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EX-31.2 - CERTIFICATION - Yangtze River Port & Logistics Ltdf10q0615ex31ii_kirininter.htm
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EX-32.2 - CERTIFICATION - Yangtze River Port & Logistics Ltdf10q0615ex32ii_kirininter.htm
EX-32.1 - CERTIFICATION - Yangtze River Port & Logistics Ltdf10q0615ex32i_kirininter.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2015

 

or

 

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

 

For the transition period from ___________ to ___________

 

Commission File Number: 333-166343

 

KIRIN INTERNATIONAL HOLDING, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   27-1636887

State or other jurisdiction of
incorporation or organization

  (I.R.S. Employer
Identification No.)
     

12th Floor, Building F, Phoenix Plaza

No. A5ShuguangXili

Chaoyang District, Beijing

People’s Republic of China

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

 

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

 

N/A

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

 

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

 

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

 

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

 

Large accelerated filer  Accelerated filer
Non-accelerated filer ☐  Smaller reporting company
(Do not check if a smaller reporting company) 

 

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

 

The registrant had 20,596,546 shares of common stock, $0.0001 per share, outstanding at August 19, 2015.

 

 

 

 
 

  

KIRIN INTERNATIONAL HOLDING, INC.

QUARTERLY REPORT ON FORM 10-Q

June 30, 2015

 

TABLE OF CONTENTS

 

        PAGE
         
PART I   FINANCIAL INFORMATION    
         
Item 1.   Financial Statements (Unaudited)   1
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   29
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   46
         
Item 4.   Controls and Procedures   46
         
PART II   OTHER INFORMATION    
         
Item 1.   Legal Proceedings   47
         
Item 1A.   Risk Factors   47
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   47
         
Item 3.   Defaults Upon Senior Securities   47
         
Item 4.   Mine Safety Disclosures   47
         
Item 5.   Other Information   47
         
Item 6.   Exhibits   47
         
SIGNATURES   48
     
Financial Statements:    

  

 
 

 

SPECIAL NOTE REGARDING VOLUNTARY FILER STATUS

 

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

 

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

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

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

 

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

  

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

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

  

CERTAIN TERMS USED IN THIS REPORT

 

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

 

 
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

KIRIN INTERNATIONAL HOLDING, INC.

CONDENSED  CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
ASSETS    
         
Cash and cash equivalents  $10,482,370   $22,004,479 
Restricted cash   17,183,084    6,785,042 
Short-term Investment   491,095    487,527 
Accounts receivable   2,405,694    58,202 
Notes receivable   600,000    600,000 
Revenue in excess of billings   9,181,592    13,586,442 
Prepayments   19,501,053    26,448,654 
Other receivables   36,251,865    28,549,244 
Receivable from a trust equity owner   1,138,567    5,415,488 
Loan to related parties   63,802,096    48,353,101 
Real estate property completed   16,058,688    1,441,194 
Real estate properties and land lots under development   164,848,982    187,445,154 
Long-term Investments   7,902,724    7,850,402 
Property and equipment, net   5,176,730    7,477,607 
Deferred tax assets   4,878,249    5,791,051 
Total assets  $359,902,789   $362,293,587 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Liabilities          
Notes payable  $2,800,000   $- 
Accounts payable   114,382,263    102,265,749 
Income taxes payable   1,899,863    1,904,666 
Other taxes payable   233,426    2,263,163 
Other payables and accrued liabilities   20,966,845    23,455,757 
Customer deposits   71,823,781    83,522,070 
Loans payable   87,179,151    92,313,136 
Deferred tax liabilities   1,082,057    266,003 
           
Total liabilities   300,367,386    305,990,544 
           
Commitments and contingencies          
           
Stockholders’ equity          
Preferred stock at $0.0001 par value; 100,000,000 shares authorized; none issued or outstanding   -    - 
Common stock at $0.0001 par value; 500,000,000 shares authorized; 20,596,546 shares issued and outstanding   2,060    2,060 
Additional paid-in capital   37,149,630    37,149,630 
Statutory reserve   1,403,154    1,403,154 
Retained earnings   11,115,442    8,967,841 
Accumulated other comprehensive income   8,434,940    8,110,120 
Total Kirin International Holding, Inc.’s equity   58,105,226    55,632,805 
Non-controlling interest   1,430,177    670,238 
Total Stockholders' equity   59,535,403    56,303,043 
Total liabilities and stockholders’ equity  $359,902,789   $362,293,587 

 

See notes to the unaudited condensed consolidated financial statements

 

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

 

1
 

 

KIRIN INTERNATIONAL HOLDING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

   Six Months Ended
June 30,
   Three Months Ended
June 30,
 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
       (Revised)       (Revised) 
                 
Revenue, net  $58,354,545   $47,641,831   $36,321,482   $40,229,654 
Cost of sales   48,757,579    39,809,623    28,986,384    34,043,637 
Gross profit   9,596,966    7,832,208    7,335,098    6,186,017 
                     
Operating expenses                    
Selling expenses   1,546,009    1,665,126    811,456    885,298 
General and administrative expenses   3,448,810    4,791,089    1,566,797    1,854,475 
                     
Total operating expenses   4,994,819    6,456,215    2,378,253    2,739,773 
                     
Income from operations   4,602,147    1,375,993    4,956,845    3,446,244 
                     
Other income (expenses)                    
Investment income (loss)   786,806    504,548    120,834    (2,000)
Interest income   3,480,811    2,469,723    1,999,856    1,236,816 
Interest expense   (4,814,932)   (5,292,851)   (2,735,250)   (2,580,985)
Other non-operating income (loss)   2,155,292    171,251    1,685,699    (39,860)
                     
Total other income (expenses)   1,607,977    (2,147,329)   1,071,139    (1,386,029)
                     
Income (loss) before income taxes   6,210,124    (771,336)   6,027,984    2,060,215 
                     
Income taxes expense   3,301,745    808,045    1,662,193    1,390,565 
                     
Net income (loss)   2,908,379    (1,579,381)   4,365,791    669,650 
Less: net income (loss) attributable to non-controlling interest   760,778    (44,055)   831,604    (35,478)
Net income (loss) attributable to stockholder of Kirin International Holding, Inc.  $2,147,601   $(1,535,326)  $3,534,187   $705,128 
Net income (loss)   2,908,379    (1,579,381)   4,365,791    669,650 
                     
Other comprehensive income (loss)                    
Foreign currency translation adjustment   324,820    (424,414)   97,018    (28,998)
Total comprehensive income (loss)   3,233,199    (2,003,795)   4,462,809    640,652 
Less: other comprehensive income (loss) attributable to non-controlling interest   760,778    (44,055)   831,604    (35,478)
Comprehensive income (loss) attributable to stockholder of Kirin International Holding, Inc.  $2,472,421   $(1,959,740)  $3,631,205   $676,130 
                     
Basic and diluted income (loss) per share  $0.10   $(0.08)  $0.17   $0.03 
Basic and diluted weighted average shares outstanding   20,596,546    20,596,546    20,596,546    20,596,546 

 

See notes to the unaudited condensed consolidated financial statements

 

2
 

 

KIRIN INTERNATIONAL HOLDING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six months Ended
June 30,
 
   2015   2014 
   (Unaudited)   (Unaudited)
(Revised)
 
Cash flows from operating activities:        
Net income (loss)  $2,908,379   $(1,579,381)
Adjustments to reconcile net  loss to net cash used in operating activities          
Depreciation   76,577    139,474 
Gain on disposal of land and units   (2,172,702)   (171,251)
Deferred tax expense (benefit)   1,764,489    (614,003)
           
Changes in operating assets and liabilities          
Restricted cash   (10,320,350)   1,454,249 
Accounts receivable   (2,340,705)   141,329 
Notes receivable   -    813,788 
Revenue in excess of billings   4,492,059    3,504,098 
Prepayments   7,121,782    (3,221,962)
Other receivables   (6,292,019)   (24,176,503)
Receivable from a trust equity owner   4,351,830    1,383,439 
Real estate property completed   (14,567,363)   521,331 
Real estate properties and land lots under development   23,830,030    (4,609,412)
Accounts payable   11,337,395    2,082,034 
Income taxes payable   (18,689)   (88,446)
Other taxes payable   (2,040,752)   (136,422)
Other payables and accrued liabilities   (2,466,951)   5,698,306 
Customer deposits   (12,276,021)   3,680,092 
           
Net cash provided by (used in) operating activities    3,386,989    (15,179,240)
           
Cash flows from investing activities:          
Purchases of equipment   (168,142)   (209,472)
Proceeds from disposal of equipment   3,185,621    598,647 
Repayment of loans from related parties   15,320,983    1,139,303 
Loans to related parties   (30,375,255)   (3,609,025)
Repayment of short-term loan from related parties   -    12,190,537 
Payment of short-term investment   (1,632,546)   (244,136)
Repayment of short-term investment   1,632,546    - 
Cash paid for investment at cost   -    (22,468)
           
Net cash provided by (used in) investing activities   (12,036,793)   9,843,386 
           
Cash flows from financing activities:          
Proceeds from financial institution loans   31,140,823    29,296,350 
Repayment of financial institution loans   (36,934,548)   (26,366,715)
Proceeds from Notes payable   2,800,000    - 
Distribution to non-controlling stockholder of Greenfield   (839)   - 
           
Net cash provided by (used in) financing activities   (2,994,564)   2,929,635 
           
Effect of exchange rate changes on cash and cash equivalents   122,259    (282,048)
Net decrease in cash and cash equivalents   (11,522,109)   (2,688,267)
           
Cash and cash equivalents - beginning of the period   22,004,479    23,407,551 
           
Cash and cash equivalents - end of the period  $10,482,370   $20,719,284 
           
Supplementary cash flow information          
Cash paid for income tax  $1,035,127   $746,874 
Cash paid for interest expense  $4,030,828   $4,931,525 

 

See notes to the unaudited condensed consolidated financial statements

 

3
 

 

KIRIN INTERNATIONAL HOLDING, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, as of June 30, 2015) 

 

Note 1 – Organization and Description of Business

 

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

 

As at June 30, 2015, the Company had following wholly-owned entities, VIEs and VIEs’ subsidiaries:

 

    Place of Incorporation   Date of Incorporation   Principal
Activities
             
Subsidiaries            
Kirin China Holding Limited (“Kirin China”)   British Virgin Islands   July 6, 2010   Investment holding
Kirin Huaxia Development Limited (“Kirin Development”)   Hong Kong, China   July 27, 2010   Investment holding
Shijiazhuang Kirin Management Consulting Co., Ltd. (“Kirin Management”)   Shijiazhuang, Hebei province, China   December 22,
2010
  Primary beneficiary of VIEs
Spectrum International Enterprise, LLC   State of California, United States of America.   January 11, 2013   Property holding
Brookhollow Lake, LLC   State of California, United States of America   February 8,
2013
  Property holding
Greenfield International Corporation *   State of California, United States of America   August 12,
2013
  Whole sale Agent of Food & Grocery
Kirin Hopkins Real Estate Group, LLC   State of California, United States of America   July 23,
2013
  Real estate development
Newport Property Holding, LLC   State of California, United States of America   July 11,
2013
  Real estate investment and management
Kirin Alamo, LLC   State of California, United States of America   December 09,
2013
  Real Estate development
Archway Development Group LLC   State of California, United States of America   April 30,
2014 
  Real Estate development
HHC-6055 Centre Drive, LLC   State of California, United States of America   April 30,
2014 
  Real Estate development
Applecrate, INC   State of California, United States of America   November 11, 2014   E-Commerce Retail/Wholesale
VIEs            
HebeiZhongding Real Estate Development Co., Ltd. (“HebeiZhongding”)   Xingtai, Hebei province, China   July 16,
2007
  Real estate development
XingtaiZhongdingJiye Real Estate Development Co., Ltd. (“ZhongdingJiye”, “XingtaiZhongding”)   Xingtai, Hebei province, China   August 7,
2008
  Real estate development
             

Subsidiaries of VIEs

Subsidiaries of HebeiZhongding

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

Dormant

 

Subsidiaries of XingtaiZhongding            
XingtaiZhongding Kirin Real Estate Development Co., Ltd. (formerly known as XingtaiZhongding Business Service Co., Ltd., “Business Service”, “Zhongding Kirin”)   Xingtai, Hebei province, China   July 29,
2008
  Real estate development
Huaxia Kirin (Beijing) Garden Project Co., Ltd.   Beijing, China   January 19,
2010
  Garden design and planting
XingtaiHetai Real Estate Development Co., Ltd.   Xingtai, Hebei province, China   December 6,
2010
  Real estate development
Huaxia Kirin (Beijing) Property Management Co., Ltd.   Beijing, China   December 19,
2011
  Property management
HebeiZhongding Property Service Co., Ltd.   Xingtai, Hebei province, China   December 19,
2011
  Property management

 

*In January 2015, Greenfield International Corporation was closed.

 

4
 

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements for the six months and three months ended June 30, 2015 and 2014 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations. Accordingly, the reader of this Form 10-Q is referred to Kirin International Holding, Inc. (“the Company”) Form 10-K for the year ended December 31, 2014 for further information. In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position at June 30, 2015, the results of operations for the six months and three months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014. The results of operations for the six months and three months ended June 30, 2015 are not necessarily indicative of the operating results for the year. The unaudited condensed consolidated balance sheets as of June 30, 2015 and December 31, 2014, the unaudited condensed consolidated statements of operations and comprehensive income (loss) for the six months and three months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014 include those of the Company, its subsidiaries and VIEs, and subsidiaries of VIEs. All material intercompany transactions and balances have been eliminated in consolidation.

 

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

 

Reclassifications

 

Certain amounts in the June 30, 2014 unaudited condensed consolidated financial statement and December 31, 2014 consolidated financial statements have been reclassified to conform to the June 30, 2015 presentation. 

