Item 1.
Business.
Overview
Kirin is a Nevada corporation that operates through its wholly-owned subsidiary, Kirin China, a non-state-owned real estate development company focused on residential and commercial real estate development in “tier-three” cities in the PRC. Tier-three cities are provincial capital cities with ordinary economic development and prefecture cities with relatively strong economic development. Kirin China’s projects are currently concentrated in Hebei Province of the PRC, primarily in the city of Xingtai, and nearby regions. Hebei Province is located in the North Region of the PRC. Kirin China intends to also focus on the Bohai Sea Surrounding Area, which comprises Beijing, Tianjin, Hebei Province, Liaoning Province and Shandong Province.
Our revenue for the year ended December 31, 2013 was $178.3 million, an increase of $111.0 million, or approximately 164.9%, compared to $67.3 million for the year ended December 31, 2012. This increase was mainly due to the sales of No.79 Courtyard and Kirin Bay.
For the year ended December 31, 2013, No.79 Courtyard’s revenue was $92.4 million, an increase of $54.8 million, or 146.2%, as compared to $37.5 million for the year ended December 31, 2012, this increase was mainly due to the sales of No.79 courtyard (Phase II, Phase III). As of December 31, 2012, only No. 79 Courtyard Phase I met revenue recognition requirement and reached a percentage-of-completion 65.5%, as of December 31, 2013, No.79 Courtyard Phase I, Phase II and Phase III met revenue recognition requirement and reached a percentage-of-completion of 95.3%, 59.1% and 53.6%, respectively.
For the year ended December 31, 2013, Kirin Bay’s revenue was $82.6 million, an increase of $50.3 million, or approximately 155.3%, as compared to $32.4 million for the year ended December 31, 2012, this increase was mainly due to the sales of Kirin Bay (Phase II, Phase III). As of December 31, 2012, only Kirin Bay Phase I met revenue requirement and reach a percentage-of-completion 56.1%, as of December 31, 2013, Kirin Bay Phase I, Phase II and Phase III met revenue recognition requirement and reached a percentage-of-completion of 85.0%, 61.6% and 35.9%, respectively.
No.79 Courtyard (Phase I), the construction of which commenced in the fourth quarter of 2011, met revenue recognition requirement and reached a percentage-of-completion of 95.3% by the year ended December 31, 2013; No.79 Courtyard (Phase II), the construction of which commenced in the second quarter of 2013, met revenue recognition requirement and reached a percentage-of-completion of 59.1% by the year ended December 31, 2013; No.79 Courtyard (Phase III), the construction of which commenced in the third quarter 2013, met revenue recognition requirement and reached a percentage-of-completion of 53.6% by the year ended December 31, 2013.
Kirin Bay (Phase I), the construction of which commenced in fourth quarter of 2011, met the revenue recognition requirement and reached a percentage-of-completion of 85.0% by the year ended December 31, 2013; Kirin Bay (Phase II), the construction of which commenced in the first quarter of 2013, met revenue recognition requisition and reached a percentage-of-completion of 61.6% by the year ended December 31, 2013; Kirin Bay (Phase III), the construction of which commenced in the second quarter of 2013, met revenue recognition requirement and reached a percentage-of-completion of 35.9% by the year ended December 31, 2013.
No.79 Courtyard and Kirin Bay are large-scale projects; their development is divided into four phases. No.79 Courtyard (Phase I) is being delivered to customers. We anticipate that No.79 Courtyard (Phase II and Phase III) will be delivered to customers in mid-to-late 2015. Kirin Bay (Phase I) is expected to be delivered to customers in mid-2014, Kirin Bay (Phase II) will be delivered to customer in mid-to-late 2014 and Kirin Bay (Phase III) is expected to be delivered to customer in late 2015.
Kirin County is a building complex of residences, commercial buildings and hotel-style apartments, the construction of which commenced in September 2009. The Kirin County Project has a total construction area of approximately 180,000 square meters. As of December 31 2013, we have completed 100% of the construction of the Kirin County Project. The residential portions of Kirin County Project have been delivered to customers in the year of 2012. Kirin County adjacent shopping arcade (Kirin Plaza), the construction of which commenced in the second quarter of 2011, which is expected to be delivered to customers in 2014.
Corporate History
Prior to March 1, 2011, we were engaged in the business of offering smokeless cigarette. On March 1, 2011, we completed a reverse acquisition transaction through a share exchange with Kirin China whereby we acquired all of the issued and outstanding shares of Kirin China in exchange for 18,547,297 shares of our common stock, which represented approximately 98.4% of our total shares outstanding immediately following the closing of the Share Exchange (the “Share Exchange”). As a result of the Share Exchange, Kirin China became our wholly-owned subsidiary. We ceased our smokeless cigarette business and became a holding company, which through certain contractual arrangements with our variable interest entities in the PRC, engage in the development and operation of real estate in the PRC.
Organization & Subsidiaries
Our wholly owned subsidiary, Kirin China owns all of the share capital of Kirin Development. Kirin Development owns all of the share capital of Kirin Management, a wholly foreign owned enterprise located in Shijiazhuang City, Hebei Province. In anticipation of the Share Exchange, on December 22, 2010, Kirin Management entered into a series of contractual arrangements, including an Entrusted Management Agreement, a Shareholders’ Voting Proxy Agreement and an Exclusive Option Agreement, with each of HebeiZhongding and XingtaiZhongding and their respective shareholders (the “Contractual Arrangements”). As a result of the Contractual Agreements, Kirin Management controls, and is entitled to the economic benefits of, HebeiZhongding and XingtaiZhongding. In turn, Iwamatsu Reien, the sole shareholder of the BVI Companies (as defined below), which are our principal stockholders, has entered into the Call Option Agreements with the Option Holders (as defined below) including Mr. JianfengGuo, the beneficial owner of HebeiZhongding and XingtaiZhongding, granting an option to the Option Holders to purchase all of the shares of the BVI Companies. Other than the parties thereto, the terms and conditions of the Contractual Arrangements entered into with HebeiZhongding and the terms and conditions of the Contractual Arrangements with XingtaiZhongding are the same. The following is a summary of each of the Contractual Arrangements:
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Entrusted Management Agreement. Pursuant to the Entrusted Management Agreement between Kirin Management, the variable interest entities and the shareholders of the variable interest entities Hebei Zhongding and Xingtai Zhongding, Hebei Zhongding and Xingtai Zhongding and their shareholders agreed to entrust the business operations of the variable interest entities and its management to Kirin Management until Kirin Management acquires all of the assets or equity of Hebei Zhongding and Xingtai Zhongding. Kirin Management has the full and exclusive right to manage and control all cash flow and assets of the Hebei Zhongding and Xingtai Zhongding and to control and administrate the financial affairs and daily operation of Hebei Zhongding and Xingtai Zhongding. In exchange, Kirin Management is entitled to the the earnings before tax of Hebei Zhongding and Xingtai Zhongding as a management fee which depends on the before-tax profit of Hebei Zhongding and Xingtai Zhongding and does not have a minimum requirement. No management fee has been paid to date. Kirin Management is also obligated to pay all of the debts of Hebei Zhongding and Xingtai Zhongding to the extent Hebei Zhongding and Xingtai Zhongdingare unable to pay such debts. Specifically, if the variable interest entities do not have sufficient cash to repay their debts when they become due and are unable to obtain any extension of, or borrow new loans to repay, such debts, Kirin Management will be responsible for paying those debts on behalf of Hebei Zhongding and Xingtai Zhongding to the extent that Hebei Zhongding and Xingtai Zhongding are unable to pay such debts. Likewise, if the net assets of Hebei Zhongding and Xingtai Zhongding are lower than their registered capital, Kirin Management will be responsible for funding the deficit. The Entrusted Management Agreement does not specify how Kirin Management and Hebei Zhongding and Xingtai Zhongding will determine the debt Hebei Zhongding and Xingtai Zhongding and the respective ability of Hebei Zhongding and Xingtai Zhongding to pay that debt. There is no existing written or oral arrangement or agreement regarding any aspect of the calculation or payment of the debts of the Hebei Zhongding and Xingtai Zhongding except the Entrusted Management Agreement. Due to the lack of binding guidance as to such matters, there may be ambiguity in the future regarding Kirin Management’s responsibility to pay the debt obligations of Hebei Zhongding and Xingtai Zhongding. To date, Kirin Management has not paid any debt of Hebei Zhongding and Xingtai Zhongding respectively. There is no renewing clause in the Entrusted Management Agreement. Unless otherwise specified or legally prohibited, any newly signed agreement shall be deemed as a new and independent agreement. The term of the Entrusted Management Agreement shall be from the effective date of it to the earlier of the following: (1) the winding up of Hebei Zhongding and Xingtai Zhongding, or (2) the date on which Kirin Management completes the acquisition of Hebei Zhongding and Xingtai Zhongding. Pursuant to the Entrusted Management Agreement, Hebei Zhongding and Xingtai Zhongding and their shareholders have the obligation to not terminate this Agreement unilaterally for any reason whatsoever.
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Shareholders’ Voting Proxy Agreement. Pursuant to the Shareholders’ Voting Proxy Agreement between Kirin Management and the shareholders of Hebei Zhongding and Xingtai Zhongding, the shareholders of Hebei Zhongding and Xingtai Zhongding irrevocably and exclusively appointed the board of directors of Kirin Management as their proxy to vote on all matters that require the approval of the shareholders of Hebei Zhongding and Xingtai Zhongding. Mr. Guo is the sole member of the board of directors of Kirin Management. There is no renewing clause in the Shareholders’ Voting Proxy Agreement. Unless otherwise specified or legally prohibited, any newly signed agreement shall be deemed as a new and independent agreement. Pursuant to the Shareholders’ Voting Proxy Agreement, it shall become effective upon the execution by Kirin Management and the shareholders of Hebei Zhongding and Xingtai Zhongding and shall not be terminated prior to the completion of acquisition of all of the shares in, or all assets or business of, Hebei Zhongding and Xingtai Zhongding by Kirin Management.
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Exclusive Option Agreement. Under the Exclusive Option Agreement between Kirin Management, Hebei Zhongding and Xingtai Zhongding and the shareholders of Hebei Zhongding and Xingtai Zhongding, the shareholders of Hebei Zhongding and Xingtai Zhongding granted to Kirin Management an irrevocable exclusive purchase option to purchase all or part of the shares or assets of Hebei Zhongding and Xingtai Zhongding to the extent that such purchase does not violate any PRC law or regulations then in effect. If Kirin Management exercises its option, Kirin Management and the shareholders of Hebei Zhongding and Xingtai Zhongding shall enter into further agreements regarding the exercise of the option, including the exercise price, which such additional agreements shall take into consideration factors such as the then applicable PRC laws and the then appraisal value of Hebei Zhongding and Xingtai Zhongding. The exercise price shall be refunded to Kirin Management or Hebei Zhongding and Xingtai Zhongding at no consideration in a manner decided by Kirin Management, in its reasonable discretion. Since Kirin Management controls and receives the economic benefits of Hebei Zhongding and Xingtai Zhongding through the Contractual Arrangements, exercising the option at this point will not result in any immediate additional benefit to the Company. Kirin Management will exercise the option when the Company believes that exercising the option would be more beneficial to it. The Exclusive Option Agreement was set up in this manner as currently foreign invested real estate enterprises are strictly controlled and heavily regulated by the PRC authorities. The Company thinks it will be subject to complex procedural requirements if it attempts to obtain approval for the acquisition of share equity or assets of Hebei Zhongding and Xingtai Zhongding under the current PRC regulations. There is no renewing clause in the Exclusive Option Agreement. Unless otherwise specified or legally prohibited, any newly signed agreement shall be deemed as a new and independent agreement. Pursuant to the Exclusive Option Agreement, it shall be effective upon the execution by Kirin Management, Hebei Zhongding and Xingtai Zhongding and the shareholders of Hebei Zhongding and Xingtai Zhongding, and shall remain effective thereafter; the Exclusive Option Agreement may not be terminated without the unanimous consent of Kirin Management, Hebei Zhongding and Xingtai Zhongding and the shareholders of Hebei Zhongding and Xingtai Zhongding, except that Kirin Management may, by giving thirty days prior notice to Hebei Zhongding and Xingtai Zhongdingand the shareholders of Hebei Zhongding and Xingtai Zhongding, terminate it.
The Company does not own any equity interests in Hebei Zhongding and Xingtai Zhongding, but controls and receives the economic benefits of their business operations through the Contractual Arrangements. In addition, Hebei Zhongding and Xingtai Zhongding are contractually controlled by the Company. Accordingly, the Company is able to consolidate the results, assets and liabilities of Hebei Zhongding and Xingtai Zhongding into its financial statements. No dividends have been paid to us to date. We intend to use the profits of Hebei Zhongding and Xingtai Zhongding for re-development of planned projects and future procurement of land use rights. We do not anticipate that Hebei Zhongding and Xingtai Zhongding will pay any dividends in the near future. XingtaiZhongding represents 1.8%, HebeiZhongding represents 51.8% and Kirin Bay represents 46.4% of the Company’s revenue for the year ended December 31, 2013.
Direct acquisition of Hebei Zhongding and Xingtai Zhongding by us would constitute a round-trip investment under the 2006 M&A Rule (please see “Government Regulation and Approvals - Mergers and Acquisitions” below). In addition, the PRC has imposed strict regulations on foreign investment in PRC real estate development enterprises. We believe that complex procedural requirements, including examination by governmental authorities, would likely follow any attempt by the Company to obtain approval for the direct acquisition of the share equity or assets of Hebei Zhongding and Xingtai Zhongding under current PRC regulations. Accordingly, we established Kirin Management as our wholly owned subsidiary and adopted the Contractual Arrangements to control and consolidate Hebei Zhongding and Xingtai Zhongding for the purpose of obtaining financing from outside the PRC.
We intend to use the proceeds from potential future offerings to pay the financial expenditures of our offshore holding companies. As a holding company, neither Kirin China nor Kirin Development has material expenditures. Kirin Management has not received any cash or assets from Hebei Zhongding and Xingtai Zhongding but has the right to obtain management fees equal to the profit of Hebei Zhongding and Xingtai Zhongding in 2013. All significant costs and expenses occur in Hebei Zhongding and Xingtai Zhongding.
Our corporate structure is as follows:
* Mr. JianfengGuo is deemed to be the sole beneficial owner of all of the equity interests in and is the founder of the Operating Companies. Mr. Guo has entered into trust agreements with respect to his holdings in each of Hebei Zhongding and Xingtai Zhongding, pursuant to which Mr. Guo is entitled to all rights afforded to a shareholder of Hebei Zhongding and Xingtai Zhongding, including the right to manage and operate Hebei Zhongding and Xingtai Zhongding, to receive dividends, and bear the risks of a shareholder of Hebei Zhongding and Xingtai Zhongding. Without Mr. Guo’s prior written consent, the nominees may not take any action as shareholders of Hebei Zhongding and Xingtai Zhongding. Mr. Guo entered into the trust agreements for several reasons. First, when HebeiZhongding was established in 2004, the then applicable Company Law of the PRC did not allow a company to be wholly owned by a sole shareholder unless it was a state owned company. Consequently, Mr. Guo used Ms. Bi, his wife, and other individuals and entities as the nominal shareholders to hold the equity interest of Hebei Zhongding and Xingtai Zhongding. Although the revised Company Law of the PRC, effective as of 2006, permits a company to be owned by a sole shareholder, the registered shareholding structure of HebeiZhongding was not changed in order to meet the financing requirements by our lenders. Second, the current effective Company Law of the PRC does not allow a domestic company that is owned by a sole individual shareholder to have any wholly owned subsidiaries. However, XingtaiZhongding has three wholly-owned subsidiaries. Consequently, Mr. Guo uses other nominal shareholders to hold part of the shares of XingtaiZhongding. Third, Hebei Zhongding and Xingtai Zhongding from time to time provide guarantees to each other for bank loans and the bank will not accept guarantees from the company if the registered controlling shareholder is also the borrower’s registered controlling shareholder. For all these reasons Mr. Guo entered into the trust agreements with the nominal shareholders. Through these trust agreements, Mr. Guo had the registered shareholders of Hebei Zhongding and Xingtai Zhongding enter into Contractual Arrangements with Kirin Management. Mr. Guo did so because he stands to benefit from the Contractual Arrangements due to the option to acquire Prolific Lion, the principle shareholder of the Company. With respect to Hebei Zhongding, Mr. Guo has entered into trust agreements with each of Liping Bi, JianfeiGuo, Li Zhao, JianheGuo and Liying Li (collectively, the “HebeiZhongding Trustees”). The Hebei Zhongding Trustees comprise all of the registered shareholders of Hebei Zhongding. With respect to Xingtai Zhongding, Mr. Guo is the 51% registered shareholder. In addition, Mr. Guo has entered into trust agreements with each of XieYuelai and Huaxia Kirin (Tianjin) Equity Investment Fund Management Co., Ltd., a company controlled by Mr. Guo (collectively, the “Xingtai Zhongding Trustees”). The Xingtai Zhongding Trustees are the 49% registered shareholders of Xingtai Zhongding. Among these nominal holders of Hebei Zhongding and Xingtai Zhongding, Huaxia Kirin (Tianjin) Equity Investment Fund Management Co., Ltd. is a company controlled by Mr. Guo, while the other individual nominal holders are family members or friends of Mr. Guo, who are willing to hold the shares in a nominal fashion for him. Pursuant to these trust agreements, Mr. Guo is deemed to be the beneficial owner of all the shares of Hebei Zhongding registered in the name of the Hebei Zhongding Trustees and Xingtai Zhongding registered in the names of the Xingtai Zhongding Trustees. Pursuant to the trust agreements, Mr. Guo is entitled to all rights of a shareholder of each of Hebei Zhongding and Xingtai Zhongding. Without Mr. Guo’s prior written consent, the nominees may not take any action as shareholders of Hebei Zhongding and Xingtai Zhongding. There is no requirement under the PRC laws and regulations to register such trust agreements with any authority.
