgage bank. Jin Ma Real Estate’s liability for guarantor’s obligation is valued based on the actual outstanding mortgage amount at each reporting period. For the nine months ended March 31, 2011 and 2010, the liability for guarantor’s obligation was not material and Jin Ma Real Estate has not suffered any losses.

 

The Jin Ma Companies have certain fixed contractual obligations and commitments that include future estimated payments. Changes in its business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in the determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

 

The following table summarizes the Jin Ma Companies’ contractual obligations as of March 31, 2011, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

  Payments Due by Period
  Total    

Less than

1 year

    1-3 Years     4-5 Years     5 Years +  
Contractual Obligations :                            
Bank and other third-party Indebtedness   $    3,523,539       $    3,203,909       $    319,630              
Total Contractual Obligations:   $    3,523,539       $    3,203,909       $    319,630              

 

Off-balance Sheet Arrangements

 

Neither we nor the Jin Ma Companies have entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties other than the guarantee of mortgages for Jin Ma Real Estate’s customers in the normal course of business. For the nine months ended March 31, 2011 and 2010, the liability for guarantor’s obligation was not material and Jin Ma Real Estate has not incurred any losses related to the guarantee of mortgages. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing or hedging services with us.

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to a smaller reporting company.

 

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ITEM 4.   CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of March 31, 2011, the end of the period covered by this report, our management concluded its evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Management conducted its evaluation of disclosure controls and procedures at March 31, 2011 under the supervision of our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation, Messrs. Yang and Wasserman concluded that because of the continuing material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of March 31, 2011 as a result of continuing material weaknesses in our internal control over financial reporting.

 

During the assessment of the effectiveness of internal control over financial reporting as of June 30, 2010, our management identified material weaknesses related to:

 

  our failure to properly record certain common stock purchase warrants and conversion options related to convertible debt as derivative liabilities and our failure to properly record the subsequent accounting for the changes in the fair value of the associated liabilities at September 30, 2009, December 31, 2009 and March 31, 2010,
     
  the lack of U.S. GAAP expertise of the Jin Ma Companies’ internal accounting staff, 
     
  the lack of our internal audit functions, 
     
  the absence of an Audit Committee as of June 30, 2010, and 
     
  a lack of segregation of duties within accounting functions. 

 

As a result of these material weaknesses, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective as of June 30, 2010. 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 our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

 

While we have made certain changes in our internal control over financial reporting during the first and second quarters of fiscal 2011 to remediate the weakness associated with the recording of derivative liabilities, we have not remediated the remaining material weaknesses cited at June 30, 2010. In order to correct these material weaknesses, we have committed to the establishment of effective internal audit functions and the addition of accounting staff at the Jin Ma Companies with the proper expertise. We will also implement additional changes to our internal controls to ensure that derivative liabilities are properly recorded in future periods. We have began our search for additional accounting staff with assistance from recruiters and through referrals, however, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region in which the Jin Ma Companies conduct operations, we were not able to hire sufficient internal audit resources before the end of March 31, 2011. However, during the rest of fiscal 2011 we will increase our search for qualified candidates with assistance from recruiters and through referrals.  

 

We believe that the foregoing steps will remediate the material weaknesses identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. Until we are able to hire the proper accounting staff it is unlikely we will be able to remediate these material weaknesses in our internal control over financial reporting and the resulting material weakness in our disclosure controls and procedures.

 

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Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our last fiscal quarter 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.

 

   None.

 

ITEM 1A.   RISK FACTORS.

 

   Not applicable to a smaller reporting company.

 

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

 

   None

 

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES.

 

   None.

 

ITEM 4.   (REMOVED AND RESERVED).

 

 

ITEM 5.   OTHER INFORMATION.

 

   None.

 

ITEM 6.   EXHIBITS

 

31.1    Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer

31.2    Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer

32.1    Section 1350 certification of Chief Executive Officer

32.2    Section 1350 certification of Chief Financial Officer

 

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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.

 

  Gold Horse International, Inc.
     
Date:   May 23, 2011  By: /s/ Liankuan Yang
  Liankuan Yang
  Chief Executive Officer, principal executive officer
     
Date:   May 23, 2011 By: /s/ Adam Wasserman
  Adam Wasserman
  Chief Financial Officer, principal financial and accounting officer

 

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