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include percentage-of-completion of properties under construction and related revenue and costs recognized, allowance for doubtful accounts, recoverability of deferred tax assets, and the assessment of impairment of long-lived assets. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

 

Fair Value of Financial Instruments

 

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

 

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

 

5
 

 

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

 

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

  

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

 

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

 

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

Reporting Currency and Foreign Currency Translation

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

6
 

 

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

 

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

 

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

  

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

 

7
 

 

Real Estate Capitalization and Cost Allocation

 

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

 

Government Grant

 

Government grants related to real estate projects developed by the Company are recognized as other income when the Company has complied with the conditions attached to the grant and the grant’s collection is reasonably assured.

  

In 2008, XingtaiZhongding was entitled to a government grant of RMB 160,000,000 (approximately $22,981,000 translated at historical exchange rate) related to Kirin County project to subsidize the modernization of the neighborhood where the real estate project is situated, and control of property price volatility.  The Company believes the government’s demands associated with the grant are gradually fulfilled as the construction and pre-sale of Kirin County make progress, and accordingly recognizes grant income at the percentage of construction completed during the year of the total grant amount.  For the six months and three months ended June 30, 2015 and 2014, the Company did not recognize any grant income, respectively.  All government grants related to Kirin County have been recognized through 2009 to 2012 as the construction of Kirin County goes on during the years.  The local government has arranged a lump sum payment of the grant to XingtaiJiye Business Investment Co., Ltd. (“Business Investment”), a related party of the Company, prior to the grant’s conditions being met out of financial consideration because it lacked managing staff and concerned that the funds would be re-assigned or invalidated without an immediate recipient.  Pursuant to the arrangement, Business Investment provides this grant money to XingtaiZhongding in proportion to the percentage of the project completed as a measure to ensure that the project satisfies the grant’s guidelines.  The grant does not have refund conditions and the Company believes government will not revoke the grant or claw back cash remitted to the escrow account unless the construction and sale of Kirin County project is cancelled by the Company.  As of June 30, 2015, the Company didn’t receive any request from the government demanding revocation and/or partial refund of the grant previously given, and the Company expects no development relating to the Kirin County project will cause the government to request the grant’s refund in next twelve months.

 

Capitalization of Interest

 

In accordance with ASC 360, Property, Plant and Equipment, interest incurred during construction is capitalized to properties under development. As of June 30, 2015 and December 31, 2014, $nil and $124,921 were capitalized as properties under development, respectively.

 

8
 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains the majority of its bank accounts in the PRC. Cash includes cash on hand and demand deposits in accounts maintained with state-owned and commercial financial institutions within the PRC.  China does not have a deposit insurance system; however, the credit risk on bank balances is limited because the Company conducts transactions and deposits balances with several state-owned banks with high credit ratings assigned by international credit rating agencies.

 

Restricted Cash

 

There are two important timings for mortgage business of PRC banks: (1) Execution of mortgage agreement: PRC banks grant mortgage loans to home purchasers and will credit the full amount to the Company account once the bank and the purchaser enter into mortgage agreement, which generally will be before the completion of the construction of projects.  (2) Issuance of House Ownership Certificate to the purchasers. At the time of execution of mortgage agreement, there are no House Ownership Certificate therefore the purchaser has no legal right to the house and therefore they cannot mortgage the house to banks. Banks will ask the developer to provide guarantee to the loan instead. When the House Ownership Certificate is issued, banks will release the guarantee ability of the developer and mortgage the house in question.  If the condominiums are not completed and the new homebuyers have no House Ownership Certificate, to secure the loan, as a common practice in China, the banks will release only 95% loan to the Company and will require that the Company open a separate account with the bank and deposit and freeze the remaining 5% of the mortgage amount to further secure the bank’s interests before the mortgage of the house with House Ownership Certificate. Because bank requires the freeze of the 5% deposit, the amount therein shall be classified on the balance sheet as restricted cash. Interest earned on the restricted cash is credited to the Company’s normal bank account. The bank will release the restricted cash after homebuyers have obtained the House Ownership Certificate and mortgage the house to bank. Total restricted cash amounted to $17,183,084 (unaudited) and $6,785,042 as of June 30, 2015 and December 31, 2014, respectively. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts. Besides this, deposits for bank acceptance notes required by PRC banks are also disclosed as restricted cash.

 

Short-term Investments

 

The classification of investment securities is based on the Company’s intent, which is re-evaluated at each balance sheet date, with respect to those securities. Short-term investments refer to the securities that the Company has positive intent and ability to hold to maturity and stated at amortized cost. The Company received $118,768 (unaudited) as dividend for the six months ended June 30, 2015.

 

Long-term Investments

 

Investments in securities of private companies the Company does not have a controlling interest and is unable to exercise significant influence are accounted for using cost method of accounting. The Company evaluates at each period end whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investments. If a decline in fair value is determined to be other than temporary, an impairment loss is recognized to reduce an investment’s cost to its fair value. The Company received $668,038 (unaudited) and $504,548 (unaudited) as dividend for the six months ended June 30, 2015 and 2014, respectively.

 

Property and Equipment, Net

 

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

 

    Estimated
Useful Lives
 
Fixtures, furniture and office equipment   

2~10 years

 
Building and warehouse   20 years 
Electronic equipment   

2~5 years

 
Nonresidential real estate property   39 years 

 

9
 

 

Income Taxes

 

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

 

Subsidiaries, VIEs and subsidiaries of VIEs of the Company located in China are governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are generally subject to tax at a new statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

 

According to the Income Tax Laws of the PRC for real estate developers, income tax of the Company is calculated by project when all units of a project are sold, tax authorities will assess the tax due on the project and issue a tax due notification to the Company. The Company has to pay the tax by the due date on the notification. If the Company does not pay the tax by the due date, the tax authorities will charge the Company interest. The Company includes any interest and penalties in general and administrative expenses.

 

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

 

The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the PRC government.

 

Land Appreciation Tax (“LAT”)

 

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

 

Accumulated Other Comprehensive Income

 

Accumulated other comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only component of other comprehensive income (loss) during the six months and three months ended June 30, 2015 and 2014 was the foreign currency translation adjustment.

 

Earnings per Share

 

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

 

Advertising Expenses

 

Advertising costs are expensed as incurred, or the first time the advertising takes place, in accordance with ASC 720-35, Advertising Costs. For the six months ended June 30, 2015 and 2014, the Company recorded an advertising expense of $760,138 (unaudited) and $997,724 (unaudited), respectively. For the three months ended June 30, 2015 and 2014, the Company recorded an advertising expense of $459,214 (unaudited) and $517,761 (unaudited), respectively. 

 

Property Warranty

 

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

 

10
 

  

The Company constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company withholds up to 5% of the contract total payment from contractors for periods of two to five years. These amounts are included in liabilities, and are only paid to the extent that there have been no warranty claims against the Company relating to the work performed or materials supplied by the contractors.  As of June 30, 2015 and December 31, 2014, the Company retained $92,981 (unaudited) and $117,218 contract payment to contractors, and the Company didn’t experience any incidences where the withheld amounts were less than the amounts the Company had to pay for the defects of properties.  The Company didn’t provide any warranty reserve as prospective expenditure amount on property warranty by the Company is insignificant.  For the six months and three months ended June 30, 2015 and 2014, the Company didn’t incur incidental costs in addition to the amount retained from contractors.

 

Impairment Losses

 

Completed real estate properties and land lots are reported in the balance sheet at the lower of their carrying amount or fair value less costs to sell. Land to be developed or under development is assessed for impairment when management believes that events or changes in circumstances indicate that its carrying amount may not be recoverable. Based on this assessment, a property that is considered impaired is written down to its fair value less costs to sell. Impairment losses are recognized through a charge to expense. No impairment of completed real estate properties or land lots was recognized for the six months and three months ended June 30, 2015 and 2014.

 

Stock-Based Compensation

 

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

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers”. For a public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

In August 2014, the FASB issued Accounting Standards Update (ASU) No.2014-15, “Presentation of Financial Statements-Going Concern”. Effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.

 

On April, 2015, the FASB issued Accounting Standards Update (ASU) 2015-03, entitled Simplifying the Presentation of Debt Issuance Costs. The ASU amends the guidance in the FASB Accounting Standards Codification (FASB ASC) Topic 835, entitled Interest-Imputation of Interest. The objective of the amendments in this Update is to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The amendments in ASU 2015-03 are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.

 

The Company is currently in the process of evaluation the impact of the adoption of ASU 2014-09, ASU 2014-15 and ASU 2015-03 on its consolidated financial statements.

 

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Correction of Prior Period Financial Statements 

 

During the six months and three months ended June 30, 2015, management determined that service fee incurred in connection with obtaining the loans should be deferred and amortized over the period of the related loans under straight-line method. In prior years, the Company had deferred the service fee and expensed when the loans are due. The Company has adjusted its December 31, 2014 consolidated balance sheet and its condensed consolidated statements of operations comprehensive income (loss) for the six months and three months ended June 30, 2014.

 

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

 

   December 31, 2014 
   As
Previously
       As
Currently
 
   Reported     Adjustment   Reported 
Assets            
                
Prepayments  $25,983,191   $465,463   $26,448,654 
Other receivables   30,206,838    (1,657,594)   28,549,244 
Deferred tax assets    5,493,018    298,033    5,791,051 
                
Total assets   363,187,685    (894,098)   362,293,587 
                
Stockholders’ equity               
                
Retained earnings   9,857,778    (889,937)   8,967,841 
Accumulated other comprehensive income   8,114,281    (4,161)   8,110,120 
                
Total Stockholders' equity   $57,197,141   $(894,098)  $56,303,043 

 

The following tables detail the corrections and impact to the condensed consolidated income statements of operations comprehensive income (loss) for the six months and three months ended June 30, 2014

 

   For the Six months Ended
June 30, 2014
   For the Three Months Ended
June 30, 2014
 
    As Previously Reported    Adjustment    As Currently Reported    As Previously Reported    Adjustment    As Currently Reported 
Interest expense  $(4,991,900)   (300,951)  $(5,292,851)  $(2,427,875)  $(153,110)  $(2,580,985)
Total other income (expense)   (1,846,378)   (300,951)   (2,147,329)   (1,232,919)   (153,110)   (1,386,029)
Income (Loss) before income taxes   (470,385)   (300,951)   (771,336)   2,213,325    (153,110)   2,060,215 
Income taxes expense (benefit)   883,283    (75,238)   808,045    1,428,843    (38,278)   1,390,565 
Net income (loss)   (1,353,668)   (225,713)   (1,579,381)   784,482    (114,832)   669,650 
Net income (loss) attributable to stockholder of Kirin International Holding, Inc.   (1,309,613)   (225,713)   (1,535,326)   819,960    (114,832)   705,128 
Foreign currency translation adjustment   (428,115)   3,701    (424,414)   (28,206)   (792)   (28,998)
Total comprehensive income (loss)   (1,781,783)   (222,012)   (2,003,795)   756,276    (115,624)   640,652 
Comprehensive income (loss) attributable to stockholder of Kirin International Holding, Inc.   (1,737,728)   (222,012)   (1,959,740)   791,754    (115,624)   676,130 
Basic and diluted loss per share   (0.07)   (0.01)   (0.08)   0.04    (0.01)   0.03 

 

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

 

Note 3 – Variable Interest Entities

 

In accordance with the VIE Agreements entered into between Kirin Management and each of Operating Companies and their respective shareholders. As a result of the VIE Agreements, Kirin Management has the power to direct the VIEs’ activities that most significantly impact the VIEs’ economic performance and the obligation to absorb the VIEs’ losses that could be significant to the VIEs and the right to receive benefits from the VIEs that could be significant to the VIEs.  Therefore Kirin Management is deemed to have a controlling financial interest in the VIEs, is considered the primary beneficiary of and consolidates with the VIEs.

 

Risks in Relation to the VIE Structure

 

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

  

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

  

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

 

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

 

13
 

 

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

  

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

 

Summary information regarding consolidated VIEs is as follows:

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
ASSETS
           
Cash and cash equivalents  $8,214,175   $21,084,446 
Restricted cash   17,183,084    6,785,042 
Short-term Investment   491,095    487,527 
Accounts receivable   2,405,694    58,202 
Revenue in excess of billings   9,181,592    13,586,442 
Prepayments   19,501,053    26,448,654 
Other receivables   46,285,476    42,314,953 
Receivable from a trust equity owner   7,576,192    11,853,261 
Loan to related parties   63,802,096    48,353,101 
Real estate property completed   16,058,688    1,441,194 
Real estate properties and land lots under development   153,912,175    178,040,195 
Investment at cost   7,202,724    7,150,402 
Property and equipment, net   389,599    466,557 
Deferred tax assets   4,878,249    5,791,051 
           
Total assets  $357,081,892   $363,861,027 
           
LIABILITIES
           
Accounts payable  $114,382,263   $102,265,749 
Income taxes payable   1,899,863    1,904,666 
Other taxes payable   233,426    2,263,163 
Other payables and accrued liabilities   19,835,585    23,325,237 
Customer deposits   71,823,781    83,507,580 
Financial institution loans   87,179,151    92,313,136 
Deferred tax liabilities   1,082,057    266,003 
           
Total liabilities  $296,436,126   $305,845,534 

 

14
 

 

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

 

For the six months and three months ended June 30, 2015 and 2014, the financial performance of VIEs is as follows:

 

   Six Months Ended
June 30,
   Three Months Ended
June 30,
 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
       (Revised)       (Revised) 
                     
Revenue, net  $58,354,545   $47,574,686   $36,321,482   $40,199,206 
Cost of sales  $48,757,579   $39,809,623   $28,986,384   $34,043,637 
Operation expenses  $3,530,720   $5,310,953   $1,712,622   $2,081,825 
Net income (loss)  $2,199,776   $(672,515)  $3,311,672   $1,337,010 

 

Note 4 – Short-term Investments 

 

On December 15, 2014 and February 15, 2015, the Company invested RMB 3,000,000 (approximately $491,000, maturing in one year) and RMB 10,000,000 (approximately $1,637,000, matured in three months and repaid on April 30, 2015), respectively, in a financial instrument managed by Xingtai Small and Micro Enterprises Investment Association. The company received $118,768 (unaudited) and nil investment income for the six and three months ended June 30, 2015, respectively.