Iwamatsu Reien, a Japanese citizen, held 100% of the shares of Prolific Lion Limited, Valiant Power Limited and Solid Wise Limited, each of which were incorporated in the British Virgin Islands (each a “BVI Company” and collectively the “BVI Companies”) and which respectively own 72.3%, 8.7% and 8.7% of the shares of the Company. The Company owns all the share capital of Kirin China. Kirin China owns all of the share capital of Kirin Development which in turn owns all of the share capital of Kirin Management, a wholly foreign owned enterprise in the PRC. Kirin Management controls and receives the economic benefits of Operating Companies’ business operations through the Contractual Arrangements. Through the Call Option Agreements (as defined below) Iwamatsu Reien has granted options to the Option Holders (as defined below) to purchase all of the shares of the BVI Companies. Each Option Holder shall be deemed to be the beneficial owner of the applicable BVI Company.
In order to avoid conflict with SAFE 75 Circular, which has certain restrictions on PRC residents to obtain overseas shares, on December 22, 2010, Iwamatsu Reien entered into Call Option Agreements (collectively, the “Call Option Agreements”) with each of Mr. Guo, Mr. Longlin Hu and Ms. Xiangju Mu (collectively, the “Option Holders”) pursuant to which Mr. Guo is entitled to purchase up to 100% shares of Prolific Lion Limited, Longlin Hu is entitled to purchase up to 100% shares of Valiant Power Limited and Xiangju Mu is entitled to purchase up to 100% of the shares of Solid Wise Limited, each at a nominal price of $0.0001 per share for a period of five years upon satisfaction of certain conditions, which such conditions were designed to be easily met. Specifically, (i) if the Operating Companies and their respective subsidiaries achieved net income of $1 million as calculated and audited in accordance with U.S. GAAP for the fiscal year ended December 31, 2009, each Option Holder will be entitled to purchase 40% of the outstanding shares of the applicable BVI Company; (ii) if the Operating Companies and their respective subsidiaries achieve net income of $2 million as calculated in accordance with U.S. GAAP for the fiscal year ended December 31, 2010, each Option Holder will be entitled to purchase 30% of the outstanding shares of the applicable BVI Company; (iii) if Hebei Zhongding and Xingtai Zhongding and their respective subsidiaries achieve net income of $3 million in accordance with U.S. GAAP for the fiscal year ended December 31, 2011, each Option Holder will be entitled to purchase up to 30% of the remaining outstanding shares of the applicable BVI Company. In addition, the Operating Companies and their respective subsidiaries achieve net income of $3 million in fiscal year 2010, each Option Holder shall have the right to purchase all shares of the applicable BVI Company at consideration of $1.00 and the third condition shall be deemed as having been met. The Company has determined that Hebei Zhongding and Xingtai Zhongding and their respective subsidiaries achieved net income of $3 million in fiscal year 2010 and therefore Mr. Guo, Mr. Hu and Ms. Mu have the right to purchase all of the shares of the applicable BVI Company. On October 31, 2012, the Purchasers exercised their call options and acquired all of shares of the BVI Companies.
By way of background, Ms. Reien established the BVI entities. Kirin China was established on July 6, 2010 and Kirin China formed Kirin Development under the laws of Hong Kong on July 27, 2010. Ms. Reien is a friend of Mr. Guo and established Kirin China for the Option Holders to comply with SAFE Circular 75 in anticipation of share exchange transaction with us. Under the Call Option Agreements, Ms. Reien acted as the nominee for the Option Holders.
To date, Mr. Guo, Mr. Hu and Ms. Mu each own all of the capital shares of the respective BVI Company and each serve as the director of the respective BVI Company; they are deemed to beneficially own the shares of the Company’s common stock owned by the BVI Companies. Additionally, Mr. Guo and Mr. Hu constitute the board of directors of Kirin China and Kirin Development. Mr. Guo and Mr. Hu are the acting Chairman and CEO, respectively, of Hebei Zhongding and Xingtai Zhongding. Ms. Reien does not and will not engage in the management or operation of any of the BVI Companies or Kirin China or any of the subsidiaries of Kirin China. Ms. Reien has not and will not receive any consideration for entering into the Call Option Agreements.
Market Area and Projects
Kirin’s projects are currently concentrated in Hebei Province of the PRC, primarily in the city of Xingtai, and nearby regions. Hebei Province is located in the North Region of the PRC. Kirin intends to also focus on the Bohai Sea Surrounding Area, which comprises Beijing, Tianjin, Hebei Province, Liaoning Province and Shandong Province. The following map shows the region in which Kirin currently operates:
Completed Projects
Kirin has completed the following projects in Xingtai City (denoted by the red star in the map above):
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Ming Shi Hua Ting. Ming Shi Hua Ting is a residential center comprised of two residential buildings with between 14 and 19 floors each and eight residential buildings with six floors each. This project was completed in 2006 and targeted homebuyers with middle to high income. The total construction area consisted of 109,260 square meters.
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Wancheng New World Commercial Center. Wancheng New World Commercial Center is primarily a commercial and business center which includes a shopping center, restaurants, recreation facilities, and entertainment and tourist attractions. The project also included over 300 residential properties. The total land area for this project was 57,000 square meters. The project commenced construction in 2007 and has been in service since June 2009. The Company’s Wancheng New World Commercial Center Project is also known as the Xintiandi Project.
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Kirin County Community. Construction on Kirin County Community commenced in September 2009 and was 100% completed by December 31, 2013. This project covers land area of 47,900 square meters. Total construction area is approximately 180,000 square meters and is comprised of residences, commercial buildings and hotel-style apartments.
Projects in process
Kirin’s project pipeline includes the Kirin Bay and No. 79 Courtyard projects, each of which is located in Xingtai City. Kirin commenced presales for these projects in the first quarter of 2011 and began to recognize revenue in the fourth quarter of 2011 for both projects.
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Kirin Bay. Covering a land area of over 660,000 square meters, Kirin expects that Kirin Bay will be the largest high-end residential community in Xingtai in terms of total construction area upon completion. The project is comprised of three sections of mixed residential and commercial properties. We commenced the construction of the Kirin Bay Project in October 2011. The first phase residences are expected to be delivered in mid-2014 while the final phase residences are expected to be delivered in 2015.
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No. 79 Courtyard. No. 79 Courtyard Project covers a land area of over 290,000 square meters and a total building area of approximately 520,000 square meters. The project is positioned as a high-end residential development with some mixed commercial use. Construction started in October 2011 and project completion is planned for the last quarter of 2014. The first phase residences are being delivered to customers while the final phase residences are expected to be delivered in 2015.
In addition to its projects in Xingtai, the Company has started research on the conditions of certain property and land and development approval procedures in cities like Shijiazhuang of Hebei Province and Dezhou and Zibo of Shandong Province (as denoted by the blue stars on the map above).
Kirin’s Homebuyers
Kirin markets its residential properties to local PRC homebuyers with $293 to $156,206 in monthly earnings, which is regarded in the PRC as middle to high income. Kirin believes that its homebuyers have high expectations of the quality of their residences, the overall community environment and surrounding amenities and developments. Kirin also believes that its homebuyers’ purchase decisions significantly influence the decisions of others of their same social status. Kirin’s targeted homebuyers vary from projects. For example, No.79 Courtyard is focusing on high-income homebuyers and Kirin Bay is focusing on standard residence markets.
The following chart shows the household monthly incomes of homebuyers who purchased residences from the Company:
The following chart shows the averaged ages of homebuyers who purchased residences from the Company:
The following chart shows purchase time of homebuyers for different projects during the period:
The Company believes that its homebuyers are primarily motivated by the need to improve their housing conditions, or “move-up” from rentals or shared living arrangements with relatives to a place of their own.
Commercial Properties
The commercial properties developed by the Company include: Wancheng New World Commercial Center, which achieved sales revenue of approximately $30.16 million, accounting for 65% of total sales of the Company during 2007 and 2008. Profits realized were approximately $4.16 million. The Wancheng New World Commercial Center achieved sales revenue of approximately $7.29 million, accounting for 9.8% of total sales of the Company during 2009 and 2010.
The primary purchasers of the commercial stores of Wancheng New World Commercial Center are entrepreneurs and investors with substantial purchasing power who live in Xingtai city or a nearby city, government officers, public servants, real estate speculators and a variety of well-known restaurants, banks, and companies in telecommunication, advisory, advertisement, and finance sectors.
Sales and Marketing
Most projects commence sales before construction begins. Typically, the first step in the sales process occurs when the homebuyer visits a sales office and decides to purchase a particular residence. The potential homebuyer then signs a binding agreement of sale for a particular residence and pays a cash down payment, which is generally non-refundable. Cash down payments currently average between 30-50% of the total purchase price of a residence, although, in some cases homebuyers elect to pay the entire purchase price at this point. When construction on the residence is complete and upon payment by the homebuyer of the remaining balance of the purchase price, if any, the residence is delivered to the homebuyer. The sales process for commercial properties is substantially similar, although commercial purchasers typically pay a higher cash down payment.
When demand is particularly high for a project, potential homebuyers seeking to signify their interest in purchasing a residence, but who may not know which particular residence they wish to purchase, will first pay refundable cash deposit typically between $781 and $3,124. If the homebuyer does not elect to purchase a residence, this initial deposit will be refunded. If the homebuyer ultimately selects a particular residence, the initial deposit will be applied to the cash down payment due upon entry into a binding agreement for that residence.
In order to attract homebuyers, we engage professional design companies to assist with project design and promotion. Dedicated sales offices are also established for each specific project. Promotional flyers, presentation boards, video clips, websites, and 3D photo displays are used to demonstrate the expected construction layout. In addition, the following media are typically utilized to promote real estate projects:
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Mainstream newspapers and magazines;
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SMS text-messaging;
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Outdoor advertisements; and
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Other promotional activities, which may include real estate exhibitions, outdoor dancing activities, free movies in target communities and residents’ badminton competitions.
To help customers choose among the apartment layouts that we offer, we usually create show rooms that demonstrate design possibilities. We pay for the completion of these marketing show rooms. After most of the units in the development have been sold, we sell the show rooms as residences, usually at premium prices.
Sales representatives are encouraged to take a proactive approach after promotions have been launched. Sales representatives usually visit nearby counties or city squares to distribute flyers advertising our communities. They are also encouraged to target and maintain contact with potential groups or organizations who have group purchasing intentions or that provide financial support for their employees to buy residences. Sales representatives receive commissions based on the amount of the purchase price once received by the Company.
We ordinarily launch several phases of sales for each project, but only provides a small proportion of residential units for sale in each phase. The Company believes that the sale of residences by phases reduces market risks since prices can be adjusted depending on demand and other economic factors.
Property Management Services
The Company provides property management services to our communities. The basic services typically provided include security, clean environment preservation, flower and tree planting and community facilities maintenance.
Land Resources Procurement
Our ability to continue development activities over the long-term will be dependent upon, among other things, a suitable economic environment and its continued ability to locate and acquire land, obtain governmental approvals for suitable parcels of land, and consummate the acquisition and complete the development of such land. When identifying potential land resources for acquisition, our first attempts to determine if the target land resource complies with the general municipal plans of the government, whether the surrounding infrastructures are well established, whether there is any existing municipal construction plan, the scale of influence of the project with respect to its neighbors and if the purchasing power of the surrounding population can afford the prices at which the Company may expect to sell the properties. Next, we consider if the initial property development cost is affordable for it, if there is any governmental tax deduction policy and if the project can become a signature project for the local government. The Company obtains land resources by participating in public tender, auction, and listing for sales of land. In addition, the Company may seek to acquire land rights that are sold in connection with the restructuring of state-owned enterprises or the military. The price and location of land resources that are state-owned or owned by the military are generally superior to private properties.
Regulations in the PRC now provide that all land use rights are granted by way of a public auction held by the land reserve administration of the applicable local government. The auction begins with the local government’s publication of an invitation to bid on a particular parcel of land. Bids must be submitted on or before the bid deadline date. Bids submitted by developers in accordance with bid procedures and deadlines are then evaluated, together with the qualifications of the developers, by the applicable land reserve administration. Bidders who do not meet all of the qualification requirements are disqualified. On the day following the closing date of the auction, an auction winner will be confirmed. The winning bidder and the transferor will enter into a confirmation agreement. Within ten days after the execution of the confirmation agreement, the winning bidder will enter into a “Land Use Rights Transfer Agreement” with the transferor and is required to make a lump sum payment of the transfer fees within two months. The process for acquisition of land resources from state-owned enterprises and the military is similar, except that the governing entities for military-owned properties are the military land management bureaus and their superior supervising authorities.
We also participate in government-dominated relocation programs, such as Kong Village Relocation Program to procure land use rights. In relocation programs, the local government takes the land from the local residents as a land reserve for a future auction and bidding process and relocates the residents. We participate in and fund such programs as a partner of the government and obtain the land use right by being invited to the auction and bidding of such land use rights. In the case of Kong Village Relocation Program, the local government did not have enough funds to pay for the relocation and new accommodations for the villagers, therefore the Company funded the local government by building new buildings as accommodation compensation for the villagers as well as bearing the costs incurred by local government compensating villagers and the zoning and developing of vacated land lots. The government will repay our costs when it sells the concerning land use right. In exchange for such financing, we will be invited to bid for the vacated land parcels for residential and commercial use at public auction at market price, and in return for our financing, the proceeds paid by the Company and received by the government the bidding will be refunded to the Company. For more details please refer to “Management Discussion and Analysis-Relocation Program of Kong Village.”
PRC Real Estate Market Overview
Future Development Trends and Regulations of the Real Estate Industry in the PRC
Due to increased urbanization, more and more people are immigrating to the cities from rural areas of the PRC, such that the boundaries of cities are extending gradually and the urban areas are experiencing rapid development. As the real estate markets in tier-one cities, such as Beijing, have experienced rapid growth in the past five years, we believe that the development potential for tier-two and tier-three cities is substantial. The Company expects that the real estate markets for tier-two and tier-three cities will expand significantly in the near future due to a variety of factors including the further development of urbanization and the immigration of rural populations into the tier-two and tier-three cities, which we believe will result in a growing demand. In addition, according to a report made by Cushman Wakefield LLP, China became the largest real estate investment market in 2010. Since the real estate markets for tier-one cities have almost reached their limits, we believe investment will be directed to tier-two and tier-three cities.
The per capita consumption of a city indicates the purchasing power of its residents. The purchasing power growth in tier-three cities is faster than overall purchasing power. China’s average growth of per capita consumption in 2013 was 12.4% according to the annual report filed by the National Bureau of Statistics. Growth in tier-one cities such as Beijing and Shanghai was reported below that average. Many tier-three cities in cities such as Dali in Yunnan, Nanchong in Sichuan, Nanchang in Jiangxi, Taizhou in Zhejiang and Weihai and Dezhou in Shandong exceeded the average, indicating higher real estate purchasing power (from Dongxing Securities Industry Report). We believe this indicates that purchasing power in tier-three cities is growing at a faster rate than it is in tier-one cities.
In 1980, a mere 19.8% of the population in China was urban and by the end of 2013, the urbanization rate had reached 53.73% according to the annual report filed by the National Bureau of Statistics. According to a report by BNP Paribas (BNPP), China’s urbanization rate should reach 60% by 2020 as shown below:
Similarly, it is predicted that the China’s urbanization rate will hit 58 percent in 2015 and grow to 65 percent by 2030 from the annual report on urban development by the Chinese Academy of Social Sciences (CASS). According to McKinsey in the Preparing for China’s Urban Billion report in March 2008, 350 million people will be added to China’s urban population by 2025-more than the population of today’s United States. One billion people are expected to live in China’s cities by 2030 and 221 Chinese cities are expected to have over one million residents. Five billion square meters of road are expected to be paved, 170 mass transit systems could be built and 40 billion square meters of floor space could be built-in five million buildings. More than half of China’s population today is still rural. With an ongoing flow of workers from the countryside into the cities, officials estimate prospective housing needs for 400 million new urban dwellers over the next 25 years.
The PRC real estate market is strictly controlled by the PRC government and, currently, real estate development companies in tier-one cities are experiencing difficulties as a result. To control the price of real estate, restrict speculation and break the isolated bubbles in the PRC real estate market, the PRC government has tightened its credit loan policies and land right acquisition regulations in tier-one cities. Accordingly, real estate development has begun to focus on tier-two and tier-three cities. Real estate developers in tier-two and tier-three cities are expanding and the PRC’s focus for real estate development has moved on from tier-one cities to tier-two and tier-three cities in response to the urbanization of China and the movement of its population.
The PRC’s Central Economic Conference at the end of 2009 and the “Document No. 1” released by the State Council in 2010 pointed out that the central government was emphasizing the urbanization of medium and small cities and small towns in China, with the purpose to alleviate the over-populated tier-one cities and to resolve the imbalanced development between urban and rural areas. For overall planning, the PRC government has shown its determination to develop small and medium-sized cities and related authorities have released favorable policies for tier-two and tier-three cities. The PRC’s Ministry of Land and Resources has begun to prioritize the land rights approval processes for real estate projects in tier-two and tier-three cities. The land rights acquired in tier-two and tier-three cities totaled 62.23 million square meters in 2009, compared to 4.83 million square meters in tier-one cities, as indicated by China’s National Bureau of Statistics.
Real estate developers have been finding it difficult to obtain easy financing for their projects due to the recent strict credit loan policies for both developers and buyers. Many of them have subsequently turned to high-cost financing, with interest rates ranging from 12% to 16%, compared with the benchmark rate of 5.31% for one-year loans as indicated in a report by China Daily.
Foreign investors account for a small proportion of the real estate market. According to the National Bureau of Statistics, foreign investors put approximately $35.85 billion into the real estate development in 2012, a 92.3 percent decrease for the same period in 2011. UBS Global Asset Management announced in April 2010 that it had successfully concluded the first closing of its joint-venture with Gemdale Corporation, a leading listed real estate developer in China. It will invest in residential development projects in First Tier and selected Second Tier cities in China. In mid-March 2010, China Overseas Land & Investment Ltd., together with ICBC International Investment Management Ltd., set up a $250 million real estate fund to invest in China’s property market.
According to the Wall Street Daily, one-quarter of Chinese homebuyers pay cash, and, on average, mortgages cover only half the property’s value. Household debt in China amounts to approximately 40% of household incomes.
Market Overview of Xingtai
According to a report from the China Daily, the total housing supply in Xingtai was 1.1 million square meters in 2005 and 1.5 million square meters in 2006; due to the macroeconomic control policy specified by the state, the housing supply shrank slightly to 1.1 to 1.3 million square meters in 2007 and the housing supply in 2008 was 1.5-1.8 million square meters.
