Nine months ended June 30th (using current year exchange rates) | |
2010 | | $ | 34,135 | |
2011 | | | 34,135 | |
2012 | | | 34,135 | |
2013 | | | 34,135 | |
2014 | | | 34,135 | |
Thereafter | | | 204,365 | |
| | $ | 375,040 | |
Risk-free interest rate | 2.60% |
Expected life of the options | 5 years |
Expected volitility | 133% |
Expected dividend yield | 0% |
Total stock-based compensation expense recognized in the accompanying condensed consolidated statement of income for the three and nine month period ended June 30, 2010 and 2009, was $7,716, $30,863 and $-0-, respectively. As of June 30, 2010, there was approximately $46,294 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense when vested.
NOTE 11. TAXES
(A) Business sales tax
The Company is subject to 5% business sales tax on actual revenue. It is the Company’s continuing practice to recognize 5% of the sales tax on estimated revenue, and file tax return based on the actual result, as the local tax authority may exercise broad discretion in applying the tax amount. As a result, the Company’s accrual sales tax may differ from the actual tax clearance.
(B) Corporate income taxes (“CIT”)
The Company is governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are generally subject to income tax at a new statutory rate of 25%, effective January 1, 2008, on income reported in the statutory financial statements after appropriate tax adjustments.
However, as approved by the local tax authority of Hanzhong City, the Company’s CIT was assessed annually at a pre-determined fixed rate as an incentive to stimulate local economy and encourage entrepreneurship. The Company incurred $133,107, $534,583 and $50,329, $195,647 income taxes for the three and nine months ended June 30, 2010 and 2009, respectively.
Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. Management believes that the possibility of any reevaluation of income taxes is remote based on the fact that the Company has obtained the written tax clearance from the local tax authority. Thus, no additional taxes payable has been recorded for the difference between the taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the fixed rate method. It is the Company’s policy that if such reevaluation of income taxes becomes probable and the amount of additional taxes due can be reason ably estimated, additional taxes shall be recorded in the period which the amount can be reasonably estimated.
(C) LAT (Land Appreciation Tax)
Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, the Company’s local tax authority in Hanzhong city has not imposed the regulation on real estate companies in its area of administration. Instead, , the local tax authority has levied the LAT at the rate of 0.8% or 1.0% against total cash receipts from sales of real estate properties, rather than according to the progressive rates.
As of June 30, 2010 and September 30, 2009, the Company has made full payment for LAT with respect to properties sold in accordance with the requirements of the local tax authorities.
(D) Tax payables consisted of the following:
| | Balance as of | |
| | June 30, 2010 (Unaudited) | | | September 30, 2009 | |
CIT | | $ | 139,930 | | | $ | - | |
Business sales tax | | | 2,271,790 | | | | 1,106,713 | |
Other taxes and fees | | | 704,908 | | | | 273,981 | |
| | | | | | | | |
Total taxes payable | | $ | 3,116,628 | | | $ | 1,380,694 | |
NOTE 12. STOCKHOLDERS’ EQUITY
Surplus reserves
The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve is required to be at least 10% of after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors.
The statutory surplus reserve fund is non-discretionary other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered capital before the conversion. Pursuant to the Company’s articles of incorporation, the Company has appropriated 10% of its net profits as statutory surplus reserve.
The discretionary surplus reserve may be used to acquire fixed assets or to increase working capital. The Company’s Board of Directors decided not to make an appropriation to this reserve for the nine months ended June 30, 2010.
NOTE 13. WEIGHTED AVERAGE NUMBER OF SHARES
In August 2009, the Company entered into a share exchange transaction which was accounted for as a reverse merger under the purchase method of accounting, since there was a change of control. The Company computes the weighted-average number of common shares outstanding in accordance with ASC 805, which states that in calculating the weighted average shares when a reverse merger takes place in the middle of the year, the number of common shares outstanding from the beginning of that period to the acquisition date shall be computed on the basis of the weighted-average number of common shares of the legal acquiree (the accounting acquirer) outstanding during the period multiplied by the exchange ratio established in the merger agreement. The number of common shares outstanding from the acquisition date to the end of that period shall be the actual number of common shares of the legal acquirer (the accounting acquiree) outstanding during that period.
NOTE 14. CONTINGENCY
As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the completion of the registration of the mortgage with the relevant mortgage registration authorities, which generally occurs within six to twelve months after the purchasers take possession of the relevant properties. The mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage default as required by the mortgage lenders. The Company has not experienced any losses related to this guarantee and believes that such reserves are sufficient.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATION
Special Note Regarding Forward Looking Statements
ThisThe following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q, contains “forward-looking”or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. Certain of these statements, including, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company that is based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words “anticipate,“anticipates,” “believe,“believes,” “estimate,“could,” “expect” and “intend”“estimates,” “expects,” “intends,” “may,” “plans,”“should,” “will” an d “would,” and words or phrases of similar import as they relate toand the Company or Company management, are intended to identifynegatives thereof, constitute forward-looking statements. SuchThese statements reflect theare predictions based upon our current risks, uncertainties and assumptions related toexpectations about future events. Actual results could vary materially as a result of certain factors, including without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors,but not limited to, those expressed in these statements. We refer you to the interest rate environment, governmental regulation“Risk Factors,” “Results of Operations,” “Disclosures About Market Risk,” and supervision, seasonality, distribution networks, product introductions“Liquidity and acceptance, technological change, changesCapital Resources” sections contained in industry practices, onetime eventsthis Quarterly Report, and the risks discussed in our other factors described hereinSecurities Exchange Commission, or SEC, filings, which identify important risks and in other filings made by the company with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect,that could cause actual results may varyto differ materially from those described hereincontained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as anticipated, believed, estimated, expected or intended. The Company doesof the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.