 

Note 5 – Accounts Receivable

 

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

  

As of June 30, 2015 and December 31, 2014, accounts receivable due from complete properties represents revenue in excess of billings balances of Kirin County project, No.79 Courtyard Phase I and Kirin Bay Phase I as the construction is completed and related condominium units are available for delivery to customers.

 

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

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)     
           
Receivable from sales of condominium units  $2,405,166   $55,375 
Receivable from property management   528    2,827 
           
   $2,405,694   $58,202 

 

15
 

 

Note 6 – Notes Receivable 

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)     
           
Receivable from individual (Promissory note)  $600,000   $600,000 

 

The Promissory note with original principle amount of $600,000 will be due on August 16, 2016, at the rate of 3%  per annum, it is due from a shareholder of Hopkins Kirin Facilities Group, LLC.

 

Note 7 – Revenue in Excess of Billings

 

Revenue in excess of billings represents the amount revenue recognized for certain residential and commercial units in Kirin Plaza, No. 79 Courtyard and Kirin Bay in accordance with the percentage-of-completion method over the cumulative payments received from respective customers.  Pursuant to sales contracts, customers are required to pay a minimum 20% of the full contract amount as a down payment, and pay the remaining balances before delivery of the properties by the Company, which is expected to be within the next 12 to 24 months, depending on construction progress of related real estate properties. As of June 30, 2015 and December 31, 2014, revenue in excess of billings is $9,181,592 (unaudited) and $13,586,442, respectively.

 

Note 8 – Prepayments

 

Prepayments consisted of the following:

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
           
Advances to suppliers and contractors  $1,356,745   $1,250,734 
Prepaid financing service fees   1,468,141    1,291,465 
Excessive business tax and LAT liabilities   9,001,272    8,873,569 
Prepayments-related parties   7,674,895    15,032,886 
           
   $19,501,053   $26,448,654 

 

Pursuant to financing service contracts entered into between the Company, Xingtai Rural Commercial Bank and Industrial and Commercial Bank of China, Xingtai Branch, the Company paid service fees for the origination of several long-term loans before they were released to the Company. Pursuant to service contracts entered into between the Company and HebeiPufa Investment Development Co., Ltd (“Pufa”), the Company paid service fees to Pufa for the origination and extension of several loans from Industrial and Commercial Bank of China, Xingtai Branch. These financing service fees are regarded as prepaid financing service fees and amortized over the respective terms of the loans.

 

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

 

The prepayments to related parties are regarding to construction contract. In certain area, the related parties have more bargain power with the construction contractors. These related parties will pay contractors on behalf of the Company according to contract terms. The construction contractors will provide construction service to the Company, and then the prepayments are recorded in costs over the course of construction period, based on the completion progress of a project. The balance of Prepayments-related parties represents the amount these related parties are yet to pay to contractors.

 

16
 

 

Note 9 – Other Receivables

 

The components of other receivables were as follows:

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
         
Working capital borrowed by contractors  $19,693,913   $20,209,181 
Due from a related party supplier   5,400,743    5,361,511 
Due from a third party supplier   4,092,457    - 
Receivable from sales of land   3,550,000    - 
Due from Xingtai Rural Commercial bank   746,464    - 
Deposit   561,318    1,693,773 
Staff allowance   1,411,812    1,069,379 
Receivables of housing maintenance funds   169,445    204,651 
Others   625,713    10,749 
           
   $36,251,865   $28,549,244 

 

Working capital borrowings by contractors are unsecured, bear no interest and become payable before the completion of the related construction and program. There was no allowance for doubtful accounts as at June 30, 2015 and December 31, 2014.

 

On April 10, 2014, the Company entered into a loan agreement with HebeiYoerma Business Service Co.,Ltd (“HebeiYoerma”), a related party ultimately controlled by Jianfeng Guo, Chairman of the Company’s Board of Directors, and the controlling stockholder of the Company, with no interest, the original amount is RMB 32,992,060 (approximately $5,400,000 (unaudited) and $5,362,000 as of June 30, 2015 and December 31, 2014) and has a term of two years. As of June 30, 2015 and December 31, 2014, there is RMB 18,211,330 (approximately $2,981,000 (unaudited)) and RMB 18,211,330 (approximately $2,960,000) working capital borrowed by HebeiYoerma, respectively. 

 

On February 11, 2015, the Company entered into a loan agreement with XingtaiDongxinshun Construction Decoration Co., Ltd (“Dongxinshun”), a third party supplier. According to the agreement, the Company made a loan to Dongxinshun of RMB 30,000,000 (approximately $4,911,000) with no interest. Dongxinshun repaid RMB 15,000,000 to the company in April, 2015. On June 23, 2015, the Company lent another RMB 10,000,000 to Dongxinshun with no interest. As of June 30, 215, the ending balance of Dongxinshun is RMB 25,000,000 ($4,092,457). Dongxinshun repaid all of this balance to the Company in July, 2015.

 

On March 3, 2015, the Company entered into a land sales agreement with a contract price of $3,550,000, this case is expected to be closed in September, 2015.

 

On June 30, 2015, the Company made a loan to Xingtai Rural Commercial Bank (“Xingtai RC Bank”) of RMB 4,560,000 ($746,464) with no interest and Xingtai RC Bank repaid RMB 4,500,000 to the Company on July 21, 2015.

 

Note 10 – Real Estate Properties and Land Lots under Development

 

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

 

   June 30,   December 31, 
   2015   2014 
Properties under development  (Unaudited)     
Kirin Plaza          
Costs of land use rights  $1,241,266   $1,153,179 
Other development costs   477,179    483,486 
No. 79 Courtyard          
Costs of land use rights   42,426,903    45,263,421 
Other development costs   19,346,106    22,400,751 
Kirin Bay          
Costs of land use rights   13,633,235    24,579,507 
Other development costs   13,985,833    22,547,288 
Archway HHC Apartment          
Costs of land use rights   8,730,454    8,730,454 
Other development costs   2,206,353    674,505 
           
Land lots under development   62,801,653    61,612,563 
           
   $164,848,982   $187,445,154 

 

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The Company acquires land use rights with lease terms ranging from 40 to 70 years through government-organized auctions, private sale transactions or capital contributions from shareholders, all related cost are recorded in Costs of land use rights. Other development costs include direct development costs, interest on indebtedness, construction overhead and indirect project costs.

 

Land use rights are divided and transferred to customers after the Company delivers properties. The Company capitalizes payments for obtaining the land use rights, and allocates to specific units within a project based on units’ gross floor area. Costs of land use rights for the purpose of property development are not amortized. Other development costs are allocated to units within a project based on the ratio of the sales value of units to the estimated total sales value.

 

As of June 30, 2015, the Company has obtained certificates representing titles of the land use rights used for the development of Kirin County, No. 79 Courtyard, Kirin Plaza and Kirin Bay projects.  All  our land use rights are assigned to real estate projects.

 

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

 

The Residential buildings of Kirin County are fully completed in December, 2012, the Residential building of No.79 Courtyard Phase I are fully completed in March, 2015 and the Residential building of Kirin Bay Phase I are fully competed in June, 2015. As of June 30, 2015 and December 31, 2014, the account balance of the real estate property completed is $16,058,688 (unaudited) and $1,441,194 respectively. 

 

Archway HHC Apartment is a proposed apartment located in Howard Hughes Center Site 4, Los Angeles, California, which will have 109 units apartment and 187 parking spaces. As of June 30, 2015, the Company paid land cost and incurred some other development cost.

 

Kong Village Relocation Program

 

Pursuant to incentive policies issued by Xingtai local government encouraging modernization of villages situated in urban vicinity, the Company participated in Kong Village Relocation Program in which the Company constructs a real property and transfers to local government at no costs, and reimburses costs incurred by local government compensating villagers and zoning and developing vacated land lots.  In exchange for the financing, the Company will be invited to bid for vacated land parcels for residential and commercial use at public auction at market price, and majority of the proceeds received by local government will be refunded to the Company. The Company capitalizes all expenditures attributable to Kong Village Relocation Program under land lots under development.  The Company secures land use rights through the auditions and use acquired land use rights for the development of Kirin Bay and other projects. In July 2011 the Company obtained the certificate of land use rights for a piece of land covered by the program through the aforementioned public auction, and used it for the development of Kirin Bay project.  Other land lots covered by the program are expected to be auctioned and obtained by the Company in the near future. As at June 30, 2015 and December 31, 2014, residual expenditures under Kong Village Relocation Program, representing accumulated costs of the land use rights to be obtained by the Company in the future, were capitalized in land lots under development in amount of $62,801,653 and $61,612,563, respectively.

 

18
 

 

On March 31, 2015, XingtaiQiaoxi District Government filed an application to Xingtai Municipal Government for a refund of RMB 125,512,500 (approximately $20,550,000 Relocation Program, the refund is expected to be approved and received in 2015) on behalf of the Company under the Kong Village.

 

Note 11 – Long-term Investments

 

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

 

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

 

As of June 30, 2015 and December 31, 2014, the balance of Long term investment for Xingtai RC Bank was $7,202,724 (unaudited) and $7,150,402, consisting 31,000,000 shares, or 5.03%, of the common stock of Xingtai RC Bank.

 

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

 

As of June 30, 2015 and December 31, 2014, the Company has deposit balances (including restricted cash) of approximately $4,740,000 (unaudited) and approximately $5,818,000 in Xingtai RC Bank, respectively.

 

On June 30, 2015, the Company made a loan to Xingtai RC Bank of RMB 4,560,000 ($746,464), with no interest and Xingtai RC Bank repaid RMB 4,500,000 to the Company on July 21, 2015 (Note 9). 

 

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

 

The Company used the equity method of accounting to record its investment in Hopkins. There is no operation of Hopkins Kirin Facilities Group, LLC till now. The Company plans to recoup all of the investment for Hopkins Kirin Facilities Group, LLC in the third quarter of 2015. 

 

As of June 30, 2015 and December 31, 2014, the ending balance in long-term investment was $7,902,724 (unaudited) and $7,850,402. The Company determined that there was no impairment on its long-term investment at June 30, 2015.

 

Note 12 – Notes Payable 

 

   June 30,   December 31, 
   2015   2014 
    (Unaudited)      
Notes Payables (Promissory note)  $2,800,000   $- 

  

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

 

19
 

  

Note 13 – Accounts Payable

 

   June 30,   December 31, 
   2015   2014 
    (Unaudited)      
Payables in relation to acquisitions of land use rights  $3,832,209   $3,804,371 
Construction contractors   110,550,054    98,461,378 
           
   $114,382,263   $102,265,749 

  

In March 2011, the Company entered into a supplementary agreement with Huada Mining Co., Ltd. in relation to the acquisition of land use rights for the development of No. 79 Courtyard project. The Company agreed to increase the land use rights’ purchase price in the original contract, to compensate Huada Mining Co., Ltd. for its inability to realize the appreciation of the transferred land use rights during the substantially prolonged contract closing period of three years. The Company has unconditionally received the title of the land use rights in 2010 before the commencement of the supplementary agreement negotiation.   In accordance with the supplementary agreement, the Company and Huada Mining Co., Ltd. will not pursue any adjustments of the land use rights’ transfer price.  As of June 30, 2015, payable to Huada Mining Co., Ltd. was $1,376,735.  The Company and Huada Mining Co., Ltd. have agreed that remaining balance will be repaid in an unspecific near future period, taking into accounts of the Company’s liquidity. Unpaid balance does not bear interest.

 

In May 2011, the Company entered into an agreement with Xingtai Kong Village Real Properties Co., Ltd., a company controlled by Kong Village Committee.  The Company agreed to pay $22,649,880 (translated as historical rate) to compensate additional costs incurred by Kong Village Committee for the Kong Village Relocation Program.   At June 30, 2015, unpaid balance plus accrued interest was $2,455,474.  The Company capitalized the additional consideration in the costs land lots under development.

  

Note 14 – Other Payables and Accrued Liabilities

 

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

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)     
Unrecognized tax benefit (Note 16(2))  $6,547,931   $6,500,366 
Deposits from customers on behalf of utility operators   12,015,719    8,195,227 
Car park deposits from customers   515,650    1,732,347 
Due to a related party suppliers   -    6,500,366 
Deposit from a contractor   92,981    117,218 
Accrued loan interest   246,794    175,510 
Estimated penalty   430,847    - 
Others   1,116,923    234,723 
           
   $20,966,845   $23,455,757 

 

On December 30, 2014, the Company entered into RMB 40,000,000 (approximately $6,550,000) loan agreement with HebeiYoerma, a related party ultimately controlled by Jianfeng Guo, Chairman of the Company’s Board of Directors, and the controlling stockholder of the Company, with no interest and the loan was due on March 30, 2015, the Company repaid the loan on January 28, 2015.

 

The Company enters into non-cancellable, fixed-price pre-sale contracts with homebuyers.  The Company is subject to a penalty payable to homebuyers in the event the property is delivered later than the date specified in the pre-sale contracts, and usually such penalty constitutes only an insignificant amount compared to the contract value.  These adjustments to contract price are recorded as a reduction of revenue in the current period on a cumulative catch-up basis. As of June 30, 2015, $430,847 estimated penalty is reasonably estimated for Kirin Bay and No. 79 Courtyard and probably will occur in future.  The Company will record the liability when such penalty can be reasonably estimated.