With the development of its local economy, since 2006 an increasing number of residents of other regions of China have been immigrating to Xingtai, which has increased housing demand. Kirin China expects this trend in increased immigration to Xingtai to continue in the near future.
According to a report from China's National Bureau of Statistics, as of the end of 2013, the core urban population of Xingtai was approximately 800,000 and its total residential area was approximately 18.4 million square meters. As such, the per capita residential area in Xingtai city was 23 square meters as of the end of 2013. According to the national “well-off” standards published by the PRC’s Department of Construction, by 2020, the average living area for urban population is expected to reach 35 square meters with an average floor area of 100 to 120 square meters for each residence. The Company believes the anticipated shortage in average living area per person in Xingtai necessary in order to meet the “well-off” standard indicates significant development potential.
Xingtai can be generally divided into two parts: Qiaodong District (i.e. East of Bridge) and Qiaoxi District (i.e. West of Bridge). The Qiaodong District is the old city area which features transportation, concentrated retail trading areas, aged buildings and a highly polluted environment. Currently, the scale of real estate development in this region is small and scattered due to high relocation costs. The quality of real estate is also low and the buildings are mostly mid-rise. Qiaoxi District, on the contrary, is the region being promoted by the local Xingtai government for development. Qiaoxi District is anticipated to be the center of the new urban area, as planned by the Xingtai government. In the 2011, the average price for a residence was at approximately $614 per square meter in Xingtai city, the average price for a residence was $839 per square meter in the first half of 2013 in Qiaoxi District.
The central bank in China is currently reinforcing strict real estate development regulations and emphasizing stringent credit loan policies, which has already had a negative impact on the real estate market. These actions may serve to hinder the development of smaller real estate companies with rigid cash flows and small amounts of capital, leaving growth space for larger, better capitalized companies.
Market Overview of the Bohai Sea Surrounding Area
The Company plans to expand its operations to the Bohai Sea Surrounding Area. Located in the center of Northeast Asia economic zone area with abundant resources and convenient transportation, the Company believes that the Bohai Sea surrounding region has great geographical strength. The National Bureau of Statistics data indicated a new trend that home and abroad foreign investment flows from the south to the north of China in recent years. The cities and sub-regions of the Bohai Sea Surrounding Area, such as Beijing, Tianjin Region, the Shandong Peninsula and Northeast regions are considered to be the “growth pole” of China’s next round of development following the development of the Pearl River Delta and Yangtze River Delta region. In the near future, we believe that the Bohai Sea Surrounding Area will enter into a sustainable and rapid growth track.
The cities in Bohai Sea Surrounding Area vary with respect to the economic development degree. The large and well developed cities in this area with mature markets, such as Beijing and Tianjin, have a declination in gross floor area and sale of real estate due to the strict real estate control policies. However, the second and third tier cities in this area still have a rapid growth rate in real estate development. Economic investment and development in this area, which is adjacent to Xingtai, is increasing. Investments in the real estate markets of Qinhuangdao, Tianjin and Tangshan increased by 21%-76% in 2010, according to the PRC’s Ministry of Land and Resources. Commensurate with an increase in investment, the price of residential real estate is has also increased.
In recent years, many large national real estate developers have begun to enter the market of Bohai Sea Surrounding Region as increasing land reserves and accelerating development of the market provide more opportunities. Compared with the Pearl River Delta region and Yangtze River Delta region, we believe that the Bohai Sea Surrounding Area has greater market demand and more opportunities. The growth rate of wholesale real estate prices in the Bohai Sea Surrounding Area is stable. As shown in the below chart of land use right procurement costs, in 2013, the land cost in Bohai Sea Surrounding Area is $573 per square meter, which is higher than the national average land cost $540 per square meter, but much lower than the Yangtze River Delta and Pearl River Delta. The cost of land right procurement in the Bohai Sea Surrounding Area is 37% lower than in the Pearl River Delta and 38% lower than in the Yangtze River Delta Regions. The overall growth rate of land use right procurement has increased from 1.97% in 2012 to 4.66% in 2013. As depicted in the chart of growth of land use right procurement, the 2013 growth rate was lower than the average annual growth rate of 7.02% of 105 cities in China. We believe that this indicates potential for real estate development and profit generation in this area. Pursuant to the data from Ministry of Land and Resources of the People’s Republic of China, the following are the land right procurement costs and growth rates in the Bohai Sea Surrounding Area for 2013.
The scale of residence paying capability (real estate price/household paying capability) demonstrates the ability of consumers to purchase houses. The overall rational scale on an international scope is within the range of 3-6 and the scale in China is higher due to its special housing system, hidden income and solid housing demand, according to Real Estate Bubble and Financial Crisis, authored by XieJinglai and Qu Bo in 2002.
As shown in the following chart, except Beijing and Dalian, the house price growth of other cities in the Bohai Sea Surrounding Region is stable, and with the economic development of the Bohai Sea Surrounding Area, the income level has increased and the scale is decreasing gradually. However, most of the sales are over 6 and Beijing and Dalian have shown scales of over 11, which indicate bubbles in their real estate markets.
Price of Private Residence / Private Residence Paying Capability Scale in the Bohai Sea Surrounding Area (US $/multiple)
Note: Residence Paying Capability Scale = Sales Price Per Square Meter/Disposable Income Per Household. Sales price is assumed as 100 square meters per suite and a household is assumed to comprise three (3) family members.
Features of Real Estate Markets in Tier-Two and Tier-Three Cities
The Company believes that the PRC’s tier-three cities have long term earning potential for investment, particularly since tier-one cities have already experienced high growth in the past few years. The Company believes that with continued urbanization and improved living standards, the demand in tier-three cities for high quality, high-end buildings is increasing. The Company anticipates that tier-three cities are at the frontier of the continued future urbanization and will benefit from the economic growth in China.
Growth potential of real estate markets in tier-two and tier-three cities
Real estate development potential has shifted to tier-two and tier-three cities and to medium and small cities. The No 1 Documents from the PRC central government pointed out that medium and small cities and towns will be the focus of China’s economic development. The PRC Ministry of Land and Resources indicated that it would prioritize approvals of real estate projects in tier-two and tier-three cities.
Higher profit margins in tier-two and tier-three cities
The Company believes that the price growth potential in the tier-two and tier-three segments is high while investment costs, especially land costs, are low. Investment return in tier-two and tier-three cities is no less than 30% and operational costs are comparatively low, according to the “2012 Analysis Report on Real Estate Prices in Major Chinese Cities” as published by the Ministry of Land and Resources of the PRC.
Competition
The real estate development industry in the PRC is highly competitive. In the tier-three cities where the Company’ primary projects are located, local and regional property developers are its major competitors. Many of the Company’s competitors are well capitalized and have greater financial, marketing, and other resources. Some also have larger land banks, greater economies of scale, broader name recognition, and a longer track record in certain markets. In certain markets, we believe our competition benefits from more established relationships in the industry, but differences between the Company and our competition’s relationships are divided geographically and vary by city, quality, and scope. As such, these comparisons are limited to specific instances. In addition, the PRC government’s recent measures designed to reduce land supply further increased competition for land among property developers.
Competition among property developers may result in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled contractors, oversupply of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which new property developments will be approved and/or reviewed by the relevant government authorities and an increase in administrative costs for hiring or retaining qualified personnel, any of which may adversely affect our business and financial condition. Furthermore, property developers that are better capitalized than us may be more competitive in acquiring land through the auction process.
The Company considers Xingtai Royal Real Property Co., Ltd. and Hengda Real estate Group Xingtai Branch Company as its major competitors in Xingtai. These two companies have similar financial capacities as the Company and engage in projects of similar sizes to those of the Company.
With respect to cities in the Bohai Sea Surrounding Area, we consider Dezhou Real Estate Company and Donghai Group as our primary competitors in Dezhou City and Shangdong Fangzheng Real Estate Development Co., Ltd. and Zhongfang Real Estate Development Company as our primary competitors in Zibo City. Because these competitors have been developing projects in these cities and others in the Bohai Sea Surrounding Area, they have already established relationships with local government and suppliers and have brand recognition among potential customers.
Competitive Advantages
We believe that the following are our advantages over our competitors:
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Experienced Real Estate Development Team. We have a professional team with significant experience in real estate development. Members of our team have had work experience with well-known real estate development companies in tier-one cities. In addition, our management members are well educated with degrees from top universities such as Tsinghua University, Xi’an Jiaotong University, Zhejiang University and the Communication University of China.
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R&D and Planning Advantage. The Company expends considerable effort on research and development to identify its target market and understand the needs and wants of potential homebuyers. We believe that by conducting research and development we can better align project design and pricing with the needs and demands of our target buyers.
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Strong Relationships with Local Government. We seek to maintain close ties with the local government in Xingtai City. For example, we aided the local government in the Kong Village Relocation Program. The Company believes such good relationships with local governments can help in the application of favorable land development policies. We believe that these relationships can better enable us to successfully bid and execute on projects.
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Pre-Sales Advantage. We seek to ensure high cash flow through presales. The Company’s investment costs for a particular project can be covered usually within one year after presales commence. For example, by the year ended December 31, 2013, the Company recorded $31.7 million in presales of its No.79 Courtyard Project since inception, which commenced in October 2011.
Growth Strategy
Completion of Pipeline Projects
The Company’s project pipeline includes the Kirin Bay and No. 79 Courtyard projects, both of which are located in Xingtai. We commenced presales for these projects in the first quarter of 2011.
The Kirin Bay Project covers a land area of over 660,000 square meters. After completion, the Company expects that the project will be the largest high-end residential community in Xingtai in terms of construction area. The project is comprised of three land construction sections, Sections B, C, and D, with total anticipated building area of approximately 1 million square meters. Section C is expected to cover a building area of approximately 380,000 square meters, which is expected to be comprised mainly of malls, hotels, office buildings and apartments. Sections B and D are expected to cover a building area of approximately 560,000 square meters. These sections are expected to be comprised of high-rise buildings, villas, kindergartens, primary schools and other commercial buildings.
Preparation for The Kirin Bay Project began in June 2009. Construction started in October 2011 and project completion is planned for the first half of 2015. The first phase residences are expected to be delivered in mid-to-late 2013 while final phase residences are expected to be delivered in the first half of 2015. The project is planned to include approximately 5,500 residential units consisting of high-rise apartments and single-family houses. The following sets forth the various categories of properties anticipated to be available for sale as part of the Kirin Bay Project and the total area and number of units available for each such category:
No. 79 Courtyard Project covers a land area of over 290,000 square meters and a total building area of 520,000 square meters. The project is positioned as a high-end residential development with some mixed commercial use.
No. 79 Courtyard Project started preparation in July 2009 and project completion is planned for the last quarter of 2014. The first phase residences are expected to be delivered in mid-2014 while the final phase residences are expected to be delivered in 2015. The following sets forth the various categories of properties anticipated to be available for sale as part of the No. 79 Courtyard Project and the total area and number of units available for each such category:
Focusing on Bohai Sea Surrounding Area
As our region selection strategy, we intend to focus on the Bohai Sea Surrounding Area. The Bohai Sea Surrounding Area has become the third most active region in the PRC for business investment, just behind the Pearl River Delta and the Yangtze River Delta Regions. The National Development and Reform Commission indicated in September 2010 that the Bohai Sea Surrounding Area, Yangtze River Delta region and Pearl River Delta region are to be prioritized for economic development.
Selecting Tier-Three Cities with Tier-Two Cities as Alternatives
We target at dynamic, highly commercialized tier-three cities with higher per capita GDP, economic growth, and citizen purchasing power than the surrounding tier-three cities. Cities such as Tianjin, Qingdao, Shenyang, Nanjing, Suzhou, Xuzhou, Hefei, Changshang, and Xi’an satisfy these criteria. Although our primary focus is tier-three cities, we may seek to expand to tier-two cities when our financial conditions permit and opportunities present.
Intellectual Property
We do not own any patent or registered trademarks.
Environmental Issues
Our business in China is subject to various pollution control regulations in China with respect to noise, water and air pollution and the disposal of waste. Specifically, the major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution, the PRC Law on the Prevention and Control of Air Pollution, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.
The Company is not aware of any investigations, prosecutions, disputes, claims or other proceedings in respect of environmental protection, nor has the Company been punished or can foresee any punishment to be made by any environmental administration authorities of the PRC.
Government Regulation and Approvals
Property and Land Use Rights
All urban land in China is owned by the State. Pursuant to 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, which became effective on May 19, 1990, 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. The land use rights are granted for a period of 70 years for residential purposes, 50 years for industrial purposes and 40 years for commercial purposes. These periods may be renewed at the expiration of the initial and any subsequent terms. Upon approval by both the land administrative authorities and city planning authorities, industrial parcel uses may be converted to other uses, and the duration and other clauses in the land use right granting agreement will be revised to match the new use. Granted land use rights are transferable and may be used as security for borrowings and other obligations.
Permits and Certificates
Development Certificates
According to the Urban Real Estate Development and Operation Administration Regulation, promulgated by State Council on July 20, 1998, the Urban Real Estate Development and Operation Administration Rules of Hebei Province promulgated by government of Hebei province and effective on July 1, 2004, and the Real Estate March 29, 2000, a real estate development enterprise shall obtain a Real Estate Development Enterprise Qualification Certificate (the “Development Certificate”) with four grades. To obtain a Grade 4 Development Certificate, an enterprise must have engaged in the real estate development business for more than one year with 100% of its completed projects passing the quality inspection by the supervising authority and shall have certain number of construction, financial, accounting and technical professionals, established a quality control system and does not have any record of material construction accidents and the registered capital shall be no less than approximately $756,220. To obtain a Grade 3 Development Certificate, besides the requirements of Grade 4 Development Certificate, an enterprise must have engaged in the real estate development business for more than two year with 100% of its completed projects of two consecutive years passing the quality inspection by the supervising authority and have completed the development of accumulatively more than 50,000 square meters construction and the registered capital shall be no less than approximately $1,209,958. To obtain a Grade 2 Development Certificate, besides the requirements of Grade 3 Development Certificate, an enterprise must have engaged in the real estate development business for more than three year with 100% of its completed projects of three consecutive years passing the quality inspection by the supervising authority and have completed the development of accumulatively more than 150,000 square meters construction and the registered capital shall be no less than approximately $3,024,895. To obtain a Grade 1 Development Certificate, besides the requirements of Grade 2 Development Certificate, an enterprise must have engaged in the real estate development business for more than five year with 100% of its completed projects of five consecutive years passing the quality inspection by the supervising authority and have completed the development of accumulatively more than 300,000 square meters construction and the registered capital shall be no less than approximately $7,562,237. With Grade 1 Development Certificate, the enterprise is allowed to develop all kinds of project without limitation. With Grade 2 Development Certificate, the enterprise is allowed to develop the project(s) with total construction area no more than 250,000 square meters each time. With Grade 3 Development Certificate, the enterprise is allowed to develop the project(s) with total construction area no more than 150,000 square meters each time. With Grade 4 Development Certificate, the enterprise may develop the project(s) with total construction area no more than 100,000 square meters each time. Upon expiration of the certificate, if the enterprise is going to continue the business of real estate development, it shall apply for a new one.
Construction projects in China often take 3-5 years or even longer to complete. As a result, many real estate and development companies often divide projects into a number of shorter phases, allowing them to sell and collect financing from a finished phase while the remainder of the project is still ongoing. The Ministry of Construction along with other sectors of government have taken the position that each phase of a project can be looked at on an individual basis for determining which grade of a development certificate a company needs to obtain to participate in the project. This allows a company with a lower grade to do a bigger project if it is broken into a number of smaller phases. However, if a company wants to develop a larger project and complete it in a single phase and in a short period, then the requirement for higher grade of certificate will be required.
Hebei Zhongding has obtained the formal Grade 2 Development Certificate No. JiJian Fang Kai Xing Zi No. 192 on December 26, 2011. Zhongding Jiye has obtained the Grade 4 Development Certificate No. JiJian Fang Kai Xing Zi No.304 with an expiration date of March 21, 2012. The Company obtained updated Grade 4 Development Certificate in July 2012. Zhongding Kirin has obtained formal Grade 4 Development Certificate on March 16, 2012.
Other Permits
For each project we develop, before commencing sales or presales of such project, we are required to obtain Land Use Rights Certificates, Construction Land Planning Permits, Construction Work Planning Permits, Work Commencement Permits and Pre-Sales Permits. Before we obtain the Pre-Sales Permit, we may apply to the local authority for informal presale permission to permit us to secure nonrefundable deposits from our customers. This is a local practice enacted by the Xingtai local government to encourage project development. We may not receive the same approval in other cities if we expand our projects beyond Xingtai.
We have obtained all of the Land Use Rights Certificates, Construction Land Planning Permits, Construction Work Planning Permits, Work Commencement Permits and Pre-Sales Permits for Kirin County Community, No. 79 Courtyard (Phase I) and Kirin Bay (Phase I) projects. For Kirin Bay Project, which will be divided into three parcels of land, we have obtained Land Use Rights Certificates for the Kirin Bay project pursuant to our participation in the Kong Village Relocation Program. For more details please refer to “Management Discussion and Analysis- Relocation Program of Kong Village.” As of the filing date of this registration form, we have obtained the remaining permits and certificates for the first phase of Kirin Bay Project.
Taxation
On March 16, 2007, the National People’s Congress of China passed the New EIT Law, and on November 28, 2007, the State Council of China passed the EIT Law Implementing Rules which took effect on January 1, 2008. The EIT Law and its implementing rules impose a unified earned income tax, or EIT, rate of 25.0% on all domestic-invested enterprises and foreign invested enterprises, or FIEs, unless they qualify under certain limited exceptions. As a result, our Operating Companies are subject to an earned income tax of 25.0%. Before the implementation of the New EIT Law, FIEs established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an EIT rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax.
In addition to the changes to the current tax structure, under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. In addition, a recent circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities.
In addition, the recent circular mentioned above sets out criteria for determining whether “de facto management bodies” are located in China for overseas incorporated, domestically controlled enterprises. However, as this circular only applies to enterprises established outside of China that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “de facto management bodies” for overseas incorporated enterprises that are controlled by individual PRC residents like us and some of our subsidiaries. We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In addition, dividends paid to us from our PRC Subsidiary will be exempted from PRC income tax but dividends we pay to our non-PRC shareholders may be subject to a 10% withholding tax.