 

20
 

 

Note 15 – Customer Deposits

 

Customer deposits consist of amounts received from customers relating to the sale of residential and commercial units. In the PRC, customers generally obtain financing for the purchase of their residential unit prior to the completion of the project. The lending institutions will provide the funds to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized. As of June 30, 2015 and December 31, 2014, the Company received $71,823,781 (unaudited) and $83,522,070 deposits from customers, respectively.

 

Note 16 – Income Taxes

 

(1)  Corporate income tax

 

The Company is incorporated in the State of Nevada in the United States of America (“U.S.”) and is subject to a progressive U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax. Kirin China is incorporated in the British Virgin Islands.  Under the current laws of the British Virgin Islands, Kirin China is not subject to tax on income or capital gains.  In addition, no British Virgin Islands withholding tax is imposed upon payments of dividends by Kirin China. Kirin Development is incorporated in Hong Kong.  Kirin Development did not earn any income that was derived in Hong Kong for the period from its date of incorporation to March 31, 2015 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

 

The Company’s subsidiaries Spectrum International Enterprise, LLC, Brookhollow Lake, LLC, Greenfield International Corporation (closed in January 2015), Kirin Hopkins Real Estate Group LLC, Newport Property Holding, LLC, Applecrate, INC, Archway Development Group LLC, HHC-6055 Centre Drive, LLC and Kirin Alamo, LLC were incorporated in State of California, U.S. and are subject to California taxes.

 

The Company’s subsidiaries, VIEs and subsidiaries of VIEs in China are subject to PRC Enterprise Income Tax (EIT) on taxable income. According to PRC tax laws and regulations, China subsidiary and VIEs are subject to EIT with the tax rate 25% since January 1, 2008, except that deemed profit method is applied to XingtaiZhongding Construction Project Management Co., Ltd., which local tax authorities levy income tax based on deemed profit of 10% of revenue. A withholding income tax rate of 5% is applied if Kirin Management, the wholly-owned foreign enterprise, distributes dividends to its immediate holding company, Kirin Development. The Company has not recorded tax provision for U.S. tax purposes as they have no assessable profits arising in or derived from the United States and intends to permanently reinvest accumulated earnings in the PRC operations in the foreseeable future. 

 

Income tax expenses (benefit) for the six months and three months ended June 30, 2015 and 2014 are summarized as follows:

 

   Six Months Ended
June 30,
   Three Months Ended
June 30,
 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited)
(Revised)
   (Unaudited)   (Unaudited)
(Revised)
 
Current                    
EIT expense  $1,016,439   $659,994   $381,828   $446,037 
LAT expense   520,817    762,054    191,009    742,559 
Deferred tax expense/( benefit) - EIT   1,764,489    (614,003)   1,089,356    201,969 
                     
   $3,301,745   $808,045   $1,662,193   $1,390,565 

 

21
 

 

A reconciliation between taxes computed at the PRC statutory rate of 25% and the Company’s effective tax rate for the six months ended June 30, 2015 and 2014 is as follows:

 

   Six Months Ended
June 30,
 
   2015   2014 
   (Unaudited)   (Unaudited) 
       (Revised) 
EIT at the PRC statutory rate of 25%  $1,552,531   $(192,834)
LAT expense   520,817    762,054 
EIT benefit of LAT   (130,204)   (190,514)
Change in Deferred tax valuation allowance   1,071,825    176,336 
Permanent items   286,776    253,003 
           
   $3,301,745   $808,045 

 

(2)  Liability for unrecognized tax benefit

  

A reconciliation of the beginning and ending amount of liability associated with unrecognized tax benefit for the six months ended June 30, 2015 and 2014 is as follows:

 

   Six Months Ended
June 30,
 
   2015   2014 
    (Unaudited)    (Unaudited) 
Unrecognized tax benefit, as the January 1  $6,500,366   $6,542,362 
Movement in current period due to foreign exchange rate fluctuation   47,565    (46,430)
           
Unrecognized tax benefit, as of June 30  $6,547,931   $6,495,932 

 

The liability for unrecognized tax benefit is related to the government grant earned by the Company for the development of Kirin County project.  Because the grant is given by local government which received proceeds of the related land use rights through public auction, it is prevailing practice that the entities receive such grants do not include earned grant in taxable income. The Company believes that the possibility exists for local or higher tax authorities re-evaluate this tax position and reverse current practice. The unrecognized tax benefit, if ultimately recognized, will impact the effective tax rate. The Company did not accrue potential penalties and interest related to the unrecognized tax benefit on the basis that tax authorities would unlikely levy penalties and interest. The Company does not expect changes in unrecognized tax benefit as of June 30, 2015 to be material in the next twelve months.

 

In accordance with PRC tax administration law and regulations, tax authorities generally have up to five years to claw back underpaid tax plus penalties and interests. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the Company’s PRC subsidiary and VIEs tax years from 2010 to 2014 remains subject to examination by tax authorities.

 

(3)  Deferred tax assets /liabilities

 

The tax effects of temporary differences that give rise to the following approximate deferred tax assets and liabilities as of June 30, 2015 and December 31, 2014 are presented below.

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)   (Revised) 
Deferred tax assets/liabilities          
Operating loss carry forward  $4,884,130   $4,892,926 
Excess of interest expense   4,809,420    3,929,488 
Revenue recognized based on percentage-of-completion   898,872    2,021,035 
Interest income from related parties   (2,409,267)   (1,505,458)
Accrued expenses   388,718    298,033 
    8,571,873    9,636,024 
           
Valuation allowance   (4,775,681)   (4,110,976)
           
Net deferred tax assets/liabilities  $3,796,192   $5,525,048 

 

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

 

Deferred taxes and liabilities associated with application of revenue recognized pursuant to percentage-of-completion will reverse when the construction progress of related projects proceeds to completion, which is expected to be December 2017 for No. 79 Courtyard and December 2016 for Kirin Bay projects, when the difference between accumulated revenue and cost of sales recognized based on percentage-of-completion method and enterprise income tax accrued pursuant to tax laws, converges.  Enterprise income tax comprises multiple interim prepayments determined predominately by periodic customer deposits collected and deemed profit ratio when a real estate project is under construction, followed by a closing to adjust to actual profit realized, after the construction is complete.  Deferred taxes and liabilities associated with application of revenue recognized pursuant to percentage-of-completion will also increase or decrease when the Company reevaluates and makes upward or downward adjustments to a project’s total revenue or cost estimate.  The Company believes deferred tax assets related to revenue recognized based on percentage-of-completion and excess of interest expense will be fully realizable.

   

Entities established in the PRC had net operating losses carry forward of $12,123,521 as of June 30, 2015 which will expire on various dates between December 31, 2015 and December 31, 2019. Entities established out of the PRC had net operation losses carry forward of $5,881,175 as of June 30, 2015.

 

Note 17 – Other Taxes Payable

 

Other taxes payable consisted of the following:

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)     
           
Business tax and related urban construction tax and education surcharge  $185,119   $2,060,115 
Land Appreciation Tax   48,307    203,048 
           
   $233,426   $2,263,163 

 

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Note 18 – Loans Payable

 

Loans payable consisted of the following:

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)     
           
Loans from Industrial and Commercial Bank of China, XingtaiYejin Branch (“ICBC 2013 Loans”)          
Original loan due January 30, 2015, maturity extended to March 30, 2016, at 9.84% per annum   11,131,483    11,050,621 
Original loan due May 30, 2015, maturity extended to December 30, 2015, at 9.84% per annum   7,857,517    7,800,439 
Due September 30, 2015, at 9.84% per annum   7,857,517    7,800,439 
Due January 30, 2016, at 9.84% per annum   7,857,517    7,800,439 
Due May 30, 2016, at 9.84% per annum   7,857,517    7,800,439 
    42,561,551    42,252,377 
Loans from Industrial and Commercial Bank of China, XingtaiYejin Branch (“ICBC 2012 Loans”)          
Due September 18, 2015, at 9.225% per annum   6,547,930    6,500,366 
Due May 19, 2015, at 9.225% per annum   -    4,875,274 
Due January 19, 2015, at 9.225% per annum   -    4,875,274 
    6,547,930    16,250,914 
Loans from HebeiXingtai Rural Commercial Bank          
Due April 24, 2015, at 12.56% per annum (“Credit Union 2014 Short-term loan”)   -    3,250,183 
Due May 8, 2015, at 12.036% per annum (“Syndicated Loans 2014”)   -    8,125,457 
Due July 24, 2015, at 11.46% per annum (“Zhongding Kirin 2014 Loan”) (note (b))   -    7,514,241 
Due June 26, 2015, at 11.46% per annum (“Short-term 2014 Loan”) (note (a))   -    3,250,183 
Due October 16, 2017, at 7.38% per annum (“Garden 2014 Loan”)   4,910,948    4,875,274 
Due November 12, 2015, at 15% per annum (“Entrust Loan 2014”)   1,933,277    1,919,233 
Due July 3, 2015, at 11.79% per annum (“Zhongding Kirin Loan 2014”) (note (b))   -    4,875,274 
Due February 6, 2016, at 15% per annum (“Entrust Loan 2015”)   2,087,153    - 
Due February 8, 2017, at 7% per annum (“Syndicated Loans 2015”)   8,184,914    - 
Due April 21, 2016, at 15.46% per annum (“Credit Union 2015 Short-term loan”)   3,273,965    - 
Due May 14, 2016, at 13.01% per annum (“Garden 2015 Loan”)   2,946,569    - 
Due May 7, 2016, at 13.11% per annum  (“HebeiZhongding Loans 2015”)   7,366,422    - 
Due June 10, 2016, at 13.01% per annum (“Zhongding Kirin Loan 2015”)   7,366,422    - 
    38,069,670    33,809,845 
           
   $87,179,151   $92,313,136 

 

Note (a): The Company repaid this loan in May, 2015.

 

Note (b): The Company repaid these loans in June, 2015.

 

ICBC 2012 Loans and ICBC 2013 Loans are floating rate loans whose rates are set at 10% above 1-to-3 year base borrowing rate stipulated by the People’s Bank of China at the date of each drawdown, and are subject to revision every 12 months.  The Company also paid financing service fees for ICBC 2012 Loans, ICBC 2013 Loans Syndicated Loans 2014, Zhongding Kirin 2014 Loan, Garden 2015 Loan, HebeiZhongding Loans 2015 and Zhongding Kirin Loan 2015.  The financing service fees were paid prior to financial institution releasing loans to the Company as prepaid interest, and have been included in the determination of respective loans’ effective interest rates. Credit Union 2015 Short-term Loan was guaranteed by HebeiYoerma and Zhongding Kirin Loan 2014 was guaranteed by an unrelated party company as arranged by the financial institution.  The Company did not pay for the guarantees.

 

As of June 30, 2015 and December 31, 2014, ICBC 2012 Loans, ICBC 2013 Loans, HebeiZhongding Loans 2015 and Zhongding Kirin Loan 2015 were secured by the Company’s real estate held for development and land use right with carrying value of approximately $118,940,000 (unaudited) and $132,360,000, respectively.

 

As of June 30, 2015 and December 31, 2014, Garden 2014 Loan and Syndicated Loans 2015 were secured by land use right owned by Zhenjiang Huaxia Kirin Real Estate Co.,Ltd with carry value of approximately $31,900,000 (unaudited) and $12,280,000, respectively. As of June 30, 2015, Garden 2015 Loan was secured by HebeiYoerma’s Land use right and property right with carrying value of approximately $6,330,000.

 

On November 14, 2014, the Company entered into a series of entrust loan agreements with Xingtai Rural Commercial bank and individuals with amount RMB 11,810,000 (approximately $1,933,000, “Entrust Loan 2014”), and borne an annual effective interest rate of 15%, including loan of RMB 1,100,000 due to managements of the Company, with the remaining balance due to third party individuals.

 

On February 10, 2015, the Company entered into a series of entrust loan agreements with Xingtai Rural Commercial bank and individuals with amount RMB 12,750,000 (approximately $2,087,000, “Entrust Loan 2015”), and borne an annual effective interest rate of 15%, including loan of RMB 1,400,000 due to managements of the Company, with the remaining balance due to third party individuals.

 

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The aggregate maturities of loans payable for each of years subsequent to June 30, 2015 are as follows:

 

Twelve months  Ending June 30  Amount 
     
2016  $74,083,289 
2017   8,184,914 
2018   4,910,948 
      
Loans payable  $87,179,151 

 

Note 19 – Restricted Stock Compensation

 

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

 

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

 

There are 146,120 unvested shares outstanding at June 30, 2015 and December 31, 2014, as all related employees have terminated service with the Company, all unvested shares will not be vested to related employees. The Company did not recognize of share-based compensation expense related to the Restricted Stock Awards for the six months and three months ended June 30, 2015 and 2014, respectively.

 

Note 20 – Revenue

 

The Company’s revenue is recognized under percentage-of-completion methods for the six months and three months ended June 30, 2015 and 2014 from pre-sale of real estate projects.  Revenue recognized for each real estate project, including adjustments made pursuant to change of estimates for the six months and three months ended June 30, 2015 and 2014 was as follows:

 

   Six Months Ended
June 30,
   Three Months Ended
June 30,
 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Kirin County  $1,837   $720,713   $86,149   $516,681 
No.79 Courtyard   20,050,513    12,704,071    9,339,551    11,738,045 
Kirin Bay   37,990,133    33,992,242    26,775,649    27,901,784 
Property Service   312,062    224,805    120,133    73,144 
                     
   $58,354,545   $47,641,831   $36,321,482   $40,229,654 

  

Note 21 – Income(loss) per Share

 

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net earnings per share are computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period.

 

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Note 22 – Non-controlling interest

 

Non-controlling interests represent the non-controlling interest stockholders’ proportionate share of the equity of Brookhollow Lake, LLC, Greenfield International Corporation, Newport Property Holding, LLC and Kirin Alamo, LLC. The non-controlling interests in 2015 and 2014 are summarized as below:

 

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

 

The non-controlling interests in Brookhollow Lake, LLC, Greenfield International Corporation, Newport Property Holding, LLC and Kirin Alamo that are not owned by the Company are shown as “non-controlling interests” in the condensed consolidated balance sheets as of June 30, 2015 and December 31, 2014 and “net income (loss) attributable to non-controlling interests” in the condensed consolidated statements of operations and comprehensive income (loss) for the six months and three months ended June 30, 2015 and 2014.

 

Note 23 – Related Party Transactions and Balances 

 

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

 

    June 30,     December 31,  
    2015     2014  
    (Unaudited)        
HuaxiaHuifeng Ventures Capital Management (Beijing) Co., Ltd (“HuaxiaHuifeng”, note(a))                
Due October 14, 2015, at 18% per annum   $ 16,369,827     $ 27,626,554  
Due October 14, 2015, no interest     2,128,078       4,532,380  
      18,497,905       32,158,934  
                 
Zhuolu Huada Real Estate Development Co., Ltd                
Originally loan due August 5, 2015, maturity extended to August 5, 2016, at 20% per annum     4,870,024       4,834,647  
                 
Zhenjiang Huaxia Kirin Real Estate Development Co., Ltd                
Due October 16. 2017, at 7.92% per annum     4,910,948       4,875,274  
Due February 8, 2017, at 8.90% per annum     8,184,914       -  
Due December 31, 2015, at 15% per annum     6,106,764       -  
      19,202,626       4,875,274  
                 
Langfang Hualin Real Estate Development Co., Ltd                
Due February 9, 2016, at 15% per annum     13,914       -  
Due March 18, 2016, at 15% per annum     24,555       -  
Due May 13, 2016, at 15% per annum     42,562       -  
Due July 9, 2016, at 15% per annum     8,185       -  
      89,216       -  
                 
Huaxia Kirin (Beijing) Investment Co., Ltd                
Due December 31, 2016, at 18% per annum     5,729,439       -  
                 
Huaxia Brother (Beijing) Investment Management Co., Ltd                
Due December 31, 2016, at 18% per annum     3,349,267       -  
                 
Beijing Huaxia Kirin Investment Development Co., Ltd                
Due December 31, 2016, at 18% per annum     2,432,556       -  
                 
Interest income receivables     9,631,063       6,484,246  
                 
    $ 63,802,096     $ 48,353,101  

 

Note (a): On February 11, 2015, the Company received RMB 84,890,000 (approximately $13,660,000, at historical exchange rate) from HuaxiaHuifeng.

 

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

 

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

  

For the years ended December 31, 2012, 2011, 2010 and 2009, XingtaiZhongding was entitled to receive RMB2,800,000, RMB43,000,000, RMB63,000,000, and RMB51,200,000, respectively ($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at respective years’ historical rates) earned government grant from Business Investment, representing total amount of the government grant. The Company has the right to determine how to utilize the earned government grant. As at June 30, 2015 and December 31, 2014, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($26,191,723 and $26,001,463) was used to repay working capital provided by Jianfeng Guo for the support of other real estate projects’ development. As of June 30, 2015, the Company had a remaining $1,138,567 earned government grant available for future drawdown after repaid working capital provided by Jianfeng Guo, which is included in “Receivable from a trust equity owner” in condensed consolidated balance sheet.

 

(3) Working capital provided by Jianfeng Guo

 

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

 

At each balance sheet date, affiliate companies and individuals who have working capital transactions with the Company’s VIEs assigned their balances to Jianfeng Guo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered into between Jianfeng Guo, related affiliate companies and individuals, and the Company’s VIEs. XingtaiZhongding also chooses to use its accumulated government grant receivable from Business Investment, to repay working capital provided by Jianfeng Guo.  Accordingly, the Company is entitled to present netted balance with Jianfeng Guo on its condensed consolidated balance sheets.

 

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Gross amount of working capital provided by and to affiliate companies and individuals designated by Jianfeng Guo as at June 30, 2015 and December 31, 2014 were as follows:

 

   June 30,  December 31,
   2015  2014
   (unaudited)   
Gross of working capital received from affiliate companies and individuals designated by Jianfeng Guo  $(42,844,129)  $(42,278,247)
Gross of working capital provided to affiliate companies and individuals designated by Jianfeng Guo   17,790,973    21,692,272 
Gross earned government grant held by a related party   26,191,723    26,001,463 
           
Receivable from a trust equity owner  $1,138,567   $5,415,488 

 

(4) Prepayment to related party

 

Please see Note 8 – Prepayments

 

(5) Loan related to related party

 

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

 

(6) Balances with a related party supplier

 

Please see Note 9 – Other receivables and Note 14 – Other Payables and Accrued liabilities.

 

(7) Service fee

 

For six months ended June 30, 2015 and 2014, the Company recorded service fee with an amount of RMB 1,200,000 (approximately $196,000 ) and RMB 2,400,000 (approximately $391,000), respectively. For three months ended June 30, 2015 and 2014, the Company recorded service fee with an amount of RMB nil and RMB 1,200,000 (approximately $196,000), respectively. The service was received from affiliate companies designated by Jianfeng Guo.

 

(8) Notes Receivable

 

Please see Note 6- Notes Receivable.

  

Note 24 – Contingencies and Commitments

  

As at June 30, 2015 and December 31, 2014, the Company provided $158,331,751 (unaudited) and $132,308,930 guarantees to mortgage bank loans granted to homebuyers of the Company’s real estate properties.  Guarantees commence when the banks release mortgage to the Company and end when House Ownership Certificates are issued and pledged to banks instead.  The fair value of the guarantees is insignificant because the possibility of the homebuyers’ default is remote, and in case of default, the Company can repossess the related properties to cover repayments of outstanding principal, interest and penalty to mortgage banks, and accordingly, the Company did not recognize fair value of these guarantees.

 

Note 25 – Subsequent event

 

On July 3, 2014, the Company received RMB 27,000,000 (approximately $4,420,000) one-year term loan from Xingtai RC Bank with an annual effective interest rate of 13.99%.  Except this, no events have occurred subsequent to the balance-sheet date through filing date that would require adjustment to or disclosure in the condensed consolidated financial statements.

 

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

 

The following discussion and analysis of the results of operations and financial condition for the six months and three months ended June 30, 2015 and 2014 should be read in conjunction with the financial statements and the notes to those financial statements, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, previously filed with the SEC (the “2014 Form 10-K”).  Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors.  See “Forward-Looking Statements.” 

 

Overview

 

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

 

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

 

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

 

Recent Developments

 

At June 30, 2015, we have the following projects under development:

 

   POC   Construction
beginning
  Completion/
Estimated
Completion
Kirin County   100%  September 2011  Late 2012
Kirin Plaza   86.4%  September 2011  Late 2015
No.79 Courtyard (Phase I)   100%  September 2011  Late 2014
No.79 Courtyard (Phase II)   92.4%  September 2012  Mid-to-late 2015
No.79 Courtyard (Phase III)   93.2%  April 2013  Mid-to-late 2015
No.79 Courtyard (Phase IV)   55.2%  July 2014  Late 2017
Kirin Bay (Phase I)   99.4%  October 2011  Late 2014
Kirin Bay (Phase II)   93.3%  March 2013  Mid-to-late 2015
Kirin Bay ( Phase III)   69.4%  May 2013  Mid-to-late 2016
Kirin Bay (Phase IV)   41.2%  April 2014  Late 2016

  

Financial Performance Highlights

 

The following summarizes certain key financial information for the six months ended June 30, 2015.

 

Total revenue was $58.4 million for the six months ended June 30, 2015, an increase of $10.8 million, or 22.5%, from $47.6 million for the same period of 2014. Our revenue stream has shifted from No.79 Courtyard Phase I and Kirin Bay Phase I, which were completed in late 2014, to No. 79 Courtyard (Phase II, Phase III and Phase IV) and Kirin Bay (Phase II, Phase III and Phase IV), which are expected to generate the majority of our revenue in the upcoming 12 months;

 

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Gross profit was $9.6 million for the six months ended June 30, 2015, an increase of 1.8 million, or 22.5%, from $7.8 million for the same period of 2014. Gross margin ratio was 16.4% and 16.4% for the six months ended June 30, 2015 and 2014.  
   
Net income was $2.9 million for the six months ended June 30, 2015, an increase of $4.5 million, or approximately 284.1%, from net loss of $1.6 million for the same period of last year.

  

Factors Affecting our Operating Results

 

Growth of China’s Economy. We operate and derive all of our revenue from sales in China. Economic conditions in China, therefore, affect our operations, including the demand for our properties and the availability and prices of our raw materials among other expenses. China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 7.8% in 2012, 7.7% in 2013, 7.4% in 2014 and 7% in the first half year of 2015. China is expected to experience continued growth in all areas of investment and consumption.  However, if the Chinese economy were to become significantly affected by a negative stimulus, China’s growth rate would likely to fall and our revenue could correspondingly decline.

 

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

 

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

 

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

 

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

 

Property Sales and Transfers — For each project we develop, pursuant to the Commodity Houses Sale Administration Regulation, effective of June 1, 2001, we are required to obtain permits before commencing project sales or presales of such project. Local governments act on the region’s interests by helping private companies streamline such projects and often coordinate with regional housing developers to allow for preliminary presales while Pre-Sales Permits are being processed. The local government in Xingtai has recognized the financial cost the Company assumed in administering the resident removal process and offered us permission to collect non-refundable deposits. This is a local practice enacted by the Xingtai local government to encourage project development. By collecting deposits from this type of buyer, we can offer a contractually fixed price to our consumers and ensure them a preference in housing selection.  We may not obtain such approval in other cities if we expand beyond Xingtai.

 

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

 

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

 

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

 

Interest Rate and Inflation Challenges. We are subject to market risks due to fluctuations in interest rates and refinancing of mid-term debt. Higher interest rates may also affect our revenues, gross profits and our ability to raise and service debt and to finance our developments.

 

According to the National Bureau of Statistics of China, China’s national inflation rate was 2.6% in 2012, 2.6% in 2013, 2.0% in 2014 and 1.4% for the first half year of 2015. Inflation could result in increases in the price of raw materials and labor costs.  We do not believe that inflation or deflation has affected our business materially.

 

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

 

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

 

Significant Accounting Policies

 

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2015 compared with those contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Result of operations” included in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with SEC on April 15, 2015.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers”. For a public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

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In August 2014, the FASB issued Accounting Standards Update (ASU) No.2014-15, “Presentation of Financial Statements-Going Concern”. Effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.

 

On April, 2015, the FASB issued Accounting Standards Update (ASU) 2015-03, entitled Simplifying the Presentation of Debt Issuance Costs. The ASU amends the guidance in the FASB Accounting Standards Codification (FASB ASC) Topic 835, entitled Interest-Imputation of Interest. The objective of the amendments in this Update is to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The amendments in ASU 2015-03 are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.

 

The Company is currently in the process of evaluation the impact of the adoption of ASU 2014-09, ASU 2014-15 and ASU 2015-03 on its consolidated financial statements.

 

Results of Operations

 

Comparison of Six and Three Months Ended June 30, 2015 and 2014

 

   Six Months Ended June 30,   Three Months Ended June 30,  
   2015 (Unaudited)  

2014 (Unaudited)

(Revised)

   2015 (Unaudited)  

2014 (Unaudited)

(Revised)

 
       % of
Revenue
       % of
Revenue
       % of
Revenue
       % of
Revenue
 
                                 
Revenue, net  $58,354,545    100%  $47,641,831    100%  $36,321,482    100%  $40,229,654    100%
Cost of sales   48,757,579    83.6%   39,809,623    83.6%   28,986,384    79.8%   34,043,637    84.6%
Gross profit    9,596,966    16.4%   7,832,208    16.4%   7,335,098    20.2%   6,186,017    15.4%
Selling expenses   1,546,009    2.6%   1,665,126    3.5%   811,456    2.2%   885,298    2.2%
General and administrative expenses   3,448,810    5.9%   4,791,089    10.1%   1,566,797    4.3%   1,854,475    4.6%
Income from operations   4,602,147    7.9%   1,375,993    2.9%   4,956,845    13.6%   3,446,244    8.6%
Investment income (Loss)   786,806    1.3%   504,548    1.1%   120,834    0.3%   (2,000)   0.0%
Interest income   3,480,811    6.0%   2,469,723    5.2%   1,999,856    5.5%   1,236,816    3.1%
Interest expense   (4,814,932)   -8.3%   (5,292,851)   -11.1%   (2,735,250)   -7.5%   (2,580,985)   -6.4%
Other non-operating income (loss)   2,155,292    3.7%   171,251    0.4%   1,685,699    4.6%   (39,860)   -0.1%
Total other income (expenses)   1,607,977    2.8%   (2,147,329)   -4.5%   1,071,139    2.9%   (1,386,029)   -3.4%
Income (loss) before income taxes expense   6,210,124    10.6%   (771,336)   -1.6%   6,027,984    16.6%   2,060,215    5.1%
Income taxes expense   3,301,745    5.7%   808,045    1.7%   1,662,193    4.6%   1,390,565    3.5%
Net income (loss)  $2,908,379    5.0%  $(1,579,381)   -3.3%  $4,365,791    12.0%  $669,650    1.7%

 

Our net income for the six months ended June 30, 2015 was $2.9 million, an increase of $4.5 million, from net loss of $1.6 million for the six months ended June 30, 2014.  Net income increased because gross profit increased by $1.8 million, the other income increased by $3.8 million and the operating and administrative expense decreased by $1.5 million, meanwhile income tax expense increased by $2.5 million for the six months ended June 30, 2015 as compared to the same period of 2014.

 

32
 

 

Our net income for the three months ended June 30, 2015 was $4.4 million, an increase of $3.7 million, from net income of $0.7 million for the three months ended June 30, 2014. Net income increase because in the three months ended June 30, 2015, the gross profit increased by $1.1 million, the other income increased by $2.5 million, the operating and administrative expense decreased by $0.4 million, meanwhile income tax expense increased by $0.3 million as compared to the same period of 2014.