Foreign Currency Exchange
All of our sales revenue and expenses are denominated in RMB. Under the PRC foreign currency exchange regulations applicable to us, RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Currently, our PRC Subsidiary and Operating Companies may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of SAFE, by complying with certain procedural requirements. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of SAFE. In particular, if our PRC Subsidiary borrows foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our PRC Subsidiary or Operating Companies by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the MOFCOM, or their respective local branches. These limitations could affect the ability of our PRC Subsidiary and Operating Companies to obtain foreign exchange through debt or equity financing.
Dividend Distributions
Our revenues are earned by our PRC Subsidiary through charging management fee from the Operating Companies pursuant to the Contractual Arrangements. However, PRC regulations restrict the ability of our PRC Subsidiary to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividend by our PRC Subsidiary only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC Subsidiary is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in such fund reaches 50% of its registered capital. Our PRC Subsidiary, Kirin Management cannot distribute the profits or pay dividends out of China before it sets aside such statutory fund unless the amounts in such fund reaches 50% of its registered capital, which is USD 100,000 currently. These reserves are not distributable as cash dividends. The statutory fund shall be set aside only when the PRC Subsidiary records profit in a fiscal year. Since December 22, 2010 when the PRC Subsidiary was established, it has not recorded any profit and therefore has not set aside any allocations to the statutory fund. If the PRC Subsidiary fails to set aside the allocations to the statutory fund when it does record profit at the end of a fiscal year, it will be subject to a fine of no more than $32,712. Our PRC Subsidiary has the discretion to allocate a portion of their after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
In addition, under the New EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006, and the Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, or Notice 601, which became effective on October 27, 2009, dividends from our PRC Subsidiary paid to us through our Hong Kong subsidiary may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if our Hong Kong subsidiary is considered a “beneficial owner” that is generally engaged in substantial business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holder of our PRC Subsidiary. Dividends declared and paid from before January 1, 2008 on distributable profits are grandfathered under the New EIT Law and are not subject to withholding tax.
Circular 75
In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an SPV for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest of offshore SPV. Failure to comply with the requirements of Circular 75 may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
As we stated under “Risk factors-Risks Related to Doing Business in China-Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC Subsidiary or the Operating Companies, limit our PRC Subsidiary’s ability to distribute profits to us or otherwise materially adversely affect us.” We cannot assure our beneficial owners or prospective shareholders, who are PRC residents as defined in Circular 75, can obtain registration with the relevant branch of SAFE, if so required, in connection with their equity interests in us and our control of equity interests in the Operating Companies through the Contractual Arrangements. However, many of the terms and provisions in Circular 75 remains unclear and implementation by central SAFE and local SAFE branches of Circular 75 has been inconsistent since its adoption. Therefore, we cannot predict how Circular 75 will affect our business operations or future strategies. For example, our present and prospective PRC Subsidiary’s ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.
Mergers and Acquisitions
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. According to the 2006 M&A Rule, a “Round-trip Investment” is defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). Under the 2006 M&A Rules, any Round-trip Investment must be approved by MOFCOM and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law.
As we stated under “Risk factors-Risks Related to Doing Business in China-PRC regulations regarding offshore financing activities by PRC residents have undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect our business.”. Though we believe the 2006 M&A Rule does not apply to us, the PRC regulatory authorities may take the view that these transactions and the Share Exchange Agreement are part of an overall series of arrangements which constitute a Round-trip Investment and as a result, we may be subject to fines and penalties on our operations in the PRC, our operating privileges in the PRC may be limited, the repatriation of the proceeds from the Offering into the PRC may be delayed or restricted, and we may face other administrative actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our securities.
Employees
As of the date of this Report, we have entered into labor contracts with all of our employees. Additionally, we have bought social insurances for our employees as set forth below:
Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe we have good relations with our employees.
Legal Proceedings
Currently there are no legal proceedings pending or threatened against the Company or Kirin China. 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.
Recent Developments
On January 11, 2013, Kirin International established a wholly-owned subsidiary Spectrum International Enterprise, in California, for the purpose of holding lease properties in the Unites States. On February 8, 2013, Kirin International established a second wholly-owned subsidiary Brookhollow Lake, LLC, in California for the purpose of holding lease properties in the Unites States, On March 25, 2013, Kirin International entered into an operating agreement with Agate Group LLC, pursuant to which Agate Group LLC acquired 10% equity interest in Brookhollow Lake, LLC for $ 180,000.
On August 12, 2013, Brookhollow Lake, LLC and Maxtor LLC, pursuant to an operating agreement between them, established Greenfield International Corporation in California, to engage in whole sale of food and other grocery. Brookhollow Lake, LLC and Maxtor LLC contributed $210,000 and $90,000 for 70% and 30% equity interest in Greenfield International Corporation, respectively.
On July 23, 2013, Kirin International and THG &Associates, LLC, pursuant to an operating agreement between them, formed Kirin Hopkins Real Estate Group LLC in California, to explore the business opportunities of real estate development in California. In accordance with the operating agreement; Kirin International should contribute $100,000 to hold 75% equity interest in Kirin Hopkins Real Estate Group LLC and, is the sole party be responsible for the company’s day to day operations; THG& Associates, LLC should contribute to prospective business opportunities, include Northgate markets rollout, etc., to hold 25% equity interest in Kirin Hopkins Real Estate Group LLC.
On July 11, 2013, Kirin International, ALFA IDC, LLC, Agate Designs, Inc. and Jin Fong Yang, pursuant to an operating agreement among them, formed Newport Property Holding, LLC in California for the purpose of real estate investment and management in the Unites States. In accordance with the operating agreement, Kirin International, ALFA IDG, LLC, Agate Designs, Inc. and Jin Fong Yang, should each contribute $800,000, $150,000, $150,000 and $500,000 to hold 50%, 9.375%, 9.375% and 31.25% equity interest in Newport Property Holding, LLC, respectively.
Item 2.
Item 2.
Properties.
Our corporate headquarter, which we lease, is located at 12th Floor, Building F, Phoenix Plaza, No.A5, Shuguang Xili, Chaoyang District, Beijing, which consists of approximately 1400 square meters.
In March 2013, Brookhollow Lake purchased a property of 20,658 square feet as its office at $2,051,873. On December 30, 2013, Brookhollow Lake sold one room to a third party for $180,637. As of December 31, 2013, the cost of this property was $1,871,236. The fair value of this property has increased to $2,564,587 after the improvement completed on this property.
Item 3.
Item 3.
Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4.
Item 4.
Mine Safety Disclosures
Not Applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities.
Market Information
Our common stock trades on the OTCBB under the symbol KIRI. The OTCBB is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (“OTC”) equity securities. An OTCBB equity security generally is any equity that is not listed or traded on a national securities exchange.
Price Range of Common Stock
The following table shows, for the periods indicated, the high and low bid prices per share of our common stock as reported by the OTCBB quotation service. These bid prices represent prices quoted by broker-dealers on the OTCBB quotation service. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.
Holders
As of December 31, 2013, there were 31 holders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Dividends
We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our Board of Directors has complete discretion on whether to pay dividends. Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
None.
Item 6.
Item 6.
Selected Financial Data.
We are not required to provide the information required by this Item because we are a smaller reporting company.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
The following discussion and analysis of the results of operations and financial condition for the year ended December 31, 2013 and 2012 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Forward-Looking Statements.”
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 maintain and manage our growth based 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
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We have completed the development of Kirin County’s 8 residential and commercial buildings in 2012. Throughout 2013 and at December 31, 2013, we have the following projects under development: 1) two commercial buildings of Kirin County Project; 2) No.79 Courtyard (Phase I, Phase II, Phase III) commenced the construction from September 2011, September 2012 and April 2013, respectively and reached the percentages-of-completion of 95.3%, 59.1% and 53.6% as of December 31, 2013, respectively; 3) Kirin Bay (Phase I, Phase II, Phase III), commenced the construction from October 2011,March 2013 and May 2013, respectively and reached the percentages-of-completion of 85.0%, 61.6%, 35.9% as of December 31, 2013. No.79 Courtyard and Kirin Bay are large-scale projects, and their development is divided into four phases. We anticipate that two commercial buildings of Kirin County will be delivered in middle to late spring of 2014; As of December 31, 2013, certain portions of No.79 Courtyard (Phase I) had been delivered to customers, No.79 Courtyard (Phase II and Phase III) is expected to be delivered to customers in the second quarter of 2015; and Kirin Bay (Phase I) is scheduled to be delivered to customers in middle to late 2014, Kirin Bay (Phase II) will be delivered to customer in late 2014. Furthermore, as at December 31, 2013, we started the preparation works for the construction of No. 79 Courtyard (Phase IV) and Kirin Bay (Phase IV).
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Pursuant to a Cooperation Agreement on the Project of Hebei Langfang Technology Valley Commercial and Residential Building (“Langfang Project Cooperation Agreement”) entered into on May 31, 2012 between HebeiZhongding and Beijing ShengshiChengmei Investment and Management Co., Ltd. (“ShengshiChengmei”), HebeiZhongding established a subsidiary Langfang City HuadingChengmei Real Estate Development Co., Ltd. (“HuadingChengmei”) in Langfang, Hebei Province, China on July 27, 2012. The registered capital of HuadingChengmei is RMB 20,000,000 (approximately US$3,200,000), which should be contributed in form of cash and paid up in two even installments on or before July 31, 2012 and May 31, 2014, respectively. In accordance with the Langfang Project Cooperation Agreement, HebeiZhongding should contribute all of HuadingChengmei’s paid-in capital, and is the sole party be responsible for HuadingChengmei’s day-to-day operations; ShengshiChengmei’s contribution to HuadingChengmei is in the form of consultation service. ShengshiChengmei agrees to undertake necessary communications with government authorities to facilitate HuadingChengmei to acquire the land use rights of a specific piece of land lot at certain predefined favorable economic terms. ShengshiChengmei also agrees to refrain from contacting a third party with respect to the specific land lot. Pursuant to Langfang Project Cooperation Agreement, HebeiZhongding and ShengshiChengmei owns 70% and 30% of HuadingChengmei’s nominal equity interest. In November 2013, Huading Chengmei was disposed at a investment loss of $37,368 in the year of 2013.
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In accordance with the Strategic Cooperation Agreement entered into between Hebei University and Huaxia Kirin (Hong Kong) International Investment Holding Group Limited, a related company, which subsequently transferred rights and obligations in associated with the Strategic Cooperation Agreement to the Company, on September 3, 2012 HebeiZhongding, through a trust equity investor, HuaxiaHuifeng Entrepreneurship Investment and Management (Beijing) Co., Ltd. (a related company ultimately owned by JianfengGuo), established a subsidiary Baoding City Heda Kirin Science and Technology Park Investment Co., Ltd. (“Heda Kirin”) in Baoding, Hebei Province, China. Pursuant to Supplementary Agreement with Baoding Heda Science and Technology Park Co., Ltd. (“Baoding Heda”), a subsidiary of Hebei University, the Company shall contribute all the paid-in capital of Heda Kirin, and processes 90% nominal equity interest in Heda Kirin; Baoding Heda processes 10% nominal equity interest in Heda Kirin but will not involve in the day-to-day management of Heda Kirin or participate in the profit distribution. Baoding Heda is entitled to receive 3% developed property area from Heda Kirin. The registered capital of Heda Kirin is RMB 100,000,000 (approximately $15,800,000). As of December 31, 2013, the Company has contributed RMB 50,000,000 (approximately $7,900,000) paid-in capital. Remaining RMB 50,000,000 (approximately $7,900,000) will be contributed before the fifth anniversary of the establishment of HedaKirin. On November 28, 2012, Baoding City Heda Kirin Science and Technology Park Investment Co., Ltd established wholly owned subsidiary Baoding City Heda Kirin Real Estate Development Co., Ltd. The registered capital of Heda Kirin Real Estate is RMB 100,000,000.
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On January 11, 2013, Kirin International established a wholly-owned subsidiary Spectrum International Enterprise, in California, for the purpose of holding lease properties in the Unites States. On February 8, 2013, Kirin International established a second wholly-owned subsidiary Brookhollow Lake, LLC, in California for the purpose of holding lease properties in the Unites States, On March 25, 2013, Kirin International entered into an operating agreement with Agate Group LLC, pursuant to which Agate Group LLC acquired 10% equity interest in Brookhollow Lake, LLC for $ 180,000.
On August 12, 2013, Brookhollow Lake, LLC and Maxtor LLC, pursuant to an operating agreement between them, established Greenfield International Corporation in California, to engage in whole sale of food and other grocery. Brookhollow Lake, LLC and Maxtor LLC contributed $210,000 and $90,000 for 70% and 30% equity interest in Greenfield International Corporation, respectively.
On July 23, 2013, Kirin International and THG &Associates, LLC, pursuant to an operating agreement between them, formed Kirin Hopkins Real Estate Group LLC in California, to explore the business opportunities of real estate development in California. In accordance with the operating agreement; Kirin International should contribute $100,000 to hold 75% equity interest in Kirin Hopkins Real Estate Group LLC and, is the sole party be responsible for the company’s day to day operations; THG& Associates, LLC should contribute to prospective business opportunities, include Northgate markets rollout, etc., to hold 25% equity interest in Kirin Hopkins Real Estate Group LLC.
On July 11, 2013, Kirin International, ALFA IDC, LLC, Agate Designs, Inc. and Jin Fong Yang, pursuant to an operating agreement among them, formed Newport Property Holding, LLC in California for the purpose of real estate investment and management in the Unites States. In accordance with the operating agreement, Kirin International, ALFA IDG, LLC, Agate Designs, Inc. and Jin Fong Yang, should each contribute $800,000, $150,000, $150,000 and $500,000 to hold 50%, 9.375%, 9.375% and 31.25% equity interest in Newport Property Holding, LLC, respectively.
Financial Performance Highlights
The following summarizes certain key financial information for the year ended by December 31, 2013.
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Total revenue was $178.3 million for the year ended December 31, 2013, an increase for $111.0 million, or 164.9%, from $67.3 million for 2012. Our revenue stream has shifted to No.79 courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I , Phase II and Phase III) ,which provide majority revenue in 2013.
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Gross profit was $26.9 million for the year ended December 31, 2013, as compared to a gross loss of $25.6 million last year. Gross margin ratio was 15.1% for the year ended December 31, 2013 as compared to gross margin ratio of -38.1% for 2012. The increase of gross profit was contributed by construction progress and sales of No.79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I ,Phase II and Phase III) for the year ended December 31,2013 and changes in cost estimates for No.79 (Phase I) ($15.8 million) and Kirin Bay (Phase I) ($5.7 million), which led to a lowered gross profit for the year ended December 31, 2012.
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Net loss was $0.2 million for the year ended December 31, 2013, a decrease of $29.2 million, or approximately 99.2%, from net loss of $29.4 million for last year, a result of the increased gross profit contributed by the sales of No.79 Courtyard(Phase I, Phase II and Phase III) and Kirin Bay( Phase I ,Phase II and Phase III) netted off increased selling, general and administrative and interest, accompanying to the development of multiple projects and the borrowing of an increased amount of loans simultaneously.
Factors Affecting our Operating Results
Growth of China’s Economy. We operate and derive all of our revenue from sales in China. Economic conditions in China, therefore, affect our operations, including the demand for our properties and the availability and prices of our raw materials among other expenses. China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 9.2% in 2011, 7.8% in 2012 and 7.7% in 2013. China is expected to experience continued growth in all areas of investment and consumption. However, if the Chinese economy were to become significantly affected by a negative stimulus, China’s growth rate would likely to fall and our revenue could correspondingly decline.
Government Regulations. Our business and results of operations are subject to PRC government policies and regulations regarding the following:
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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.
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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.
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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.
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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. Since the second half of 2009, the PRC real estate market has experienced strong recovery from the financial crisis and housing prices rose rapidly in certain cities. In response to concerns over the scale of the increase in property investments, the PRC government has implemented measures and introduced policies to curtail property speculation and promote the healthy development of the real estate industry in China. In January 2011, the General Office of State Council issued a Notice of the State Council on Issues Related to Further Enhancing the Regulation and Control of Real Estate Market (the “Notice”), which provided that the purchasers of a second residential property for their households must make down payments of no less than 60% of the purchase price and the interest rate of any mortgage for such property must equal at least the benchmark interest rate plus 10%. The Notice also requested the tax departments to take further measures on the supervision and inspection of the collection and administration of land appreciation tax, and request the local governments to increase the effective supply of low-income housing and ordinary commodity housing. The Notice also provided that in municipalities, the capital city of each province, and other cities where housing prices are too high, a local resident household having one residential household property, or a non-local resident household which is able to provide required certificates as to payment of income tax and social insurance contributions for a certain number of years, may only purchase one additional residential property; for a local resident household already having two or more residential property, or a non-local resident household that already has one or more residential properties or is unable to provide the requisite certificates, the purchase of any residential property in the local area is not permitted. The PRC government’s policies and regulatory measures on the PRC real estate sector could limit our access to required financing and other capital resources, adversely affect the property purchasers’ ability to obtain mortgage financing or significantly increase the cost of mortgage financing, reduce market demand for our properties and increase our operating costs. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures or that agencies and banks will not adopt restrictive measures or practices in response to PRC governmental policies and regulations, which could substantially reduce pre-sales of our properties and cash flow from operations and substantially increase our financing needs, which would in turn materially and adversely affect our business, financial condition, results of operations and prospects.
Interest Rate and Inflation Challenges. We are subject to market risks due to fluctuations in interest rates and refinancing of mid-term debt. Higher interest rates may also affect our revenues, gross profits and our ability to raise and service debt and to finance our developments.
According to the National Bureau of Statistics of China, China’s national inflation rate was 5.4% in 2011, 2.6% in 2012 and 2.6% in 2013. Inflation could result in increases in the price of raw materials and labor costs. We do not believe that inflation or deflation has affected our business materially.
Acquisitions of Land Use Rights and Associated Costs. We acquire land for development through the governmental auction process and by obtaining land use rights from third parties through negotiation, acquisition of entities, co-development or other joint venture arrangements.
Our ability to secure sufficient financing for land use rights acquisitions and property development depends on internal cash flows in addition to lenders’ perceptions of our credit reliability, market conditions in the capital markets, investors’ perception of our securities, the PRC economy and the PRC government regulations that affect the availability and cost of financing real estate companies or property purchasers.
Significant Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include percentage-of-completion of properties under construction and related revenue and costs recognized, allowance for doubtful accounts, recoverability of deferred tax assets, and the assessment of impairment of long-lived assets. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
Fair Value of Financial Instruments
The Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC Subtopic 820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
ASC Subtopic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
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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.
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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.
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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.
As of December 31, 2013 and 2012, none of the Company’s financial assets or liabilities was measured at fair value on a recurring basis. The Company did not have any nonfinancial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013 and December 31, 2012.
Reporting Currency and Foreign Currency Translation
The functional currency of the Company, Kirin China, Kirin Development and Kirin Management is the United States dollar (“US$”). The functional currency of the Company’s VIEs and subsidiaries of VIEs in the PRC is Renminbi (“RMB”). The Company’s reporting currency is US$. The assets and liabilities of the Company’s VIEs and subsidiaries of VIEs in China are translated at the exchange rate on the balance sheet dates, stockholders’ equity is translated at the historical rates and the revenues and expenses are translated at the weighted average exchange rates for the periods. The resulting translation adjustments are reported under accumulated other comprehensive income in the consolidated statements of income and comprehensive income in accordance with ASC 220, Comprehensive Income.
Since July 2005, the RMB is no longer pegged to the US$. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the US$ in the medium-to-long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. PRC exchange control regulations may also restrict the Company’s ability to convert RMB into foreign currencies.
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 of 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.
The Company adopts the percentage-of-completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than twelve months at that date.
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 transaction are recognized in the period in which the transaction occurs.
Except for the down payment, remaining contract price can be settled by several installments or financed by mortgage. The Company requires customers to pay 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 can be approved. The Company provides guarantees for mortgage loans from financial institutions to customers (see “Restricted cash”). Such guarantees expire when customers have obtained House Ownership Certificate of 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 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.
Real Estate Capitalization and Cost Allocation
Properties under development or completed 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 grant related to real estate projects developed by the Company are recognized as other income when the Company has complied with the conditions attached to the grant and the grant’s collection is reasonably assured.
In 2008, Xingtai Zhongding was entitled to a government grant of approximately $25,138,655 related to Kirin County project to subsidize the modernization of the neighborhood where the real estate project 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 years ended December 31, 2013 and 2012, the Company recognized approximately $nil and $443,049 grant income, respectively. All government grant related to Kirin County has been recognized as of December 31, 2012 as the construction of Kirin County completed during the year. The local government has arranged a lump sum payment of the grant to Xingtai Jiye Business Investment Co., Ltd. (“Business Investment”), a related party of the Company, prior to the grant’s conditions being met out of financial consideration because it lacked managing staff and concerned that the funds would be re-assigned or invalidated without an immediate recipient. Pursuant to the arrangement, Business Investment provides this grant money to Xingtai Zhongding in proportion to the percentage of the project completed as a measure to ensure that the project satisfies the grant’s guidelines. The grant does not have refund conditions and the Company believes government will not revoke the grant or claw back cash remitted to the escrow account unless the construction and sale of Kirin County project is cancelled by the Company. As at December 31, 2013, the Company didn’t receive any request from government demanding revocation and/or partial refund of the grant previously given, and the Company expects no development relating to the Kirin County project will cause government to request the grant’s refund in next twelve months.
Capitalization of Interest
In accordance with ASC 360, Property, Plant and Equipment, interest incurred during construction is capitalized to properties under development. For the years ended December 31, 2013 and 2012, $326,259 and $633,302 were capitalized as properties under development, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains 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 are 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 $8,362,905 and $6,924,572 as at December 31, 2013 and 2012, 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.
Investment at Cost
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 $206,512 as dividend for the year ended December 31, 2013.
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:
Income Taxes
The Company follows ASC 740, Income Taxes, which require the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, 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.
Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and it prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosures and transitions.
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. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current PRC government officials.
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 borrowings 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.
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 components of comprehensive income during the year ended December 31, 2013 and 2012 were net income and 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, to issue common stock were exercised and converted into common stock. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.
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 years ended December 31, 2013 and 2012, the Company recorded an advertising expense of $3,426,229 and $1,438,576, respectively.
Property Warranty
The Company provides customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts. The warranty period varies from two to five years, depending on different property components the warranty covers.
The Company constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company withholds up to 5% of the contract total payment from contractors for periods of two to five years. These amounts are included in liabilities, and are only paid to the extent that there have been no warranty claims against the Company relating to the work performed or materials supplied by the contractors. As at December 31, 2013 and 2012, the Company retained $140,661 and $205,823 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 years ended December 31, 2013 and 2012, 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 years ended December 31, 2013 and 2012.
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 February 2013, the Financial Accounting Standards Board ("FASB") issued amendments under ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220). The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.
Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In July 2013, The FASB issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, This Update applies to all entities that have unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists at the reporting date. The amendments in this Update do not require new recurring disclosures. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim period within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
Results of Operations
Comparison of Years Ended December 31, 2013 and 2012
Our net loss for the year ended December 31, 2013 was $0.2 million, a decrease of $29.2 million, from net loss of $29.4 million for the year ended December 31, 2012. Net loss decreased for the following reasons: 1) in the first half of 2013, Kirin Bay Phase I, Phase II, No.79 Courtyard Phase I and Phase II became the main revenue resource and contributed most of the increased revenue and gross profit; 2) in the fourth quarter of 2013, Kirin bay Phase III, No. 79 Courtyard Phase III, met the revenue recognition requirement in December 2013 and reached the percentages-of-completion of 35.9% and 53.6%, respectively; and 3) in the first quarter of 2012, there was a reassessment of Kirin County project’s expected revenue, budgeted costs, and percentage-of-completion which increased the cost of real estate sales for the year ended December 31, 2013.
In line with the construction and pre-sale of No.79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III), and preparation works for prospective projects, our overall operating expense in advertising, staff salaries, and administration increased by $3.5million, or 28.2% for the year ended December 31, 2013 compared with the year ended December 31, 2012. These expenses increase mainly due to a result of new advertising campaigns to promote the pre-sale of our No.79 Courtyard (Phase II, Phase III) and Kirin Bay (Phase II, Phase III) projects, increased advertising expense $2.0 million or 138.2% for the year ended December 31, 2013 compared with the year ended December 31, 2012, and increase professional and related expense $2.2 million, or 294.2% for the year ended December 31, 2013 compared with the year ended December 31, 2012. Also, our interest expense increased mainly due to an increased amount of average outstanding bank loans for the year ended December 31, 2013 compared to those for the year ended December 31, 2012.
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 constitutes only an insignificant amount compared to the contract value. These adjustments to contract price are recorded as reduction of revenue in the current period on a cumulative catch-up basis.
With regard to a project’s cost estimate, the Company’s in-house cost estimating staffs, work in collaboration with a committee also 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 quantitate consumption and on-going rate of materials, labor, machinery and overheads. For the purpose of preparing the Company’s consolidated financial statements; a project’s cost estimate is reviewed by in-house cost estimators at each year-end and adjusted for material developments in the interval. Changes in estimates of a project’s revenue and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a project’s percentage of completion. When a project’s total cost estimate to be incurred exceeds total estimated revenue to be earned, a provision for the entire loss on the project is recorded in the period the loss is determined. In addition to our existing monthly detailed cost estimate upon receiving construction data from the architects, we have hired additional competent professionals to ensure early identification of variances from prior estimated project revenue and cost, to reduce the likelihood of significant changes to the estimates.
Revenues and Gross Profit
Revenue from Real Estate, net. Real estate sales represent revenue from the pre-sale of properties under development. For the years ended December 31, 2013 and 2012, revenue was derived from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), Kirin Bay (Phase I), Kirin Bay (Phase II), Kirin Bay (Phase III), Kirin County (including adjacent shopping arcade),Under the percentage-of-completion method, revenue is the percentage of completed construction at a point in time is multiplied by total value of contracts signed up to that same point.
Our revenue from the pre-sale of real estate properties for the year ended December 31, 2013 was $178.3 million, an increase of $111.0 million, or approximately 164.9%, compared to $67.3 million for the same period of 2012. Revenue from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), Kirin Bay (Phase I), Kirin Bay(Phase II), and Kirin Bay (Phase III) was $51.0 million, $20.7 million, $20.6 million, $34.7 million, $34.0 million and $14.0 million respectively, representing 28.6%, 11.6%, 11.6%, 19.5%, 19.1% and 7.8% of total revenue earned in the year ended December 31, 2013. The percentage of completion of No.79 Courtyard (Phase I) increased from 65.5% as of December 31, 2012 to 95.3% as of December 31, 2013, the percentage of completion of No.79 Courtyard (Phase II, Phase III) is 59.1% and 53.6%, respectively. The percentage of completion of Kirin Bay (Phase I) increased from 56.1% as of December 31, 2012 to 85.0% as of December 31, 2013, the percentage of completion of Kirin Bay (Phase II, Phase III) is 61.6% and 35.9%, respectively. For the year ended December 31, 2013, Hebei Zhongding Property Service Co., Ltd. began to provide property service to Kirin County and began to recognized revenue for this period and contributed $0.5 million of the revenue.
The increment of revenue for the year ended December 31, 2013 was primarily due to progress we made on the construction of No.79 Courtyard (Phase I, Phase II) and Kirin Bay (Phase I and Phase II) both of which were in the later period of the construction; No.79 Courtyard (Phase III) and Kirin Bay (Phase III) were in the middle construction stage. Comparatively, for the year ended December 31, 2012, No.79 Courtyard (Phase I) and Kirin Bay (Phase I) were at the middle of the construction. Although No.79 Courtyard (Phase III) commenced construction in the third quarter 2013 and Kirin Bay (Phase III) commenced construction in the second quarter 2013, these two projects met revenue requirement in the fourth quarter 2013. By the year ended December 31, 2013, No.79 Courtyard (Phase III) and Kirin Bay (Phase III) reached a percentage-of-completion of 53.6% and 35.9% respectively, which resulted in a significant increase of revenue in the fourth quarter 2013 as compared with 2013 previous quarters.
The following table shows the percentage-of-completion of each project as at comparable period end:
Kirin Bay is a three-phase, master-planned community built on a land area of approximately 660,000 square meters. Positioned as a mid-market residential development, Kirin Bay also features kindergarten, a primary school, hotel, office buildings and apartments. As of the Report, we have obtained necessary government approvals. For Kirin Bay (Phase I), we acquired Land Use Rights Certificates (issued on July 7, 2011), Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued on August 10, 2011), Work Commencement Permit (issued on September 29, 2011) and Pre-Sales Permit (issued on September 30, 2011); for Kirin Bay (Phase II), we acquired Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued on July 31, 2012), Work Commencement Permit (issued On November 22, 2012) and Pre-Sales Permit (issued on March 26, 2013); and 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).
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 the Report, we have obtained necessary government approvals. For No. 79 Courtyard (Phase I) we acquired Land Use Rights Certificate (issued on November 9, 2010), Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on September 1, 2011), Work Commencement Permit (issued on November 2, 2011) and Pre-Sales Permit (issued on November 2, 2011); for No.79 Courtyard (Phase II), we acquired Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on July 20, 2012), Work Commencement Permit (issued on September 1, 2012) and Pre-Sales Permit (issued on September 27, 2012); 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( August 12, 2013).
We bought the land use right of No. 79 Courtyard in 2007 and incurred land use right acquisition cost from year 2008 to 2011. We also started the land cleanup preparation work such as the demolishment and relocation in 2010 and early 2011, which resulted relevant cost as well. We also incurred cost related to the planning of the project as well as government levied tax and fees prior to the fourth quarter of 2011.
We have obtained necessary government approvals, including Land Use Rights Certificates, Construction Land Planning Permits, Construction Work Planning Permits, Work Commencement Permits and Pre-Sales Permits, for our No. 79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III). We commenced the construction of Kirin County’s shopping arcade, which was designed to complement Kirin County Project, and provide convenience to the residents of Kirin County. However, due to the zoning plan by the local authority, we have not obtained the Construction Land Planning Permits so far, and therefore, the construction shopping arcade part of Kirin County, has been 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 before December 2014. Our current design of the shopping arcade, including but not limited to, salable gross floor area, is not disputed by local government agencies.
The following table summarizes the key pre-sale information of our projects (in thousands dollars):
Cost of Real Estate Sales. Cost of real estate sales consist of land use rights costs, construction and installation costs. Our costs of real estate sales for the year ended December 31, 2013 were $151.4 million, an increase of $58.5 million, or approximately 62.9%, compared to $92.9 million for the same period of 2012. Our total cost of real estate sales increased in relation to the construction of two new projects: No.79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III). Both projects were at their peak of expenditures, in accordance with our construction plans, and both of the No.79 Courtyard (Phase IV) and Kirin Bay (Phase IV) projects were at beginning state.
Gross Profit (Loss). Gross profit for the year ended December 31, 2013 was $26.9 million (gross profit ratio: 15.1%) compared to gross loss $25.6 million (gross loss ratio: 38.1%), for the same period of 2012, due to the increased presales and the percentage-of-completion (POC) of No.79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay ( Phase I, Phase II and Phase III) in the year of 2013, the Kirin County project’s modification of several pre-sales contracts, and change to the total estimated costs (including upgraded building exterior decoration standard, construction materials and labor price changes, and contractors’ claims) in the year of 2012. The estimated costs of No.79 Courtyard (Phase I), Kirin Bay (Phase I) and Kong Village Relocation Program were revised according to certain design changes and material cost increase which decreased the gross ratio of the two projects. The cost increases of Kong Village Relocation Program also increase the cost of land of all parcels of Kirin Bay.
The Company expected that Kirin County project, Kirin Bay project and No.79 Courtyard project will have positive gross margins which are in line with the common margin rates as the similar projects in similar market. However, when considering the market adaption capability, marketing plan and construction ability, these projects may be split into several phases to develop. And the actual gross profit percentages may vary between different phases of the same project. For example, in the fourth quarter of 2013, the Company had sold more commercial units of No. 79 Courtyard, which inherently had higher profit margin than that of residential units of No. 79 Courtyard, and thus resulted in higher profit margin earned in the quarter of 2013 than prior quarters of 2013. Sometimes, for the reasons of positioning of the whole project, marketing and promotion purposes, a single phase may bear a low or even negative gross profit as indicated in No. 79 Courtyard Phase II and Kirin Bay Phase I during the year 2013. Management believes that this is temporary and will stimulate potential sales of the other phases of the projects and Company’s other real estate projects as well. The gross margin percentage, from the whole project perspective, will eventually be positive and consistent with other comparable projects in similar market.
The following tables set forth the aggregate Gross Floor Area (GFA) and the percentage-of-completion (POC) and Contract sold by project for the year ended December 31, 2013 and 2012:
The following tables set forth the consolidated square meters sold and average selling price per square meter by each project for the year ended December 31, 2013 and 2012:
(1)
This column reflects the aggregate amount of all contracts entered into as of the end of the applicable period.
(2)
This column reflects the total square meters sold during the applicable period.
(3)
This column reflects the average price per square meter for all properties sold during the applicable period.
(4)
These numbers include pre-sale of Kirin County’s adjacent shopping arcade in 2013.
Operating Expenses. Operating expenses for the year ended December 31, 2013 were $15.8 million, an increase of $3.5 million, or 28.2%, from $12.3 million for the year ended December 31, 2012. Corresponding to sales in No.79 Courtyard (Phase I, Phase II and Phase III), Kirin Bay (Phase I, Phase II and Phase III) and Kirin County projects, our overall operating expenses in advertising, staff salaries, and maintenance increased substantially in the year of 2013 compared with the year of 2012.
We expect our selling and marketing expenses to increase in the near future in connection with the pre-sale and construction of Kirin Bay, No.79 Courtyard’s entering into new phases and development of new projects.
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Advertising Expenses. Our advertising expenses increased from $1.4 million for the year ended December 31, 2012 to $3.4 million for the year ended December 31, 2013. Such increase was mainly a result of new advertising campaigns to promote the pre-sale of our No.79 Courtyard (Phase II, Phase III) and Kirin Bay (Phase II, Phase III) projects, which are currently in their construction stage. The advertising expenses are expected to further increase as we advance to next phase of our No.79 Courtyard and Kirin Bay projects.
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Professional and related Expense. Our professional expense increased from $ 0.7 million for the year ended December 31, 2012 to $2.9 million for the year ended December 31, 2013. Because the company commenced new construction phases for No.79 Courtyard (Phase II, Phase III) and Kirin Bay (Phase II, Phase III), must obtained more services such as legal, tax etc. Such increase was due to the increased expenses of approximately $1.4 million on third party services that Hebei Zhongding and Xingtai Zhongding Kirin Reeal Estate Development Co., Ltd. obtained in terms of legal, tax, human resource etc.
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Office and Administrative Expenses. Office and administrative expenses decreased from $5.7 million to $5.1 million from 2012 to 2013. This was mainly attributable to controlling expenses such as office supplies costs, traveling, and communication fees.
Interest Expense. Our interest expense was $7.7 million for the year ended December 31, 2013, an increase of $1.6 million, or 27.0%, from $6.1 million for the year ended December 31, 2012. The increase was primarily related to substantially increased amount of average outstanding bank loan balance and higher interest rate of new loans borrowed in 2013. We expect that there will be a further increase of interest expense in the near future when we have additional projects in development.
Income Taxes. Income taxes expense for the year ended December 31, 2013 totaled $3.8 million, an increase of $17.9 million or 126.9% from income taxes benefit of $14.1 million for the year ended December 31, 2012. The increase was mainly due to the new project’s downward adjustment of land appreciation tax liability and deferred tax liabilities in relation to revenue recognition caused by increased total project estimated costs for the year ended December 31, 2013.
Net Loss. Net loss for the year ended December 31, 2013 was $0.2 million compared to net loss of $29.4 million in the year ended December 31, 2012, a decrease of $29.2 million or 99.2%. Net loss decreased was principally a result of the increased gross profit contributed by the sales of No.79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III) offset by the increased selling, general and administrative expense and interest expense, accompanying to the development of multiple projects and the increased interest expense relating to the borrowing of a larger amount of loans within the comparable periods; In the first quarter of 2012, a reassessment was made on Kirin county project’s expected revenue. Meanwhile, budgeted costs and percentage-of-completion increased the cost of real estate sales for the year ended December 31, 2012.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the years indicated:
We had a balance of cash and cash equivalents of $23.4 million as of December 31, 2013 compared with a balance $24.1 million as of December 31, 2012. 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 from operating activities was $17.1million for the year ended December 31, 2013, compared to net cash inflow from operating activities of $14.6 million for the year ended December 31, 2012, an increase of $2.5 million. The increase in net cash flows from operating activities was primarily contributed by the following factors:
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We invested $43.4 million in real properties and land lots under development (net of accounts payable) in the year ended December 31, 2013. In the same period of 2012, we invested $13.8 million on our projects, part of which was payment of land lot cost for No.79 Courtyard and Kirin Bay. This accounted for $29.6 million increase in cash inflow from operating activities.