 

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

 

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

 

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

 

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Revenues and Gross Profit

 

   Six Months Ended June 30,   Three Months Ended June 30, 
   2015   2014   2015   2014 
       % of
Revenue
       % of
Revenue
       % of
Revenue
       % of
Revenue
 
                                 
Revenue, net  $58,354,545    100%  $47,641,831    100%  $36,321,482    100%  $40,229,654    100%
-No.79 Courtyard (Phase I)   4,407,722    7.6%   1,233,400    2.6%   49,047    0.1%   1,129,915    2.8%
-No.79 Courtyard (Phase II)   1,745,267    3.0%   4,062,993    8.5%   980,551    2.7%   4,019,394    10.0%
-No.79 Courtyard (Phase III)   6,235,760    10.7%   7,407,678    15.5%   2,269,854    6.2%   6,588,736    16.4%
-No.79 Courtyard (Phase IV)   7,661,764    13.1%   -    -    6,040,099    16.6%   -    - 
-Kirin Bay (Phase I)   2,058,221    3.5%   9,315,855    19.6%   1,867,443    5.1%   7,686,051    19.1%
-Kirin Bay (Phase II)   5,737,910    9.8%   10,297,884    21.6%   3,106,072    8.6%   8,442,688    21.0%
-Kirin Bay (Phase III)   26,736,383    45.8%   13,099,974    27.5%   19,411,556    53.4%   10,494,516    26.1%
-Kirin Bay (Phase IV)   3,457,619    5.9%   1,278,529    2.7%   2,390,578    6.6%   1,278,529    3.2%
-Kirin County   1,837    0.1%   720,713    1.5%   86,149    0.2%   516,681    1.3%
-Property Service   312,062    0.5%   224,805    0.5%   120,133    0.3%   73,144    0.2%
Cost of sales   48,757,579    83.6%   39,809,623    83.6%   28,986,384    79.8%   34,043,637    84.6%
-No.79 Courtyard (Phase I)   4,125,165    7.1%   889,853    1.9%   15,560    0.0%   801,594    2.0%
-No.79 Courtyard (Phase II)   1,682,660    2.9%   4,112,603    8.6%   928,483    2.6%   4,089,983    10.2%
-No.79 Courtyard (Phase III)   4,354,855    7.5%   4,571,593    9.6%   1,344,971    3.7%   3,933,768    9.8%
-No.79 Courtyard (Phase IV)   6,302,243    10.8%   -    -    4,911,590    13.5%   -    - 
-Kirin Bay (Phase I)   1,789,669    3.1%   7,931,307    16.6%   1,463,158    4.0%   7,392,101    18.4%
-Kirin Bay (Phase II)   5,537,272    9.5%   9,396,763    19.7%   2,630,473    7.2%   7,682,018    19.1%
-Kirin Bay (Phase III)   21,349,677    36.6%   10,386,022    21.8%   15,413,960    42.4%   8,324,260    20.7%
-Kirin Bay (Phase IV)   2,879,690    4.9%   1,140,090    2.4%   1,913,718    5.3%   1,140,090    2.8%
-Kirin County   37,643    0.1%   1,112,658    2.3%   66,081    0.2%   535,121    1.3%
-Property Service   698,705    1.2%   268,734    0.6%   298,390    0.8%   144,702    0.4%
Gross profit   9,596,966    16.4%   7,832,208    16.4%   7,335,098    20.2%   6,186,017    15.4%
-No.79 Courtyard (Phase I)   282,557    0.5%   343,547    0.7%   33,487    0.1%   328,321    0.8%
-No.79 Courtyard (Phase II)   62,607    0.1%   (49,610)   -0.1%   52,068    0.1%   -70,589    -0.2%
-No.79 Courtyard (Phase III)   1,880,905    3.2%   2,836,085    6.0%   924,883    2.5%   2,654,968    6.6%
-No.79 Courtyard (Phase IV)   1,359,521    2.3%   -    -    1,128,509    3.1%   -    - 
-Kirin Bay (Phase I)   268,552    0.5%   1,384,548    2.9%   404,285    1.1%   293,950    0.7%
-Kirin Bay (Phase II)   200,638    0.3%   901,121    1.9%   475,599    1.3%   760,670    1.9%
-Kirin Bay (Phase III)   5,386,706    9.2%   2,713,952    5.7%   3,997,596    11.0%   2,170,256    5.4%
-Kirin Bay (Phase IV)   577,929    1.0%   138,439    0.3%   476,860    1.3%   138,439    0.3%
-Kirin County   (35,806)   -0.1%   (391,945)   -0.8%   20,068    0.1%   (18,440)   0.0%
-Property Service   (386,643)   -0.7%   (43,929)   -0.1%   (178,257)   -0.5%   (71,558)   -0.2%
Profit margin   16.4%        16.4%        20.2%        15.4%     
-No.79 Courtyard (Phase I)   6.4%        27.9%        68.3%        29.1%     
-No.79 Courtyard (Phase II)   3.6%        -1.2%        5.3%        -1.8%     
-No.79 Courtyard (Phase III)   30.2%        38.3%        40.7%        40.3%     
-No.79 Courtyard (Phase IV)   17.7%        -         18.7%        -      
-Kirin Bay (Phase I)   13.0%        14.9%        21.6%        3.8%     
-Kirin Bay (Phase II)   3.5%        8.8%        15.3%        9.0%     
-Kirin Bay (Phase III)   20.1%        20.7%        20.6%        20.7%     
-Kirin Bay (Phase IV)   16.7%        10.8%        19.9%        10.8%     
-Kirin County   -1949.2%        -54.4%        23.3%        -3.6%     
-Property Service   -123.9%        -19.5%        -148.4%        -97.8%     

 

34
 

 

Revenue, net.  Real estate sales represent revenue from the pre-sale of properties under development. For the six months and three months ended June 30, 2015 and 2014, revenue was derived from the pre-sale of No.79 Courtyard (Phase I, Phase II, Phase III and Phase IV), Kirin Bay (Phase I, Phase II, Phase III and Phase IV) and property service. Under the percentage-of-completion method, revenue is the percentage of completed construction at a point in time is multiplied by total value of contracts signed up to that same point.

  

Our revenue for the six months ended June 30, 2015 was $58.4 million, an increase of $10.8 million, or approximately 22.5%, compared to $47.6 million for the same period of 2014.  The revenue increased because of the sales of new phases: revenue from Phase IV of No. 79 Courtyard is $7.7 million in the first half year of 2015, while nil in the first half year of 2014, revenue from Phase III and Phase IV of Kirin Bay is $30.2 million in the first half year of 2015, increased by $15.8 as compared with $14.4 million in the first half year of 2014.

 

Revenue from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), No.79 Courtyard (Phase IV), Kirin Bay (Phase I), Kirin Bay (Phase II), Kirin Bay (Phase III) and Kirin Bay (Phase IV) was $4.4 million, $1.7 million, $6.2 million, $7.7 million, $2.1 million, $5.7 million, $26.7 million and $3.5 million respectively, representing 7.6%, 3.0%, 10.7%, 13.1%, 3.5%, 9.8%, 45.8% and 5.9% of total revenue earned in the six months ended June 30, 2015. For the six months ended June 30, 2015, revenue of property service increased by $0.1 million as compared with the same period of 2014.

 

Our revenue from the pre-sale of real estate properties for the three months ended June 30, 2015 was $36.3 million, a decrease of $3.9 million, or approximately 9.7%, compared to $40.2 million for the same period of year 2014. Revenue from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), No.79 Courtyard (Phase IV), Kirin Bay (Phase I), Kirin Bay (Phase II), Kirin Bay (Phase III) and Kirin Bay ( Phase IV) was $0.1 million, $1.0 million, $2.3 million, $6.0 million, $1.9 million, $3.1 million, $19.4 million and $2.4 million respectively, representing 0.1%, 2.7%, 6.2%, 16.6%, 5.1%, 8.6%, 53.4% and 6.6% of total revenue earned in the three months ended June 30, 2015.

 

The following tables set forth the percentage-of-completion (POC) by project for the period ended June 30, 2015 and 2014 and year ended December 31, 2014 and 2013:

 

   As at
June 30,
2015
   As at
December 31,
2014
   As at
June 30,
2014
   As at
December 31,
2013
 
No.79 Courtyard Phase I   100%   96.1%   95.4%   95.3%
No.79 Courtyard Phase II   92.4%   88.0%   70.2%   59.1%
No.79 Courtyard Phase III   93.2%   86.3%   62.9%   53.6%
No.79 Courtyard Phase IV   55.2%   44.9%   -    - 
Kirin Bay Phase I   99.4%   98.3%   92.6%   85.0%
Kirin Bay Phase II   93.3%   88.7%   74.1%   61.0%
Kirin Bay Phase III   69.4%   55.4%   40.2%   35.9%
Kirin Bay Phase IV   41.2%   22.9%   9.9%   - 
Kirin County   100%   100%   100%   100%
Kirin Plaza   86.4%   85.8%   83.7%   82.9%

 

Kirin Bay is a four-phase, master-planned community built on a land area of approximately 660,000 square meters. Positioned as a mid-market residential development, Kirin Bay also features kindergarten, a primary school, hotel, office buildings and apartments.  As of issuance date of the Company’s Form 10-Q for the quarter ended March 31, 2015, (“the Form 10-Q”), we have obtained necessary government approvals. For Kirin Bay (Phase I), we acquired Land Use Rights Certificates (issued on July 7, 2011), Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued on August 10, 2011), Work Commencement Permit (issued on September 29, 2011) and Pre-Sales Permit (issued on September 30, 2011); for Kirin Bay (Phase II), we acquired Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued on July 31, 2012), Work Commencement Permit (issued On November 22, 2012) and Pre-Sales Permit (issued on March 26, 2013); for Kirin Bay (Phase III), we obtained Construction Land Planning Permit (issued On June 9, 2011), Construction Work Planning Permit (issued on January 15, 2013), Work Commencement Permit (issued on  March 26, 2013) and Pre-sales Permit (issued on September 18, 2013); and for Kirin Bay (Phase IV), we obtained Construction Land Planning Permit (issued On June 9, 2011), Construction Work Planning Permit (issued on January 15, 2013), Work Commencement permit (issued on April 9, 2014) and Pre-sales Permit (issued on May 27, 2014).

 

35
 

 

No. 79 Courtyard is a project positioned as a high-end residential development with some mixed commercial use, which covers a land area of over 290,000 square meters and a total building area of approximately 520,000 square meters. As of issuance date of the Form 10-Q, we have obtained necessary government approvals. For No. 79 Courtyard (Phase I) we acquired Land Use Rights Certificate (issued on November 9, 2010), Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on September 1, 2011), Work Commencement Permit (issued on November 2, 2011) and Pre-Sales Permit (issued on November 2, 2011); for No.79 Courtyard (Phase II), we acquired Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on July 20, 2012), Work Commencement Permit (issued on September 1, 2012) and Pre-Sales Permit (issued on September 27, 2012); for No.79 Courtyard (Phase III), Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on January 16, 2013), Work Commencement Permit (issued on April 3, 2013) and Pre-sales Permit (issued on August 12, 2013); for No.79 Courtyard (Phase IV), Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on December 12, 2013), Work Commencement Permit (issued on July 1, 2014) and Pre-sales Permit (issued on September 29, 2014).

 

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

 

For Kirin Bay Project, we have obtained the land use right pursuant to our participation in the Kong Village Relocation Program.

 

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

 

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

 

   Cumulative
contract
value of
pre-sale
as of
June 30,
2015
   Cumulative
Customer
 deposits
collected
 as of
June 30,
2015
   Contract
value of
 pre-sale for
 the six
months ended
June 30,
2015
   Customer
deposits
 collected for
the six
 months ended
June 30,
2015
 
No.79 Courtyard Phase I  $128,252    133,263    72    254 
No.79 Courtyard Phase II   37,996    38,535    234    444 
No.79 Courtyard Phase III   59,897    56,665    3,383    7,327 
No.79 Courtyard Phase IV   35,459    32,302    9,850    12,611 
Kirin Bay Phase I   94,037    95,210    1,424    941 
Kirin Bay Phase II   72,472    72,910    2,479    3,029 
Kirin Bay Phase III   107,507    101,506    25,004    22,383 
Kirin Bay Phase IV   19,286    18,532    4,007    3,711 
Kirin County (including Kirin Plaza)   108,085    117,098    -72    -258 

 

Cost  Cost of real estate sales consist of land use rights costs, construction and installation costs. Our costs of real estate sales for the six months ended June 30, 2015 were $48.8 million, an increase of $9.0 million, or 22.5 %, compared to $39.8 million for the same period of 2014.  Our costs of real estate sales for the three months ended June 30, 2015 were $29.0 million, a decrease of $5.0 million, or approximately 14.9%, compared to $34.0 million for the same period of year 2014. Our total cost of real estate sales increased in relation to the increase of revenue. As under the percentage of completion method, revenue from units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project.

 

36
 

 

Gross Profit   Gross profit was $9.6 million for the six months ended June 30, 2015 (gross profit ratio: 16.4 %), increased by $1.8 million as compared to gross profit of $7.8 million (gross profit ratio: 16.4%) for the six months ended June 30, 2014.

 

Gross profit for the three months ended June 30, 2015 was $7.3 million (gross profit ratio: 20.2%), increased by $1.1 million as compared with gross profit of $6.2 million (gross profit ratio: 15.4%) for the same period of year 2014, due to the higher gross margin ratio of the commercial units of Kirin Bay Phase III and No.79 Courtyard Phase III

 

The following tables set forth the aggregate Gross Floor Area (GFA) and the percentage-of-completion (POC) and Contract sold by project for the six months ended June 30, 2015 and 2014:

 

   Total   POC cumulative
accomplished
for the
six months
ended
June 30,
   Contract value
of units sold
for the
six months
ended
June 30,
   Revenue
recognized
for the
six months
ended
June 30,
 
   GFA   2015   2014   2015   2014   2015   2014 
No.79 Courtyard (Phase I)   130,096    100%   95.4%  $71,843   $1,241,795   $4,407,722   $1,233,400 
No.79 Courtyard (Phase II)   45,122    92.4%   70.2%   234,404    289,274    1,745,267    4,062,993 
No.79 Courtyard (Phase III)   47,960    93.2%   62.9%   3,383,441    5,728,422    6,235,760    7,407,678 
No.79 Courtyard (Phase IV)   40,767    55.2%   -    9,850,060    -    7,661,764    - 
Kirin Bay (Phase I)   163,607    99.4%   92.6%   1,423,825    3,842,813    2,058,221    9,315,855 
Kirin Bay (Phase II)   92,043    93.3%   74.1%   2,479,368    5,576,264    5,737,910    10,297,884 
Kirin Bay (Phase III)   130,734    69.4%   40.2%   25,003,702    24,063,303    26,736,383    13,099,974 
Kirin Bay (Phase IV)   31,496    41.2%   9.9%   4,007,243    12,901,598    3,457,619    1,278,529 
Kirin County   183,314    98.5%   98.3%   (72,293)   797,371    1,837   $720,713 
                                    
Total   865,139             $46,381,593   $54,440,840   $58,042,483   $47,417,026 

 

37
 

 

The following tables set forth the consolidated square meters sold and average selling price per square meter by each project for the six months ended June 30, 2015 and 2014:

 

   2015   2014 
   Contract
Sales(1)
   Square
Meters
Sold(2)
   Average
Selling
Price(3)
   Contract
Sales(1)
   Square
Meters
Sold(2)
   Average
Selling
Price(3)
 
No.79 Courtyard Phase I                        
-residential  $-    -   $-   $822,694    545   $1,510 
-commercial   -    -    -    -    -    - 
-garage   71,843    145    495    419,101    657    638 
No.79 Courtyard Phase II                              
-One elevator and four suites   -    -    -    184,133    143    1,288 
-Parking lots   234,404    156    1,503    105,141    72    1,460 
No.79 Courtyard Phase III                              
-residential   2,742,335    2,414    1,136    4,946,171    3,458    1,430 
-commercial   532,672    216    2,466    474,363    123    3,857 
-garage   108,434    151    718    307,888    281    1,096 
No.79 Courtyard Phase IV                              
-residential   9,850,060    7,558    1,303    -    -    - 
Kirin Bay Phase I                              
-residential   418,373    429    975    701,220    742    945 
-commercial   947,944    282    3,362    1,388,353    500    2,777 
-garage   57,508    70    822    1,753,240    3,101    565 
Kirin Bay Phase II                              
-residential   2,115,597    1,936    1,093    5,228,198    4,180    1,251 
-garage   363,771    952    382    348,066    557    625 
Kirin Bay Phase III                              
-residential   24,577,542    27,408    897    23,369,411    25,994    899 
-garage   426,160    571    746    693,892    951    730 
Kirin Bay Phase IV                              
-residential   3,926,530    4,423    888    12,901,598    14,657    880 
-garage   80,713    147    549    -    -    - 
Kirin County                              
-residential   -    -    -    -    -    - 
-commercial   (145,052)   195    (744)   632,563    794    797 
-garage   72,759    319    228    164,808    738    223 
                               
Total  $46,381,593    47,372   $979   $54,440,840    57,493   $947 

 

38
 

 

The following tables set forth the consolidated square meters sold and average selling price per square meter by each project for the three months ended June 30, 2015 and 2014: 

 

   2015   2014 
   Contract
Sales(1)
   Square
Meters
Sold(2)
   Average
Selling
Price(3)
   Contract
Sales(1)
   Square
Meters
Sold(2)
   Average
Selling
Price(3)
 
No.79 Courtyard Phase I                        
-residential  $-    -   $-   $819,786    545   $1,504 
-commercial   -    -    -    -    -    - 
-garage   39,807    29    1,373    286,745    339    848 
No.79 Courtyard Phase II                              
-One elevator and four suites   -    -    -    183,716    143    1,285 
-Parking lots   207,095    156    1,328    -    -    - 
No.79 Courtyard Phase III                              
-residential   375,812    880    427    3,467,427    2,240    1,548 
-commercial   1,152,190    353    3,264    329,554    89    3,703 
-garage   50,349    108    466    96,249    86    1,119 
No.79 Courtyard Phase IV                              
-residential   6,001,990    4,510    1,331    -    -    - 
Kirin Bay Phase I                              
-residential   425,386    429    992    357,204    380    940 
-commercial   947,944    282    3,362    1,388,353    500    2,777 
-garage   6,086    (24)   (254)   292,269    553    529 
Kirin Bay Phase II                              
-residential   285,625    264    1,082    3,348,954    2,857    1,172 
-garage   187,213    584    321    237,255    372    638 
Kirin Bay Phase III                              
-residential   11,404,231    12,644    902    18,955,468    21,180    895 
-garage   143,138    190    753    371,125    516    719 
Kirin Bay Phase IV                              
-residential   1,223,722    1,379    887    12,901,598    14,657    880 
-garage   -    -    -    -    -    - 
Kirin County                              
-residential   -    -    -    -    -    - 
-commercial   -    -    -    529,591    678    781 
-garage   40,926    175    234    49,995    254    197 
                               
Total  $22,491,514    21,959   $1,024   $43,615,289    45,389   $961 

 

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

 

39
 

 

Operating Expenses. Operating expenses for the six months ended June 30, 2015 were $5.0 million, a decrease of $1.5 million, or 22.6%, from $6.5 million for the six months ended June 30, 2014. The decrease was because our overall operating expenses in staff salaries decreased by $0.3 million, advertising expenses decreased by $0.2 million and professional fee decreased by $0.8 million for the six months ended June 30, 2015 as compared to the same period of 2014. 

 

Operating expenses for the three months ended June 30, 2015 were $2.4 million, a decrease of $0.3 million, or 13.2%, from $2.7 million for the three months ended June 30, 2014.

 

   Six Months Ended June 30,   Three Months Ended June 30, 
   2015   2014   2015   2014 
       % of
Expenses
       % of
Expenses
       % of
Expenses
       % of
Expenses
 
Operating expenses  $4,994,819    100%  $6,456,215    100%  $2,378,253    100%  $2,739,773    100%
Selling expenses   1,546,009    31.0%   1,665,126    25.8%   811,456    34.1%   885,298    32.3%
Advertising expense   760,138    15.2%   997,724    15.5%   459,214    19.3%   517,761    18.9%
Staff salaries   352,279    7.1%   218,659    3.4%   160,854    6.8%   136,880    5.0%
Office and Administrative expenses   433,592    8.7%   448,743    7.0%   191,388    8.0%   230,657    8.4%
General and administrative expenses   3,448,810    69.0%   4,791,089    74.2%   1,566,797    65.9%   1,854,475    67.7%
Staff salaries   1,279,780    25.6%   1,740,919    27.0%   687,379    28.9%   770,005    28.1%
Professional expenses   916,120    18.3%   1,720,795    26.7%   341,122    14.3%   499,279    18.2%
Office and Administrative expenses   1,252,910    25.1%   1,329,375    20.6%   538,296    22.6%   585,191    21.4%

  

Advertising Expenses. Our advertising expenses decreased from $1.0 million for the six months ended June 30, 2014 to $0.8 million for the same period of 2015. Such decrease was mainly a result of our No.79 Courtyard and Kirin Bay projects are well-known projects in Xingtai City, no much additional advertising fee spent on promoting projects.

 

40
 

 

Professional and related Expense. Our professional expense decreased from $1.7 million for the six months ended June 30, 2014 to $0.9 million for the six months ended June 30, 2015. The decrease was due to service fee of related party decreased by $0.9 million.
   
Staff salaries. Our staff salaries decreased from $2.0 million for the six months ended June 30, 2015 to $1.6 million for the six months ended June 30, 2015 as a result of staff number decrease.

 

Interest Expense, net. Our net interest expense was $1.3 million for the six months ended June 30, 2015, a decrease of $1.5 million, or 52.7%, from $2.8 million for the same period of 2014.   The decrease was due to: 1) the interest expense for the six months ended June 30, 2015 decreased from $5.3 million for the same period of 2014 to $4.8 million, decreased by $0.5 million, the company repaid more loan to financial institution in the first half year of 2015. 2) the Company recognizes interest income from loans to related parties, which was $3.5 million for the six months ended June 30, 2015, increased by $1.0 million as compared to $2.5 million interest income for the six months ended June 30, 2014.

 

Our net interest expense was $0.7 million and $1.3 million for the three months ended June 30, 2015 and 2014.  The decrease was due to the company recognized interest income from loans to related parties, which was $2.0 million for the three months ended June 30, 2015, increased by $ 0.8 million as compared to $1.2 million interest income for the three months ended June 30, 2014. 

 

Other non - operating income (loss). Other Non-operating income was $2.2 million for the six months ended June 30, 2015, an increase of $2.0 million, or 1158.6%, from $0.2 million for the same period of 2014. Other non-operating income was the gain from the disposal of building units and land, according to the full accrual method, the Company recognized the gain from land sales of $1.7 million in the first half year of 2015.

 

Income Taxes. Income taxes expense for the six months ended June 30, 2015 totaled $3.3 million, an increase of $2.5 million or 308.6% from income taxes expense of $0.8 million for the six months ended June 30, 2014. Income taxes increased because: 1) Deferred tax expense increased by $2.4 million mainly due to deferred tax liabilities arose from interest income and revenue recognition; 2) Current income tax expense increased by $0.4 million, meanwhile LAT expense decreased by $0.2 million as compare for the same period of 2014. Income taxes expense for the three months ended June 30, 2015 totaled $1.7 million, an increase of $0.3 million from income taxes expense of $1.4 million for the three months ended June 30, 2014.

 

Net Income (Loss). Net income for the six months ended June 30, 2015 was $2.9 million, compared to net loss of $1.6 million for the six months ended June 30, 2014, there was an increase of $4.5 million or 284.1%. Net income increased because gross profit increased by $1.8 million, other income increased by $3.8 million and the operating and administrative expense decreased $1.5 million, meanwhile income tax expense increased $2.5 million for the six months ended June 30, 2015 as compared with the same period of 2014.

 

Our net income for the three months ended June 30, 2015 was $4.4 million, an increase of $3.7 million, from net income of $0.7 million for the three months ended June 30, 2014. Net income increased due to the gross profit increased by $1.1 million, other income increased by $2.5 million, the operating and administrative expenses decreased by $0.4 million, meanwhile, income tax increased by $0.3 million, as compared with the same period ended June 30, 2014.

 

Liquidity and Capital Resources

 

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

 

  

Six Months Ended

June 30,

   2015
(Unaudited)
 

2014

(Unaudited)

Net cash provided by (used in) operating activities  $3,386,989   $(15,179,240)
Net cash provided by (used in) investing activities   (12,036,793)   9,843,386 
Cash flows provided by (used in) financing activities   (2,994,564)   2,929,635 
Effect of exchange rate changes on cash and cash equivalent   122,259    (282,048)
Net decrease in cash and cash equivalents   (11,522,109)   (2,688,267)
Cash and cash equivalents - beginning of period   22,004,479    23,407,551 
Cash and cash equivalents - end of period   10,482,370    20,719,284 

 

41
 

 

We had a balance of cash and cash equivalents of $10.5 million as of June 30, 2015 compared with a balance $20.7 million as of June 30, 2014. We have historically funded our working capital needs through advance payments from customers, bank borrowings, and capital from stockholders. Our working capital requirements are influenced by the state and level of our operations, and the timing of capital needed for projects.

 

Operating Activities. Net cash inflow provided by operating activities was $3.4 million for the six months ended June 30, 2015, compared to net cash outflow used in operating activities of $15.2 million for the six months ended June 30, 2014, an increase of $18.6 million. The increase in net cash inflows provided by operating activities was primarily due to the following:

 

We had $2.9 net income in the six months ended June 30, 2015. In the same period of 2014, we had net loss of $1.6 million, which led to a $4.5 million increase in net cash inflow from operating activities.
   
We had $20.6 million cash inflow from real estate property completed and real estate property under development (combination of accounts payable) for the six months ended June 30, 2015. In the same period of 2014, we invested $2.0 million on our projects, this accounted for $22.6 million increase in the net cash inflow from operating activities; 
   
Changes in customer deposit provided $12.3 million cash outflow for the six months ended June 30, 2015. In the same period of 2014, changes in customer deposit contributed $3.7 million cash inflow, which led to a $16.0 million increase in the net cash outflow from operating activities.
   
Changes in prepayments provided $7.1 million cash inflow for the six months ended June 30, 2015. In the same period of 2014, changes in prepayments contributed $3.2 million cash outflow, which led to a $10.3 million increase in the net cash inflow from operating activities.
   
Changes in receivable from a trust equity owner provided $4.4 million cash inflow for the six months ended June 30, 2015. In the same period of 2014, changes in receivable from a trust equity owner contributed $1.4 million cash inflow, which led to a $3.0 million increase in the net cash inflow from operating activities.
   

 

Changes in other receivable provided $6.3 million cash outflow for the six months ended June 30, 2015.  In the same period of 2014, changes in other receivable contributed $24.2 million cash outflow, which led to a $17.9 million decrease in net cash outflow from operating activities. 
   

 

Revenue in excess of billing and Accounts receivable provided $2.2 million cash inflow for the six months ended June 30, 2015.  In the same period of 2014, Revenue in excess of billing and Account receivable contributed $3.6 million cash inflow, which led to a $1.4 million decrease in the net cash inflow from operating activities.
   