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Changes in prepayments (combination of others receivables) provided $27.9 million cash outflow for the year ended December 31, 2013. In the same period of 2012, changes in prepayments (combination of others receivables) provided $12.8 million cash outflow, which led to a $15.1 million increase in net cash outflow. The $27.9million cash outflow was mainly due to $10.2 million increase in advances to suppliers for our projects and $17.7 million increase in borrowings to the third parties contractors.
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Changes in taxes (combination of defer taxes and other taxes payable) provided $0.5 million cash inflow for the year ended December 31, 2013, compared to changes in taxes contributed $17.1 million cash outflow in the same period of 2012, which led to a $17.6 million increase in net cash inflow. This difference was mainly due to $6.8 million increase from tax payable to tax bureau and $10.8 million increase from deferred taxes.
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Changes in customer deposit (combination of revenue in excess of billings) provided $4.0 million cash outflow for the year ended December 31, 2013, compared to $58.2 million cash inflow received in the year ended December 31, 2012, which lead to a $54.2 million decrease in net cash inflow from operating activities.
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Changes in restricted cash provided $1.2 million cash outflow for the year ended December 31, 2013, compared to restricted cash generated $5.2 million cash outflow in the same period of 2012, which led to a $4.0 million increase in net cash inflow.
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We have net loss $0.2 million for the year ended December 31, 2013, compared to net loss $29.4 million in the same period of 2012, which led to a $29.6 million increase in net cash inflow.
Investing Activities. Net cash used in investing activities was $37.7 million for the year ended December 31, 2013, compared to net cash of $19.3 million used in investing activities for the year ended December 31, 2012, represented an increase of $18.4 million. The increase was due to a $12.1 million short-term loan to a related party at the end of 2013 and $3.9 million (RMB 24,000,000) cash outflow in stock subscription for proposed Hebei Xingtai Rural Commercial Bank Co., Ltd. The short-term loan has been collected in January 2014, received $12.1 million from related party, Furthermore, we have completed our investment of a 5.25% minority interest in Hebei Xingtai Rural Commercial Bank Co., Ltd., which could potentially benefit our future borrowing capacity.
Financing Activities. Net cash inflows from financing activities was $19.2 million for the year ended December 31, 2013, compared to $18.0 million cash inflows for the year ended December 31, 2012, an increase of cash inflows of $1.2 million.
Contractual Obligations
Long-term debt obligations, costs of land use rights and non-cancellable construction contract obligations for the year ended of December 31, 2013
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 December 31, 2013, we entered into non-cancellable agreements with several suppliers for our on-going business of constructing residential and commercial properties. The total amount we committed to pay contractors as outlined in these non-cancellable construction agreements aggregates approximately $59.3 million.
Material Financial Obligations
Loans Payable
As of the year ended of December 31, 2013 our total loan balance was $89.5 million.
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In August 2012, one of the wholly-owned subsidiaries of our variable interest entity Xingtai Zhong, Xingtai Zhongding Kirin Real Estate Development Co., Ltd., entered into a long-term loan contract totaling RMB 150,000,000 (approximately $24,533,857) with Xingtai Chengjiao Rural Credit Cooperative Union Association. The loan provides terms ranging from maximums of 18 to 24 months and is designated for propagating the development of the Kirin Bay Project. The loan is collateralized with the Kirin Bay land use rights. As of December 31, 2013, these loans’ effective interest rate was 11.38% per annum.
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On September 17, 2012, the Company entered into a loan contract with Industrial and Commercial Bank of China, Xingtai Yejin Branch for a series of loans with a maximum principle amount of RMB180,000,000 (approximately $29,700,000). These loans were collateralized by partial of the Company’s No. 79 Courtyard land use rights and properties under development, due in several installments through January 31, 2014 to September 18, 2015, and borne an annual interest rate of 9.225%. The company repaid RMB 3,000,000 to the financial institution on December 27, 2013.
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In December 2012, one of the wholly-owned subsidiaries of our variable interest entity Xingtai Zhongding, Xingtai Zhongding Kirin Real Estate Development Co., Ltd. entered into a loan contract to totaling $4,906,771 (RMB 30,000,000) with Kong Village Committee with a 12 month term, with an interest rate of 14.4% per annum. This loan is not collateralized.
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On April 24, 2013, one of the wholly-owned subsidiaries of our variable interest entity Xingtai Zhongding, Xingtai Zhongding Kirin Real Estate Development Co., Ltd. entered into a loan contract with Xingtai Rural Commercial Bank with amount of RMB20,000,000 (approximately $3,271,181) through Hebei Youerma Business Service Co., Ltd (a third party company). This loan was credit loan, and borne an annual effective interest rate of 8.55%. The principal amount of the loan is due on April 24, 2014.
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On May 15, 2013, Hebei Zhongding, entered into a loan contract with Industrial and Commercial Bank of China, XingtaiYejin Branch for a series of loans with a maximum principle amount of RMB270,000,000 (approximately $44,160,942). These loans were partially collateralized by the Company’s No. 79 Courtyard land use, and borne an annual effective interest rate of 9.84%. As of December 31, 2013, the Company has drawn RMB 170,000,000 from the bank. The term of the loan is for 36 months, which will start from the actual withdrawal date. RMB70, 000,000 shall be repaid by January 30, 2015. RMB 50,000,000 shall be repaid by May 30, 2015, RMB50, 000,000 shall be repaid by September 30, 2015. RMB50, 000,000 shall be repaid by January 30, 2016. RMB50, 000,000 shall be repaid by May 30, 2016. The subsidiary agreed to pay RMB3, 800,000 to the lender as a financing service charge under the loan.
Related Party Transactions and Balances
(1) Loan to a related party
In August 2013, Kirin entered into a loan agreement with Huaxia Huifeng Ventures Capital Management (Beijing) Co., Ltd. (“Huaxia Huifeng”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to Huaxia Huifeng for $35,953,000 (RMB 221,160,000). On October 15, 2013, the Company signed a supplement loan agreement in amount of $27,636,000 (RMB 170,000,000) which bears 18% interest rate and has a term of one year. As of December 31, 2013, the outstanding balance of the loan was $33,204,995 (RMB 196,560,000 for original loan and RMB 6,455,342 for interest income).
(2) Government grant escrowed by Business Investment
In 2008, Xingtai Zhongding, was entitled to a government grant associated with its development of Kirin County project of RMB160, 000,000 ($22,981,000, translated at historical exchange rate). Cash representing the grant has been remitted to Business Investment, a trust equity owner of Xingtai Zhongding in June 2008. Business Investment originally acquired the land use rights of Kirin County project, and contributed the land use rights to Xingtai Zhongding as paid-in capital to develop the project. Based on the arrangement between Business Investment and Xingtai Zhongding, which has been sanctioned by local government, the benefit of the government grant is to be transferred from Business Investment to Xingtai Zhongding. Specifically, Business Investment acts as an escrow agent but also is nominally responsible for Xingtai Zhongding’s progress. Earned portions of the government grant become available to Xingtai Zhongding based on percentage of completion.
For the years ended December 31, 2012, 2011, 2010 and 2009, Xingtai Zhongding was entitled to receive 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. At December 31, 2012 and December 31, 2013, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($25,332,088 and $26,169,447, translated at respective historical rates) was used to repay working capital provided by Jianfeng Guo for the support of other real estate projects’ development. At December 31, 2013, the Company had a remaining $4,247,788 earned government grant available for future drawdown after repaid working capital provided by Jianfeng Guo, which is included in “Receivable from a related party” in 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. Xingtai Zhongding 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 consolidated balance sheets.
Gross amount of working capital provided by and to affiliate companies and individuals designated by Jianfeng Guo as at December 31, 2013 and 2012 were as follows:
(4) Short term loan to related party
As of December 31, 2013, the ending balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these are all wired to five related companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies are ultimately controlled by JianfengGuo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin.
On December 30, 2013, Hebei Zhongding entered into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing Cathay Kirin Assets Management Company and Beijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000. On December 30, 2013, Business Service entered into loan agreements with Beijing Cathay Kirin Hospitality Management Company, and Cathay Brother (Beijing) Investment Management Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000, respectively. The maturity date of the loan agreements is January 2, 2014.
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. 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 to all the auction and bidding process to acquire the vacated land.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Recently Issued Accounting Pronouncements
FASB issued several ASUs during the year, which are not expected to have a material impact on the consolidated financial statements upon adoption.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
We are not required to provide the information required by this Item because we are a smaller reporting company.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
Reference is made to the financial statements, listed in Item 15, which appear at pages through of this Report and which are incorporated herein by reference.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
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, due to the material weaknesses identified 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.
Management's Annual Report on Internal Control Over Financial Reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our management has determined that as of December 31, 2013, the Company’s internal control over financial reporting was not effective for the purposes for which it is intended.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm as we are a smaller reporting company and not required to provide the report.
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 December 31, 2013.
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We do not have a functional audit committee; and
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We have substantial related party transactions and have no corporate governance policies in place to review, authorize and approve such transactions.
The Company is still determining what steps it will take to remedy these material weaknesses.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the quarter of December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
Our directors, executive officers and key employees are listed below. The number of directors is determined by our Board of Directors. All directors hold office until the next annual meeting of the Board or until their successors have been duly elected and qualified. Officers are elected by the Board of Directors and their terms of office are, except to the extent governed by employment contract, at the discretion of the Board of Directors.
Directors and Executive Officers
JianfengGuo, Chairman of the Board of Directors
Mr. Guo has been the Chairman of XingtaiZhongding and HebeiZhongding since August 2008 and April 2006, respectively. He also serves as the Chairman of the Board of Directors of Huaxia Kirin (Beijing) Investment Co., Ltd. since December 2004, an investment company headquartered in Beijing focusing on real estate development, land development and property service investment. Mr. Guo served as the Chairman of Board of Directors and General Manager of XingtaiSanchao Real Estate Development Co., Ltd., a real estate development company in Xingtai City and the previous shareholder of HebeiZhongding, from December 1995 to April 2006. He also worked as Director of Department II of Xingtai Real Estate Development Co., Ltd., a real estate development company in Xingtai City, from October 1994 to December 1995. Mr. Guo has more than twenty years of experience in senior management, enterprise investment, and real estate development operations. Mr. Guo is an MBA candidate at Asia International Open University (Macau).
Longlin Hu, President and Chief Executive Officer, Director
Mr. Hu currently serves as the Director and General Manager of Huaxia Kirin (Beijing) Investment Co., Ltd. since May 2010 and previously served as an independent director and strategic consultant to Huaxia Kirin from March 2008 to May 2010. Mr. Hu was the Director and Vice General Manager of Beijing Mainstreets Investment Group Corporation, a real estate development and investment company listed on the Shenzheng Stock Exchange in the PRC, from April 2005 to September 2010. Mr. Hu was the assistant Chairman and Chief Financial Officer of Neo-China Land Group (Holdings) Limited, a real estate development company listed on the Hong Kong Exchange, from October 2003 to December 2004. Prior to joining the Neo-China Land Group, Mr. Hu was the senior project manager at the Investment Banking Headquarter of Haitong Securities Co., Ltd., one of the major investment banks in China, from May 2000 to October 2003. He holds Bachelor and Master Degrees in Economics of Renmin University of China. Mr. Hu is also qualified as a Fellow of Life Management Institute.
XinZheng (Cindy), Chief Financial Officer
Ms. Zheng joined the Company in December 2009. Since September 2010, she has been employed in the Company’s finance department where she has had oversight of the Company’s accounting and financing matters. Prior to that, Ms. Zheng was employed as Marketing Director for both XingtaiZhongdingJiye Real Estate Development Co., Ltd. and HebeiZhongding Real Estate Development Co., Ltd, which through certain contractual arrangements, the Company controls. As Marketing Director, Ms. Zheng’s responsibilities included oversight of the Company’s marketing efforts. From May 2006 to December 2009, Ms. Zheng was employed in the Lighting Division of Philips, a Netherlands based fortune 500 company. Philips has generated approximately $9 billion dollars in revenue in China, where she was responsible for budgeting and financial planning for the northern China operations of Philip’s lighting division. From April 2004 to May 2006, Ms. Zheng was employed by Mercer Consulting in China where she engaged in management consulting and financial modeling for a variety of companies, including state and privately owned business. Ms. Zheng graduated from University of Bradford in the United Kingdom in February 2004 with a Master Degree in Finance Management.
Director Qualifications
Below is a summary of the qualifications, attributes, skills and experience of each of our directors that led us to the conclusion that such director should serve as a director of our Company, in light of our business and structure.
Mr. Jianfeng Guo
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Leadership and Management experience - Mr. Guo has been the Chairman of Xingtai Zhongding and Hebei Zhongding since August 2008 and April 2006, respectively, and, since December 2004, has also served as the Chairman of the Board of Directors of Huaxia Kirin (Beijing) Investment Co., Ltd.
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Industry experience - Mr. Guo has more than twenty years of experience in real estate development operations.
Mr. Longlin Hu
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Leadership and Management experience - Mr. Hu has been the Director and General Manager of Huaxia Kirin (Beijing) Investment Co., Ltd. since May 2010 and previously served as a director and Vice General Manager of Beijing Mainstreets Investment Group Corporation from April 2005 to September 2010.
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Industry experience - Mr. Hu has more than seven years of experience in real estate development operations.
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Education - Mr. Hu holds Bachelor and Master Degrees in Economics.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Family Relationships
There are no family relationships between any of our directors or executive officers and any other directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
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been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
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had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
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been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
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been found by a court of competent jurisdiction in a civil action or by the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
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been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
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been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
Code of Ethics
Due to the limited number of persons involved in the management of the Company, we have not adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions.
Corporate Governance
The business and affairs of the company are managed under the direction of our board. In addition to the contact information in this annual report, each stockholder will be given specific information on how he/she can direct communications to the officers and directors of the corporation at our annual stockholders meetings. All communications from stockholders are relayed to the members of the board of directors.
Board Committees
We have not formed an Audit Committee, Compensation Committee, or Nominating and Corporate Governance Committee as of this Report. Our Board of Directors performs the principal functions of an Audit Committee. We currently do not have an audit committee financial expert serving on our Board of Directors.
Role in Risk Oversight
Our board of directors is primarily responsible for overseeing our risk management processes. The board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The board of directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our company are consistent with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company does not have a class of securities registered under the Exchange Act and therefore its directors, executive officers, and any persons holding more than ten percent of the Company’s common stock are not required to comply with Section 16 of the Exchange Act.
Item 11.
Item 11.
Executive Compensation.
Summary Compensation Table
The following table sets forth information regarding each element of compensation that we paid or awarded to our executive officers for fiscal 2013 and 2012.
Employment Agreements
We currently do not have employment agreement with any of our directors and executive officers.
Option Grants
We had no outstanding equity awards as of the end of fiscal 2013.
Option Exercises and Fiscal Year-End Option Value Table
There were no stock options exercised during fiscal 2013 by the executive officers.
Long-Term Incentive Plans and Awards
There were no awards made to a named executive officer in fiscal 2013 under any long-term incentive plan.
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
We have no other employment agreements with any of our executive officers.
Directors’ Compensation
Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors.
On March 1, 2011, Mr. Jianfeng Guo was appointed as a member of the Board of Directors in connection with our reverse acquisition of Kirin China. In fiscal 2013, Kirin paid a salary of $150,000 to Mr. Guo as a director. In fiscal 2014, we will pay a salary of $150,000 to Mr. Guo as a director. Mr. Longlin Hu has not received compensation for serving as a director of the Company.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information regarding our shares of common stock beneficially owned as of March 19, 2014, for (i) each stockholder known to be the beneficial owner of 5% or more of the Company’s outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of March 19, 2014. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of March 19, 2014 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.
Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, at the address of: Room 1506, South Building of China Overseas Plaza, No. 8 Guanghua Dongli Road, Chaoyang District, Beijing, 100020.
(1) Ms. Mu owns all of the capital stock of Solid Wise, which owns 1,746,000 shares of the Company’s common stock. Mr. Mu may be deemed to be the beneficial owner of the shares of our common stock held by Solid Wise.
(2) Ms. Guo owns all of the capital stock of Prolific Lion, which owns 13,975,348 shares of the Company’s common stock. Mr. Guo may be deemed to be the beneficial owner of the shares of our common stock held by Prolific Lion.
(3) Ms. Hu owns all of the capital stock of Valiant Power, which owns 1,746,000 shares of the Company’s common stock. Mr. Hu may be deemed to be the beneficial owner of the shares of our common stock held by Valiant Power.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
The following includes a summary of transactions since the beginning of fiscal 2012, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds $120,000 and in which any related person had or will have a direct or indirect material interest (other than compensation described in Item 11 of this Report). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
(1) Loan to a related party
In August 2013, Kirin entered into a loan agreement with Huaxia Huifeng Ventures Capital Management (Beijing) Co., Ltd. (“Huaxia Huifeng”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to Huaxia Huifeng for $35,953,000 (RMB 221,160,000). On October 15, 2013, the Company signed a supplement loan agreement in amount of $27,636,000 (RMB 170,000,000) which bears 18% interest rate and has a term of one year. As of December 31, 2013, the outstanding balance of the loan was $33,204,995 (RMB 196,560,000 and RMB 6,455,342 for interest income).
(2) Government grant escrowed by Business Investment
In 2008, Xingtai Zhongding, was entitled to a government grant associated with its development of Kirin County project of RMB160, 000,000 ($22,981,000, translated at historical exchange rate). Cash representing the grant has been remitted to Business Investment, a trust equity owner of Xingtai Zhongding in June 2008. Business Investment originally acquired the land use rights of Kirin County project, and contributed the land use rights to Xingtai Zhongding as paid-in capital to develop the project. Based on the arrangement between Business Investment and Xingtai Zhongding, which has been sanctioned by local government, the benefit of the government grant is to be transferred from Business Investment to Xingtai Zhongding. Specifically, Business Investment acts as an escrow agent but also is nominally responsible for Xingtai Zhongding’s progress. Earned portions of the government grant become available to Xingtai Zhongding based on percentage of completion.
For the years ended December 31, 2012, 2011, 2010 and 2009, Xingtai Zhongding was entitled to receive RMB 2,800,000, RMB 43,000,000, RMB 63,000,000, and RMB 51,200,000, respectively ($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at respective years’ historical rates) earned government grant from Business Investment, representing total amount of the government grant. The Company has the right to determine how to utilize the earned government grant. At December 31, 2012 and December 31, 2013, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($25,332,088 and $26,169,447, translated at respective historical rates) was used to repay working capital provided by Jianfeng Guo for the support of other real estate projects’ development. At December 31, 2013, the Company had a remaining $4,247,788 earned government grant available for future drawdown after repaid working capital provided by Jianfeng Guo, which is included in “Receivable from a related party” in 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. Xingtai Zhongding 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 consolidated balance sheets.
(4) Short term loan to related party
As of December 31, 2013, the ending balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these are all wired to five related companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies are ultimately controlled by JianfengGuo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin.
On December 30, 2013, Hebei Zhongding entered into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing Cathay Kirin Assets Management Company and Beijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000. On December 30, 2013, Business Service entered into loan agreements with Beijing Cathay Kirin Hospitality Management Company, and Cathay Brother (Beijing) Investment Management Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000, respectively. The maturity date of the loan agreements is January 2, 2014.
Director Independence
Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
●
the director is, or at any time during the past three years was, an employee of the company;
●
the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
●
a family member of the director is, or at any time during the past three years was, an executive officer of the company;
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the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
●
the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.
Mr. Guo is not considered independent because he received compensation from Kirin China for $150,000 in fiscal 2013. Mr. Hu is not considered independent because he is an executive officer of the Company. Mr. Liu is considered independent in light of the NASDAQ Listing Rule 5605(a)(2) and the standards established by the Commission.
We have not formed an Audit Committee, Compensation Committee, or Nominating and Corporate Governance Committee.
Item 14.
Item 14.
Principal Accounting Fees and Services.
Audit Fees
For the Company’s fiscal years ended December 31, 2013 and December 31, 2012, we were billed approximately $162,500 and $167,500, respectively, for professional services rendered for the audit and reviews of our financial statements.
Audit Related Fees
The Company did not incur any audit related fees, other than the fees discussed in Audit Fees, above, for services related to our audit for the fiscal years ended December 31, 2013 and December 31, 2012.
Tax Fees
For the Company’s fiscal years ended December 31, 2013 and December 31, 2012, we were billed approximately $5,750 and $5,000, respectively, for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2013 and December 31, 2012.
Pre-Approval of Services
We do not have an audit committee. As a result, our Board of Directors performs the duties of an audit committee. Our Board of Directors evaluates and approves in advance the scope and cost of the engagement of an auditor before the auditor renders the audit and non-audit services. We do not rely on pre-approval policies and procedures.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this report:
(1)
Financial Statements:
The audited balance sheet of the Company as of December 31, 2013 and December 31, 2012, the related condensed statements of operations, changes in stockholders’ deficiency and cash flows for the years then ended, the footnotes thereto, and the report of Marcum Bernstein &Pinchuk LLP, independent auditors, are filed herewith.
(2)
Financial Schedules:
None
Financial statement schedules have been omitted because they are either not applicable or the required information is included in the financial statements or notes hereto.
(3)
Exhibits:
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report.
(b) The following are exhibits to this Report and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included.
Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
●
may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;
●
may apply standards of materiality that differ from those of a reasonable investor; and
●
were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ JianfengGuo
Chairman of the Board of Directors
April 15, 2014
JianfengGuo
/s/ Longlin Hu
President, Chief Executive Officer
and Director
April 15, 2014
Longlin Hu
(Principal Executive Officer)
/s/ XinZheng
Chief Financial Officer
April 15, 2014
XinZheng
(Principal Financial and
Accounting Officer)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by
Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
The registrant has not sent to its stockholders an annual report to security holders covering the registrant’s last fiscal year or any proxy statement, form of proxy or other proxy soliciting material with respect to any annual or other meeting of security holders.
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 AND 2012
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Kirin International Holding, Inc.
We have audited the accompanying consolidated balance sheets of Kirin International Holding, Inc. and its subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Kirin International Holding, Inc. and its subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum Bernstein & Pinchuk LLP
New York, New York
April 15, 2014
NEW YORK OFFICE • 7 Penn Plaza • Suite 830 • New York, New York
10001 • Phone 646.442.4845 • Fax 646.349.5200 • marcumbp.com
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
See notes to the consolidated financial statements
Certain of the assets of the VIEs can be used only to settle obligations of the consolidated VIEs. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 3).
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
See notes to the consolidated financial statements
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
See notes to the consolidated financial statements
KIRIN INTERNATIONAL HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to the consolidated financial statements
KIRIN INTERNATIONAL HOLDING, INC.
NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS
Note 1 - Organization and Description of Business
Kirin International Holding, Inc. (the “Company”, formerly known as Ciglarette, Inc.) 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 December 31, 2013, the Company had following wholly-owned entities:
The Company was a development stage company and had not generated significant revenue since its inception to March 1, 2011 (the “Closing Date”. See below.).
Kirin China was principally owned and controlled by Jianfeng Guo for the period from its incorporation to the Closing Date.
Pursuant to trust agreements entered into between Jianfeng Guo and each of the stockholders of Hebei Zhongding and Xingtai Zhongding, Jianfeng Guo is deemed to be the beneficiary owner of all the shares of Hebei Zhongding and Xingtai Zhongding.
On December 22, 2010, a series of contractual arrangements (the “VIE Agreements”) were entered between Kirin Management, a wholly-owned subsidiary of Kirin China, and each of Hebei Zhongding and Xingtai Zhongding (Hebei Zhongding and Xingtai Zhongding are collectively referred to as the “Operating Companies”) and their then respective trust 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. VIE Agreements are described in details in Note 3.
On the Closing Date, the Company entered into a Share Exchange Agreement by and among (i) the Company, (ii) the Company’s then principal stockholder Lisan Rahman, (iii) Kirin China, and (iv) the former shareholders of Kirin China, pursuant to which the former shareholders of Kirin China transferred to the Company all of their shares of Kirin China in exchange for the issuance of 18,547,297 shares of the Company’s common stock, which represented 98.4% of the Company’s total shares outstanding immediately following the closing of the transaction (such transaction, the “Share Exchange”). As a result of the Share Exchange, Kirin China became the Company’s wholly-owned subsidiary. Prior to the Share Exchange, the Company also cancelled in aggregate 5,594,297 shares of its common stock held by the Company’s prior stockholders through a spin-out of substantially all of its assets and all of its debts and other liabilities to former principal stockholder, Lisan Rahman, and in exchange for a consideration of $50,000 paid by Kirin China.
On the Closing Date and immediately following the Share Exchange, and on July 15, 2011, the Company completed an initial and the second closing of a private offering (the “Offering”) of investment units (each a “Unit” and collectively, the “Units”) each consisting of 4 shares of common stock, a three-year series A warrant to purchase 1 share of common stock of the Company at an exercise price of $6.25 per share (the “Series A Warrants”) and a three-year Series B warrant to purchase 1 share of common stock of the Company at an exercise price of $7.50 per share (the “Series B Warrants” and collectively with the Series A Warrants, the “Investor Warrants”). An aggregate of 169,004 Units were sold in the Offering for gross proceeds to the Company of $3,380,080. The Company received $2,331,656 net proceeds from the Offering after deducting related issuance costs.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company have been prepared in conformity with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). The consolidated balance sheets as of December 31, 2013 and 2012, and the consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the two-year period ended December 31, 2013 include those of the Company, its subsidiaries and VIEs, and subsidiaries of VIEs. All material intercompany transactions and balances have been eliminated in consolidation.
The 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.
The Share Exchange described in Note 1 is treated as recapitalization of the Company. As such, Kirin China is the continuing entity for financial reporting purposes. In a reverse acquisition the historical shareholders’ equity of the accounting acquirer prior to the merger is retroactively reclassified (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any difference in par value of the registrant’s and the accounting acquirer’s stock by an offset in paid in capital. Therefore, the consolidated financial statements have been prepared as if Kirin China had always been the reporting company and then on the reverse acquisition date, had changed its name and reorganized its capital stock.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include percentage-of-completion of properties under construction and related revenue and costs recognized, allowance for doubtful accounts, recoverability of deferred tax assets, and the assessment of impairment of long-lived assets. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
Fair Value of Financial Instruments
The Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC Subtopic 820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
ASC Subtopic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
●
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
●
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
●
Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Reporting Currency and Foreign Currency Translation
The functional currency of the Company, Kirin China, Kirin Development and Kirin Management is the United States dollar (“US$”). The functional currency of the Company’s VIEs and subsidiaries of VIEs in the PRC is Renminbi (“RMB”). The Company’s reporting currency is US$. The assets and liabilities of the Company’s VIEs and subsidiaries of VIEs in China are translated at the exchange rate on the balance sheet dates, stockholders’ equity is translated at the historical rates and the revenues and expenses are translated at the weighted average exchange rates for the periods. The resulting translation adjustments are reported under accumulated other comprehensive income in the consolidated statements of income and comprehensive income in accordance with ASC 220, Comprehensive Income.
Since July 2005, the RMB is no longer pegged to the US$. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the US$ in the medium-to-long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. PRC exchange control regulations may also restrict the Company’s ability to convert RMB into foreign currencies.
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 of 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.
The Company adopts the percentage-of-completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than twelve months at that date.
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 transaction are recognized in the period in which the transaction occurs.
Except for the down payment, remaining contract price can be settled by several installments or financed by mortgage. The Company requires customers to pay 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 can be approved. The Company provides guarantees for mortgage loans from financial institutions to customers (see “Restricted cash”). Such guarantees expire when customers have obtained House Ownership Certificate of 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 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 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 constitutes only an insignificant amount compared to the contract value. These adjustments to contract price are recorded as reduction of revenue in the current period on a cumulative catch-up basis.
With regard to a project’s cost estimate, the Company’s in-house cost estimating staffs, work in collaboration with a committee also 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 quantitate consumption and on-going rate of materials, labor, machinery and overheads. For the purpose of preparing the Company’s consolidated financial statements, a project’s cost estimate is reviewed by in-house cost estimators at each year-end and adjusted for material developments in the interval. Changes in estimates of a project’s revenue and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a project’s percentage of completion. When a project’s total cost estimate to be incurred exceeds total estimated revenue to be earned, a provision for the entire loss on the project is recorded in the period the loss is determined. In addition to our existing monthly detailed cost estimate upon receiving construction data from the architects, we have hired additional competent professionals to ensure early identification of variances from prior estimated project revenue and cost, to reduce the likelihood of significant changes to the estimates.
Real Estate Capitalization and Cost Allocation
Properties under development or completed 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 grant related to real estate projects developed by the Company are recognized as other income when the Company has complied with the conditions attached to the grant and the grant’s collection is reasonably assured.
In 2008, Xingtai Zhongding was entitled to a government grant of approximately $25,138,655 related to Kirin County project to subsidize the modernization of the neighborhood where the real estate project 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 years ended December 31, 2013 and 2012, the Company recognized approximately $nil and $443,000 grant income, respectively. All government grant related to Kirin County has been recognized as of December 31, 2012 as the construction of Kirin County completed during the year. The local government has arranged a lump sum payment of the grant to Xingtai Jiye Business Investment Co., Ltd. (“Business Investment”), a related party of the Company, prior to the grant’s conditions being met out of financial consideration because it lacked managing staff and concerned that the funds would be re-assigned or invalidated without an immediate recipient. Pursuant to the arrangement, Business Investment provides this grant money to Xingtai Zhongding in proportion to the percentage of the project completed as a measure to ensure that the project satisfies the grant’s guidelines. The grant does not have refund conditions and the Company believes government will not revoke the grant or claw back cash remitted to the escrow account unless the construction and sale of Kirin County project is cancelled by the Company. As at December 31, 2013, the Company didn’t receive any request from government demanding revocation and/or partial refund of the grant previously given, and the Company expects no development relating to the Kirin County project will cause government to request the grant’s refund in next twelve months.
Capitalization of Interest
In accordance with ASC 360, Property, Plant and Equipment, interest incurred during construction is capitalized to properties under development. For the years ended December 31, 2013 and 2012, $326,259 and $633,302 were capitalized as properties under development, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains 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 are 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 $ 8,362,905 and $6,924,572 as at December 31, 2013 and 2012, 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.
Investment at Cost
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 $206,512 as dividend for the year ended December 31, 2013.
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:
Income Taxes
The Company follows ASC 740, Income Taxes, which require the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, 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.
Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and it prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosures and transitions.
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 borrowings 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.
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 components of comprehensive income during the year ended December 31, 2013 and 2012 were net income and 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, to issue common stock were exercised and converted into common stock. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.
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 years ended December 31, 2013 and 2012, the Company recorded an advertising expense of $3,426,229 and $ 1,438,576, respectively.
Property Warranty
The Company provides customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts. The warranty period varies from two to five years, depending on different property components the warranty covers.
The Company constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company withholds up to 5% of the contract total payment from contractors for periods of two to five years. These amounts are included in liabilities, and are only paid to the extent that there have been no warranty claims against the Company relating to the work performed or materials supplied by the contractors. As at December 31, 2013 and 2012, the Company retained $140,661 and $205,823 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 years ended December 31, 2013 and 2012, 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 years ended December 31, 2013 and 2012.
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 February 2013, the Financial Accounting Standards Board ("FASB") issued amendments under ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (Topic 220). The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.
In April 2013, The FASB issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In July 2013, The FASB issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists at the reporting date. The amendments in this Update do not require new recurring disclosures. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
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.
The VIE Agreements are summarized below:
Entrusted Management Agreement
Pursuant to the Entrusted Management Agreement between Kirin Management, the Hebei Zhongding Real Estate Development Corporation Limited and Xingtai ZhongdingJiye Real Estate Development Company Limited (the “Operating Companies”) and the shareholders of the Operating Companies, the Operating Companies and their shareholders agreed to entrust the business operations of the Operating Companies and its management to Kirin Management until Kirin Management acquires all of the assets or equity of the Operating Companies. Kirin Management has the full and exclusive right to manage and control all cash flow and assets of the Operating Companies and to control and administrate the financial affairs and daily operation of the Operating Companies. In exchange, Kirin Management is entitled to the Operating Companies’ earnings before tax as a management fee which depends on the before-tax profit of the Operating Companies and does not have a minimum requirement. No management fee has been paid to date. Kirin Management is also obligated to pay all of the Operating Companies’ debts to the extent the Operating Companies are unable to pay such debts. Specifically, if the Operating Companies do not have sufficient cash to repay their debts when they become due and are unable to obtain any extension of, or borrow new loans to repay, such debts, Kirin Management will be responsible for paying those debts on behalf of the Operating Companies to the extent that the Operating Companies are unable to pay such debts. Likewise, if the Operating Companies’ net assets are lower than their registered capital, Kirin Management will be responsible for funding the deficit. The Entrusted Management Agreement does not specify how Kirin Management and the Operating Companies will determine Operating Company debt and the respective Operating Companies’ ability to pay that debt. There is no existing written or oral arrangement or agreement regarding any aspect of the calculation or payment of the debts of the Operating Companies except the Entrusted Management Agreement. Due to the lack of binding guidance as to such matters, there may be ambiguity in the future regarding Kirin Management’s responsibility to pay the debt obligations of the Operating Companies. To date, Kirin Management has not paid any of the Operating Companies’ respective debts. There is no renewing clause in the Entrusted Management Agreement. Unless otherwise specified or legally prohibited, any newly signed agreement shall be deemed as a new and independent agreement. The term of the Entrusted Management Agreement shall be from the effective date of it to the earlier of the following: (1) the winding up of the Operating Companies, or (2) the date on which Kirin Management completes the acquisition of the Operating Companies. Pursuant to the Entrusted Management Agreement, the Operating Companies and their shareholders have the obligation to not terminate this Agreement unilaterally for any reason whatsoever.
Shareholders’ Voting Proxy Agreement
Pursuant to the Shareholders’ Voting Proxy Agreement between Kirin Management and the shareholders of the Operating Companies, the Operating Companies’ shareholders irrevocably and exclusively appointed the board of directors of Kirin Management as their proxy to vote on all matters that require the approval of the Operating Companies shareholders. Mr. Guo is the sole member of the board of directors of Kirin Management. There is no renewing clause in the Shareholders’ Voting Proxy Agreement. Unless otherwise specified or legally prohibited, any newly signed agreement shall be deemed as a new and independent agreement. Pursuant to the Shareholders’ Voting Proxy Agreement, it shall become effective upon the execution by Kirin Management and the shareholders of the Operating Companies and shall not be terminated prior to the completion of acquisition of all of the shares in, or all assets or business of, the Operating Companies by Kirin Management.
Exclusive Option Agreement
Under the Exclusive Option Agreement between Kirin Management, the Operating Companies and the shareholders of the Operating Companies, the Operating Companies’ shareholders granted to Kirin Management an irrevocable exclusive purchase option to purchase all or part of the shares or assets of the Operating Companies to the extent that such purchase does not violate any PRC law or regulations then in effect. If Kirin Management exercises its option, Kirin Management and the Operating Companies’ shareholders shall enter into further agreements regarding the exercise of the option, including the exercise price, which such additional agreements shall take into consideration factors such as the then applicable PRC laws and the then appraisal value of the Operating Companies. The exercise price shall be refunded to Kirin Management or the Operating Companies at no consideration in a manner decided by Kirin Management, in its reasonable discretion. Since Kirin Management controls and receives the economic benefits of the Operating Companies through the Contractual Arrangements, exercising the option at this point will not result in any immediate additional benefit to the Company. Kirin Management will exercise the option when the Company believes that exercising the option would be more beneficial to it. The Exclusive Option Agreement was set up in this manner as currently foreign invested real estate enterprises are strictly controlled and heavily regulated by the PRC authorities. The Company thinks it will be subject to complex procedural requirements if it attempts to obtain approval for the acquisition of share equity or assets of the Operating Companies under the current PRC regulations. There is no renewing clause in the Exclusive Option Agreement. Unless otherwise specified or legally prohibited, any newly signed agreement shall be deemed as a new and independent agreement. Pursuant to the Exclusive Option Agreement, it shall be effective upon the execution by Kirin Management, the Operating Companies and the shareholders of the Operating Companies, and shall remain effective thereafter; the Exclusive Option Agreement may not be terminated without the unanimous consent of Kirin Management, the Operating Companies and the shareholders of the Operating Companies, except that Kirin Management may, by giving thirty days prior notice to the Operating Companies and the shareholders of the Operating Companies, terminate it.