Changes in other payable provided $2.5 million cash outflow for the six months ended June 30, 2015.  In the same period of 2014, changes in other payable contributed $5.7 million cash inflow, which led to an $8.2 million increase in net cash outflow from operating activities.
   
Changes in income tax payable (combination of other taxes payable) provided $2.1 million cash outflow for the six months ended June 30, 2015.  In the same period of 2014, changes in tax payable contributed $0.2 million cash outflow, which led to a $1.9 million increase in the net cash outflow from operating activities.
   
Change in restricted cash provided $10.3 million cash outflow for the six months ended June 30, 2015, compared to restricted cash generated $1.5 million cash inflow in the same period of 2014, which led to $11.8 million increase in net cash outflow.

 

Investing Activities. Net cash outflow used in investing activities was $12.0 million for the six months ended June 30, 2015, compared to net cash inflow of $9.8 million provided by investing activities for the six months ended June 30, 2014, represented an increase of $21.8 million in the net cash outflow from investing activities. The Company loans repaid from related parties increased by $2.0 million, meanwhile, loans paid to related party increased by $26.8 million in the first half year of 2015 as compared with the same period of 2014.

 

Financing Activities. Net cash outflow used in financing activities was $3.0 million for the six months ended June 30, 2015, compared to $2.9 million cash inflows provided by financing activities for the six months ended June 30, 2014, an increase of cash outflows of $5.9 million. This was mainly due to an increase of repayment of financial institution loan of $10.6 million in the first half year of 2015 as compared with the same period of 2014, meanwhile, an increase of $1.8 million of financial institution loan received in the first half year of 2015 as compared with same period of 2014 and the Company received $2.8 million cash inflow from note payable in the first half year of 2015.

 

42
 

 

Contractual Obligations

 

Long-term debt obligations, costs of land use rights and non-cancellable construction contract obligations for the six months ended of June 30, 2015

 

   Payments due by period 
       less than   1-3 
in thousands of US Dollars  Total   1 year   years 
Loans payable  $87,179   $74,083   $13,096 
Costs of land use rights   3,832    3,832    - 
Non-cancellable construction contract obligations   122,736    122,736    - 
                
Total   213,747    200,651    13,096 

 

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

 

As of June 30, 2015, we entered into non-cancellable agreements with several contractors for our on-going business of constructing residential and commercial properties. The total amount we committed to pay contractors as outlined in these non-cancellable construction agreements aggregates approximately $122.7 million.

 

Material Financial Obligations

 

Loans Payable

 

As of June 30, 2015 our total loan balance was $87.2 million.

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited)     
         
Loans from Industrial and Commercial Bank of China, XingtaiYejin Branch (“ICBC 2013 Loans”)        
Original loan due January 30, 2015, maturity extended to March 30, 2016, at 9.84% per annum   11,131,483    11,050,621 
Original loan due May 30, 2015, maturity extended to December 30, 2015, at 9.84% per annum   7,857,517    7,800,439 
Due September 30, 2015, at 9.84% per annum   7,857,517    7,800,439 
Due January 30, 2016, at 9.84% per annum   7,857,517    7,800,439 
Due May 30, 2016, at 9.84% per annum   7,857,517    7,800,439 
    42,561,551    42,252,377 
Loans from Industrial and Commercial Bank of China, XingtaiYejin Branch (“ICBC 2012 Loans”)          
Due September 18, 2015, at 9.225% per annum   6,547,930    6,500,366 
Due May 19, 2015, at 9.225% per annum   -    4,875,274 
Due January 19, 2015, at 9.225% per annum   -    4,875,274 
    6,547,930    16,250,914 
Loans from HebeiXingtai Rural Commercial Bank          
Due April 24, 2015, at 12.56% per annum (“Credit Union 2014 Short-term loan”)   -    3,250,183 
Due May 8, 2015, at 12.036% per annum (“Syndicated Loans 2014”)   -    8,125,457 
Due July 24, 2015, at 11.46% per annum (“Zhongding Kirin 2014 Loan”) (note (b))   -    7,514,241 
Due June 26, 2015, at 11.46% per annum (“Short-term 2014 Loan”) (note (a))   -    3,250,183 
Due October 16, 2017, at 7.38% per annum (“Garden 2014 Loan”)   4,910,948    4,875,274 
Due November 12, 2015, at 15.00% per annum (“Entrust Loan 2014”)   1,933,277    1,919,233 
Due July 3, 2015, at 11.79% per annum (“Zhongding Kirin Loan 2014”) (note (b))   -    4,875,274 
Due February 6, 2016, at 15% per annum (“Entrust Loan 2015”)   2,087,153    - 
Due February 8, 2017, at 7% per annum (“Syndicated Loans 2015”)   8,184,914    - 
Due April 22, 2015, at 15.46% per annum (“Credit Union 2015 Short-term loan”)   3,273,965    - 
Due May 14, 2016, at 13.01% per annum (“Garden 2015 Loan”)   2,946,569    - 
Due May 7, 2016, at 13.11% per annum  (“HebeiZhongding Loans 2015”)   7,366,422    - 
Due June 10, 2016, at 13.01% per annum (“Zhongding Kirin Loan 2015”)   7,366,422    - 
    38,069,670    33,809,845 
           
   $87,179,151   $92,313,136 

 

Note (a): The Company repaid this loan in May, 2015.

 

Note (b): The Company repaid these loans in June, 2015.

 

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ICBC 2012 Loans and ICBC 2013 Loans are floating rate loans whose rates are set at 10% above 1-to-3 year base borrowing rate stipulated by the People’s Bank of China at the date of each drawdown, and are subject to revision every 12 months.  The Company also paid financing service fees for ICBC 2012 Loans, ICBC 2013 Loans Syndicated Loans 2014, Zhongding Kirin 2014 Loan, Garden 2015 Loan, HebeiZhongding Loans 2015 and Zhongding Kirin Loan 2015.  The financing service fees were paid prior to financial institution releasing loans to the Company as prepaid interest, and have been included in the determination of respective loans’ effective interest rates. Credit Union 2015 Short-term Loan was guaranteed by HebeiYoerma and Zhongding Kirin Loan 2014 was guaranteed by an unrelated party company as arranged by the financial institution.  The Company did not pay for the guarantees.

 

As of June 30, 2015 and December 31, 2014, ICBC 2012 Loans, ICBC 2013 Loans, HebeiZhongding Loans 2015 and Zhongding Kirin Loan 2015 were secured by the Company’s real estate held for development and land use right with carrying value of approximately $118,940,000 (unaudited) and $87,030,000, respectively.

 

As of June 30, 2015 and December 31, 2014, Garden 2014 Loan and Syndicated Loans 2015 were secured by land use right owned by Zhenjiang Huaxia Kirin Real Estate Co., Ltd with carry value of approximately $31,900,000 (unaudited) and $12,280,000, respectively. Garden 2015 Loan was secured by HebeiYoerma’s land use right and property right with carrying value of $6,330,000.

 

On November 14, 2014, the Company entered into a series of entrust loan agreements with Xingtai Rural Commercial bank and individuals with amount RMB 11,810,000 (approximately $1,933,000, “Entrust Loan 2014”), and borne an annual effective interest rate of 15%, including loan of RMB 1,100,000 due to managements of the Company, with the remaining balance due to third party individuals.

 

On February 10, 2015, the Company entered into a series of entrust loan agreements with Xingtai Rural Commercial bank and individuals with amount RMB 12,750,000 (approximately $2,087,000, “Entrust Loan 2015”), and borne an annual effective interest rate of 15%, including loan of RMB 1,400,000 due to managements of the Company, with the remaining balance due to third party individuals.

 

Related Party Transactions and Balances

 

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

 

    June 30,     December 31,  
    2015     2014  
    (Unaudited)        
HuaxiaHuifeng Ventures Capital Management (Beijing) Co., Ltd(note(a))                
Due October 14, 2015, at 18% per annum   $ 16,369,827     $ 27,626,554  
Due October 14, 2015, no interest     2,128,078       4,532,380  
      18,497,905       32,158,934  
Zhuolu Huada Real Estate Development Co., Ltd                
Original loan due August 5, 2015, maturity extended to August 5, 2016, at 20% per annum     4,870,024       4,834,647  
Zhenjiang Huaxia Kirin Real Estate Development Co., Ltd                
Due October 16. 2017, at 7.92% per annum     4,910,948       4,875,274  
Due February 8, 2017, at 8.90% per annum     8,184,914       -  
Due December 31, 2015, at 15% per annum     6,106,764       -  
      19,202,626       4,875,274  
Langfang Hualin Real Estate Development Co., Ltd                
Due February 9, 2016, at 15% per annum     13,914       -  
Due March 18, 2016, at 15% per annum     24,555       -  
Due May 13, 2016, at 15% per annum     42,562       -  
Due July 9, 2016, at 15% per annum     8,185       -  
      89,216       -  
Huaxia Kirin (Beijing) Investment Co., Ltd                
Due December 31, 2016, at 18% per annum     5,729,439       -  
                 
Huaxia Brother (Beijing) Investment Management Co., Ltd                
Due December 31, 2016, at 18% per annum     3,349,267       -  
                 
Beijing Huaxia Kirin Investment Development Co., Ltd                
Due December 31, 2016, at 18% per annum     2,432,556       -  
                 
Interest income receivables     9,631,063       6,484,246  
                 
    $ 63,802,096     $ 48,353,101  

 

Note (a): On February 11, 2015, the Company received RMB 84,890,000 (approximately $13,660,000, at historical exchange rate) from HuaxiaHuifeng.

 

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

 

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

 

For the years ended December 31, 2012, 2011, 2010 and 2009, XingtaiZhongding was entitled to receive RMB2,800,000, RMB43,000,000, RMB63,000,000, and RMB51,200,000, respectively ($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at respective years’ historical rates) earned government grant from Business Investment, representing total amount of the government grant. The Company has the right to determine how to utilize the earned government grant. As at June 30, 2015 and December 31, 2014, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($26,191,723 and $26,001,463) was used to repay working capital provided by Jianfeng Guo for the support of other real estate projects’ development. As at June 30, 2015, the Company had a remaining $1,138,567 earned government grant available for future drawdown after repaid working capital provided by Jianfeng Guo, which is included in “Receivable from a trust equity owner” in condensed consolidated balance sheet.

 

(3) Working capital provided by Jianfeng Guo

 

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

 

At each balance sheet date, affiliate companies and individuals who have working capital transactions with the Company’s VIEs assigned their balances to Jianfeng Guo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered into between Jianfeng Guo, related affiliate companies and individuals, and the Company’s VIEs. XingtaiZhongding also chooses to use its accumulated government grant receivable from Business Investment, to repay working capital provided by Jianfeng Guo.  Accordingly, the Company is entitled to present netted balance with Jianfeng Guo on its condensed consolidated balance sheets.

 

Gross amount of working capital provided by and to affiliate companies and individuals designated by Jianfeng Guo as at June 30, 2015 and December 31, 2014 were as follows:

 

   June 30,  December 31,
   2015  2014
           
Gross of working capital received from affiliate companies and individuals designated by Jianfeng Guo  $(42,844,129)  $(42,278,247)
Gross of working capital provided to affiliate companies and individuals designated by Jianfeng Guo   17,790,973    21,692,272 
Gross earned government grant held by a related party   26,191,723    26,001,463 
           
Receivable from a trust equity owner  $1,138,567   $5,415,488 

 

(4) Prepayment to related party

 

Please see Note 8 – Prepayments

 

(5) Loan related to related party

 

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

 

(6) Balances with a related party supplier

 

Please see Note 9 – Other receivables and Note 14 – Other Payables and Accrued liabilities.

 

(7) Service fee

 

For six months ended June 30, 2015 and 2014, the Company recorded service fee with an amount of RMB 1,200,000 (approximately $196,000) and RMB 2,400,000 (approximately $391,000), respectively. For three months ended June 30, 2015 and 2014, the Company recorded service fee with an amount of RMB nil and RMB 1,200,000 (approximately $196,000), respectively. The service was received from affiliate companies designated by Jianfeng Guo.

 

(8) Notes Receivable

 

Please see Note 6 – Notes Receivable.

 

45
 

 

Relocation Program of Kong Village

 

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

 

Off-Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers”. For a public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The amendments in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

In August 2014, the FASB issued Accounting Standards Update (ASU) No.2014-15, “Presentation of Financial Statements-Going Concern”. Effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.

 

On April, 2015, the FASB issued Accounting Standards Update (ASU) 2015-03, entitled Simplifying the Presentation of Debt Issuance Costs. The ASU amends the guidance in the FASB Accounting Standards Codification (FASB ASC) Topic 835, entitled Interest-Imputation of Interest. The objective of the amendments in this Update is to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The amendments in ASU 2015-03 are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.

 

The Company is currently in the process of evaluation the impact of the adoption of ASU 2014-09, ASU 2014-15 and ASU 2015-03 on its consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

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

  

46
 

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. For the material weakness described below, management concluded that our internal controls over financial reporting were not effective as of June 30, 2015.

 

We do not have a functional audit committee; and

 

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

 

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

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the second quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

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

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

  

Item 6. Exhibits.

 

Exhibit

Number

  Description
     
31.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Schema
101.CAL   XBRL Taxonomy Calculation Linkbase
101.DEF   XBRL Taxonomy Definition Linkbase
101.LAB   XBRL Taxonomy Label Linkbase
101.PRE   XBRL Taxonomy Presentation Linkbase

 

In accordance with SEC Release 33-8238, Exhibits 32.1 is being furnished and not filed.

 

47
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  KIRIN INTERNATIONAL HOLDING, INC.
   
Dated: August 19, 2015 By: /s/ Jianfeng Guo
    Jianfeng Guo
    Chief Executive Officer
     
Dated: August 19, 2015 By: /s/ Cindy Zheng
    Cindy Zheng
   

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

 

 

48