These agreements are governed by the PRC laws and regulations. PRC laws and regulations concerning the validity of the VIE Agreements are uncertain, as many of these laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement by the PRC government may involve substantial uncertainty. Further, these VIE Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration proceedings pursuant to PRC laws. If Hebei Zhongding or Xingtai Zhongding or their respective stockholders fail to perform their obligations under the VIE Agreements, the Company may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, and there is a risk that the Company may be unable to obtain these remedies. Therefore the VIE Agreements may not be as effective in providing control over Hebei Zhongding and Xingtai Zhongding as direct ownership. Because the Company relies on Hebei Zhongding and Xingtai Zhongding for revenue, any termination of or disruption to these VIE Agreements could detrimentally affect the business of the Company.
The Company’s revenues are earned by Kirin Management. However, PRC regulations restrict the ability of the PRC subsidiary to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividend by the PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Kirin Management is also required under PRC laws and regulations to allocate at least 10% of the annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in such fund reaches 50% of its registered capital. Kirin Management cannot distribute the profits or pay dividends out of China before it sets aside such statutory fund unless the amounts in such fund reaches 50% of its registered capital. Kirin Management has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Although the statutory reserves can be used to, among other things, increase the registered capital and eliminate future losses in excess of retained earnings of Kirin Management, these reserves are not distributable as cash dividends. These statutory reserves may only be applied to the development of Kirin Management; consequently funds distributable up the corporate structure made available by Kirin Management may be limited. Kirin Management have the discretion to allocate a portion of their after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Since the statutory reserves and the staff welfare and bonus funds cannot be distributed to the shareholder except in the event of liquidation, allocation of the statutory reserves and the staff welfare and bonus funds will limit the funds available to Kirin Management that are distributable up the corporate chain.
In addition, the PRC Income Tax Law also imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprise without any establishment or place within China or if the received dividends have no connection with such foreign investors’ establishment or place within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Summary information regarding consolidated VIEs is as follows:
Certain of the assets of the VIEs can be used only to settle obligations of the consolidated VIEs. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.
For the years ended December 31, 2013 and 2012, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes sales of approximately $178,200,000 and $67,290,000, respectively, cost of sales of approximately $151,400,000 and $93,930,000, respectively, operating expenses of approximately $14,000,000 and $10,826,000, respectively, and net income of approximately $1,500,000 and net loss $27,982,000, respectively.
Note 4 - Accounts Receivable
Accounts receivable consists of balances due from completed properties in accordance with full accrual method, under which the Company recognizes related revenue after customers have made sufficient down payment.
As at December 31, 2013, accounts receivable include revenue in excess of billings balances of Kirin County project as the construction is completed and related condominium units are available for delivery to customers.
Receivables from sales of condominium units are collateralized by underlying properties’ Ownership Certificates and bear no interest. Receivables from sales of land use rights are uncollateralized and bear no interest.
Note 5 - Notes Receivable
The Bank acceptance notes amount to RMB 5,000,000 (or approximately $817,800) are within six months and due on June 19, 2014. The Company endorsed all the Bank acceptance notes to its supplier in January, 2014.
The Promissory note with original principle amount of $600,000 will be due on August 16, 2016, at the rate of 3% per annum.
Note 6 - Revenue in Excess of Billings
Revenue in excess of billings represents the amount revenue recognized for certain residential and commercial units in Kirin County project 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.
Note 7 - Prepayments
Prepayments consisted of the following:
Pursuant to financing service contracts entered into between the Company, Xingtai Chengjiao Rural Credit Cooperative Union Association, and Industrial and Commercial Bank of China, Xingtai Branch, the Company paid service fees for the origination of several long-term loans before they were released to the Company. The financing service fees are regarded as prepaid loan interest and amortized over the respective terms of the loans.
Business tax and LAT are payable each year at 5% and 1% - 2% of customer deposits received. The Company recognizes sales-related business tax and LAT in the income statement to the extent that they are proportionate to the revenue recognized each period. Any excessive amounts of business and LAT liabilities recognized at period-end pursuant to tax laws and regulations over the amounts recognized in the income statement are capitalized in prepayments and will be expensed in subsequent periods.
The prepayment to related party is regarding to construction contract. In certain area, the related parties have more bargain power with the construction contractors. The construction contractors will provide construction service.
Note 8 - Other Receivables
The components of other receivables were as follows:
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 December 31, 2013 and 2012.
Note 9 - Real Estate Properties and Land Lots under Development
The components of real estate properties and land lots under development were as follows:
As at December 31, 2013, 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 16).
The Residential buildings of Kirin Country are fully completed in December, 2012. As of December 31, 2013 and December 31, 2012, the real estate property completed is $1,427,910 and $6,958,177 separately
Kong Village Relocation Program
Pursuant to incentive policies issued by Xingtai local government encouraging modernization of villages situated in urban vicinity, the Company participated in Kong Village Relocation Program in which the Company constructs a real property and transfers to local government at no costs, and reimburses costs incurred by local government compensating villagers and zoning and developing vacated land lots. In exchange for the financing, the Company will be invited to bid for vacated land parcels for residential and commercial use at public auction at market price, and majority of the proceeds received by local government will be refunded to the Company. The Company capitalizes all expenditures attributable to Kong Village Relocation Program under land lots under development. The Company expects to secure land use rights through the auditions and will use acquired land use rights for the development of Kirin Bay and other project. In July 2011 the Company obtained the certificate of land use rights for a piece of land covered by the program through the aforementioned public auction, and used it for the development of Kirin Bay project. Other land lots covered by the program are expected to be auctioned and obtained by the Company in the near future. As at December 31, 2013 and 2012, 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 $55,559,989 and $46,796,223, respectively.
Note 10 - Investment at Cost
Investment at cost represents the Company’s equity interest in Hebei Xingtai Rural Commercial Bank Co., Ltd. (“Xingtai RC Bank”), a private financial institution. In June 2011, the Company agreed to become a stockholder of Xingtai RC Bank and paid RMB 20,000,000, or approximately $3,142,000 to subscribe to 16,000,000 shares, or 6.96%, of the common stock of the financial institution. The establishment of Xingtai RC Bank is based on restructured business of Xingtai Chengjiao Rural Credit Cooperative Union Association. On December 12, 2012, Xingtai RC Bank obtained required approvals from China banking regulatory agencies and completed all registration procedures.
The Xingtai Rural Commercial Bank increased paid in capital from RMB 240,000,000, or approximately $38,207,000 to RMB 500,000,000, or approximately $79,598,000 on April 26, 2013. The Company paid approximately RMB 24,000,000, or approximately $3,841,000 to keep its stockholder position.
As of December 31, 2013 and 2012, the balance of long term investment for Xingtai Rural Commercial Bank was $7,196,598 and $ 3,166,511, the company had 31,000,000 shares and 16,000,000 shares, or 5.25% and 6.96%, of the common stock of the financial institution in the year ended December 31, 2013 and 2012.
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. The Company determined that there was no impairment on this investment during year ended December 31, 2013.
As of December 31, 2013 and 2012, the Company has deposit balances (including restricted cash) of $6,672,000 and $18,697,000 in Xingtai RC Bank, respectively.
In November 2013, the company invested $700,000 to Hopkins Kirin Facilities Group, LLC to obtain 22.5% share.
The Company used the equity method of accounting to record its investment in Hopkins Kirin Facilities Group, LLC, since the Company has the ability to exercise significant influence over the operating and financing activities of Hopkins Kirin Facilities Group, LLC. The Company determined that there was no impairment on these investments during year ended December 31, 2013. There is no transaction in 2013 for Hopkins Kirin Facilities Group, LLC. The Company didn’t obtain investment income from Hopkins Kirin Facilities Group, LLC.
As of December 31, 2013 and 2012, the ending balance in investment was $7,929,422 and 3,166,511.
Note 11 - Accounts Payable
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 at December 31, 2013, payable to Huada Mining Co., Ltd. was $1,273,367. 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 to compensate additional costs incurred by Kong Village Committee for the Kong Village Relocation Program. At December 31, 2013, unpaid balance plus accrued interest was $2,453,386. The Company capitalized the additional consideration in the costs land lots under development.
Note 12 - Other Payables and Accrued Liabilities
The components of other payables and accrued liabilities were as follows:
Note 13 - Customer Deposits
Customer deposits consist of amounts received from customers relating to the sale of residential and commercial units. In the PRC, customers generally obtain financing for the purchase of their residential unit prior to the completion of the project. The lending institutions will provide the funds to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized. As of December 31, 2013 and 2012, the Company received $87,713,585 and $87,184,895 deposits from customers, respectively.
Note 14 - Income Taxes
(1) Corporate income tax
The Company is incorporated in the State of Nevada in the U.S., and is subject to a progressive U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax. Kirin China is incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, Kirin China is not subject to tax on income or capital gains. In addition, no British Virgin Islands withholding tax is imposed upon payments of dividends by Kirin China. Kirin Development is incorporated in Hong Kong. Kirin Development did not earn any income that was derived in Hong Kong for the period from its date of incorporation to December 31, 2013 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 and Kirin Hopkins Real Estate Group LLC were incorporated in State of California, United States of America and are subject to California taxes.
The Company’s subsidiary and VIEs in China are subject to PRC Enterprise Income Tax (EIT) on taxable income. According to PRC tax laws and regulations, China subsidiary and VIEs are subject to EIT with the tax rate 25% since January 1, 2008, except that deemed profit method is applied to Xingtai Zhongding Construction Project Management Co., Ltd., which local tax authorities levy income tax based on deemed profit of 8% of revenue. A withholding income tax rate of 5% is applied if Kirin Management, the wholly-owned foreign enterprise, distributes dividends to its immediate holding company, Kirin Development. The Company has not recorded tax provision for U.S. tax purposes as they have no assessable profits arising in or derived from the United States and intends to permanently reinvest accumulated earnings in the PRC operations in the foreseeable future.
Income tax expenses for the years ended December 31, 2013 and 2012 are summarized as follows:
A reconciliation between taxes computed at the PRC statutory rate of 25% and the Company’s effective tax rate for the years ended December 31, 2013 and 2012 is as follows:
(2) Liability for unrecognized tax benefit
A reconciliation of the beginning and ending amount of liability associated with unrecognized tax benefit for the years ended December 31, 2013 and 2012 is as follows:
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 December 31, 2013 to be material in the next twelve months.
In accordance with PRC tax administration law and regulations, tax authorities generally have up to five years to claw back underpaid tax plus penalties and interests. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the Company’s PRC subsidiary and VIEs tax years from 2009 to 2013 remains subject to examination by tax authorities.
(3) Deferred tax
The tax effects of temporary differences that give rise to the following approximate deferred tax assets and liabilities as of December 31, 2013 and 2012 are presented below.
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 2014 for No. 79 Courtyard and 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 total deferred tax assets associated with net operating loss carry forward of $2,566,277 as of December 31, 2013 which will expire on various dates between December 31, 2014 and December 31, 2018. The Company provided a valuation allowance of $2,038,062 based on projected future revenue available to utilize net operating loss carried forward. Entities established out of the PRC had total deferred tax assets associated with net operation loss carry forward of $973,964 and a 100% valuation allowance has been provided.
Note 15 - Other Taxes Payable
Other taxes payable consisted of the following:
Note 16 - Loans Payable
Loans payable as of December 31, 2013 and 2012 consisted of the following:
Note (a): These loans were repaid in full when they become mature subsequent to balance sheet date.
ICBC 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2012 are floating rate loans whose rates are set at 10% above 1-to-3 year base borrowing rate stipulated by the People’s Bank of China at the date of each drawdown, and are subject to revision every 12 months. The Company also paid financing service fees for ICBC 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2012. The financing service fees were paid prior to financial institution releasing loans to the Company as prepaid interest, and have been included in the determination of respective loans’ effective interest rates. Credit Union 2013 Short-term Loan was guaranteed by an unrelated company as arranged by the financial institution. The Company did not pay for the guarantee.
As of December 31, 2013 and December 31, 2012, ICBC 2010 Loans, ICBC2012 Loans and Syndicated Loans 2012 were secured by the Company’s real estate held for development with carrying value of approximately $134,340,000 and $87,900,000, respectively.
The aggregate maturities of loans payable for each of years subsequent to December 31, 2013 are as follows:
Note 17- Restricted Stock Compensation
In accordance with the Employment Agreements approved by the Board of the Directors, the Company granted certain employees restricted common stock (“Restricted Stock Awards”). Restricted Stock Awards are issued to the employees in five even installments at the beginning or in the interim of each year of five-year employment period. Shares issued under Restricted Stock Awards in each year of the employment period cannot be disposed of or pledged until they are fully vested, which is the last day of the full service year and the employment is not terminated. Unvested shares maybe reacquired by the Company for no consideration following the employee’s termination of service.
The fair value of the Restricted Stock Awards is based on the market value of the Company’s common stock on the date of grant. Pre-vesting forfeiture is expected to be nil. The Company records compensation costs for the Restricted Stock Awards on a straight-line basis over the employment period for the entire award.
Restricted Stock Awards activity as of and for the year ended December 31, 2013 is as follows:
The Company recognized $nil and $406,000 of share-based compensation expense related to the Restricted Stock Awards for the year ended December 31, 2013 and 2012, respectively.
Note 18 - Revenue
The Company’s revenue is recognized under percentage-of-completion methods for the years ended December 31, 2013 and 2012 from pre-sale of real estate projects. Revenue recognized for each real estate project, including adjustments made pursuant to change of estimates for the years ended December 31, 2013 and 2012 was as follows:
As described in Summary of Significant Accounting Policies - Revenue Recognition, revenue for the year ended December 31, 2013 included certain reversal adjustments as a result of change in respective project’s total revenue and cost estimates.
Note 19 -Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares comprise shares issuable upon the exercise of Series A Warrants, Series B Warrants, Agent Warrants and unvested and unissued Restricted Stock Award, using the treasury stock method.
Series A Warrants, Series B Warrants and Agent Warrants to acquire 392,090 shares of common stock, and unvested and unissued Restricted Stock Award were not included in the computation of diluted EPS because the effect would have been anti-dilutive. Series A Warrants, Series B Warrants and Agent Warrants were still outstanding as of December 31, 2013.
Note 20 - Non-controlling interest
Non-controlling interests represent the non-controlling interest stockholders’ proportionate share of the equity of Brookhollow Lake, LLC and Greenfield International Corporation. The non-controlling interests in 2013 and 2012 are summarized as below:
The non-controlling interests in Brookhollow Lake, LLC, Greenfield International Corporation and Newport Property Holding, LLC that are not owned by the Company are shown as “non-controlling interests” in the consolidated balance sheets as of December 31, 2013 and “net loss attributable to non-controlling interests” in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2013.
Note 21 - Related Party Transactions and Balances
(1) Loan to a related party
In August 2013, Kirin entered into a loan agreement with HuaxiaHuifeng Ventures Capital Management (Beijing) Co., Ltd. (“HuaxiaHuifeng”), a related company ultimately controlled by JianfengGuo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to HuaxiaHuifeng for $35,953,000 (RMB 221,160,000). On October 15, 2013, the company signed a supplement loan agreement in amount of $27,636,000 (RMB 170,000,000) which bears 18% interest rate and has a term of one year. As of December 31, 2013, the outstanding balance of the loan was $33,204,995 (RMB 196,560,000 for original loan and RMB 6,455,342 for interest income).
(2) Government grant escrowed by Business Investment
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 ($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 December 31, 2012 and December 31, 2013, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($25,332,088 and $26,169,447, translated at respective historical rates) was used to repay working capital provided by JianfengGuo for the support of other real estate projects’ development. As at December 31, 2013, the Company had a remaining $4,247,788 earned government grant available for future drawdown after repaid working capital provided by JianfengGuo, which is included in “Receivable from a related party” in consolidated balance sheet.
(3) Working capital provided by JianfengGuo
JianfengGuo, 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 JianfengGuo. 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 JianfengGuo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered into between JianfengGuo, 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 JianfengGuo. Accordingly, the Company is entitled to present netted balance with JianfengGuo on its consolidated balance sheets.
Gross amount of working capital provided by and to affiliate companies and individuals designated by JianfengGuo as at December 31, 2013 and 2012 were as follows:
(4) Short term Loan to related party
As of December 31, 2013, the ending balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these are all wired to five related companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies are ultimately controlled by JianfengGuo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin.
On December 30, 2013, Hebei Zhongding entered into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing Cathay Kirin Assets Management Company and Beijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000. On December 30, 2013, Business Service entered into loan agreements with Beijing Cathay Kirin Hospitality Management Company, and Cathay Brother (Beijing) Investment Management Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000, respectively. The maturity date of the loan agreements is January 2, 2014
(5) Prepayment to related party
Please see Note 7 - Prepayments
Note 22 - Contingencies and Commitments
As at December 31, 2013 and 2012, the Company provided approximately $77,130,000 and $42,885,000 guarantees to mortgage bank loans granted to homebuyers of the Company’s real estate properties. Guarantees commence when the banks release mortgage to the Company and end when House Ownership Certificates are issued and pledged to banks instead. The fair value of the guarantees is insignificant because the possibility of the homebuyers’ default is remote, and in case of default, the Company can repossess the related properties to cover repayments of outstanding principal, interest and penalty to mortgage banks, and accordingly, the Company did not recognize fair value of these guarantees.
Note 23 - Subsequent Events
On January 2, 2014, the company received RMB 74,900,000 short-term loans from related party companies.
On March 25, 2014, Hebei Zhongding received long-term loan of $1,636,000 (RMB 10,000,000) from Industrial and Commercial Bank of China Xingtai Yejin Branch. On April 4, 2014. Hebei Zhongding received long-term loan of $3,271,000 (RMB 20,000,000) from Industrial and Commercial Bank of China Xingtai Yejin Branch. The principal amount of the loan is due on May 30, 2016.