Summary Overview of Our Business
Overview
On March 17, 2006, China Agro Sciences Corp., a Florida corporation formerly known as M-GAB Development Corporation entered into an Agreement and Plan of Merger with Dalian Holding Corp., a Florida corporation (formerly known as China Agro Sciences Corp.) ("DHC"). This transaction closed on May 1, 2006, at which time, in accordance with the Agreement, DHC merged with Dalian Acquisition Corp, a Florida corporation that was our wholly-owned subsidiary (“Dalian”) (the “Merger”). As a result of the merger, Dalian merged into DHC, with DHC remaining as the surviving entity and our wholly-owned subsidiary, Dalian, ceased to exist, and we issued 13,449,488 shares of our common stock to the former shareholders of DHC.
After the merger transaction between our subsidiary, Dalian, and DHC,We conduct substantially all of our operationsbusiness through Shaanxi Guangsha Investment and Development Group Co., Ltd., in Hanzhong, Shaanxi Province. All of our businesses are conducted throughin mainland China. We were founded by Mr. Xiaojun Zhu, our subsidiary, DHC,Chairman and Chief Executive Officer and commenced operations in 1995 in Hanzhong, a prefecture-level city of Shaanxi Province. Since the initiation of our business, we have been focused on expanding our business in certain Tier 2 cities in China which conducts allwe strategically selected based on a set of itscriteria. Our selection criteria includes population and urbanization growth rate, general economic condition and growth rate, income and purchasing power of resident consumers, anticipated demand for private residential properties, availability of future land supply and land prices and governmental urban pla nning and development policies. As of June 30, 2010, we have established operations through its subsidiary, Ye Shun,in two Tier 2 cities and its wholly-owned subsidiary, Runze. Therefore, since our relevant operations post merger are conducted through Ye Shunone county in Hanzhong City, Shaanxi Province, comprising of downtown area and Runze the discussion herein relates to the operations of those two entities.
Ye Shun is a Hong Kong registered enterprise that has its ownership in Runze as its primary asset. Runze is a state-appointed pesticide manufacturer in China. Through Runze, we specializewest ring road in the manufacturingcity of various pesticidesHanzhong, city of Weinan, a municipality in Shaanxi Province, and herbicides, particularly the herbicide Acetochlor. However, during the quarterly period ended June 30, 2009,Yang County.
We intend to continue our expansion into additional selected Tier 2 cities and counties as suitable opportunities arise. We will expand to more select targeted Tier 2 cities including cities in Sichuan Province and other Tier 2 cities in Shaanxi Province which we did not sell any product or have any revenues as a result of not being able to utilize DHC’s facilities because of the new regulation regarding all manufacturing plants being in “chemical zones.” Although we hope to be able to manufacture productare surveying for expansion in the near future, we may not be able to do so and would have to undertake a significant expense in building a new manufacturing facility if we decided to continue with our current business plan and manufacture herbicides and pesticides.future.
Results
Our Current Organizational Structure
The following chart reflects our current organizational structure:
Our Markets
We currently operate in three local markets in Shaanxi Province — downtown area of operationsHanzhong, city of Weinan, and Yang county in Hanzhong City.
The following table sets forth our projects and the total Gross Floor Area (“GFA”) in each location indicated as of June 30, 2010:
| | Yangzhou Pearl Garden | | | Mingzhu Qinju | | | Mingzhu Garden | |
Properties under construction | | | 155,618 | | | | 10,619 | | | | 76,962 | |
Properties under planning | | | 25,767 | | | | N/A | | | | N/A | |
Completed projects | | | 137,562 | | | | 31,857 | | | | 28,072 | |
Total number of projects | | | 3 | | | | 2 | | | | 3 | |
Total GFA (square meters) (1) (2) | | | 318,947 | | | | 42,476 | | | | 105,034 | |
(1) Calculated by square meters (1 square meter = 10.7 square feet).
(2) The amounts for ‘‘Total GFA’’ in this table and elsewhere in this statement are the amounts of total saleable residential GFA and are derived on the following basis:
· | for properties that are sold, the stated GFA is based on the sales contracts relating to such property; |
· | for unsold properties that are completed or under construction, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and |
· | for properties that are under planning, the stated GFA is based on the land grant contract and our internal projection. |
We intend to seek attractive opportunities to expand into additional Tier 2 cities and counties. Our selections are based on certain criteria, including economic growth, per capita income, population, urbanization rate as well as availability of suitable land supply and local residential property market conditions.
Suppliers
In China, the supply of land is controlled by the government. Since the early 2000s, the real estate industry in China has been transitioning from an arranged system controlled by the PRC government to a more market-oriented system. At present, although the Chinese government still owns all urban land in China, land use rights with terms up to 70 years can be granted to, and owned or leased by, private individuals and companies. Generally, there are two ways the Company usually applies to acquire land use rights.
In 2005, the Company acquired a land lease from a bankrupt company, Weinan Chemical Company, which covers an area of 80 acres. After the acquisition, the Company started the construction of the Lijing Garden Projects and finished all three projects of the Lijing Garden in June 2008.
In May 2008, the Company successfully acquired a land lease covering 236 acres through bidding on an auction held by the local Land Consolidation and Rehabilitation Center of Yang County. After the acquisition, the Company started the construction of Yangzhou Pearl Garden Projects on the acquired land lease, with a total construction Gross Floor Area of 318,947 square meters. As of June 30, 2010, 43.1% of the projects of Yangzhou Pearl Garden have been completed, 48.8% were still under construction and the remaining 8.1% is under planning and is expected to be completed before December 2011.
In July 2008, the Company acquired the land lease of another bankrupt company, Hanzhong Energy Company, which covers an area of 30 acres in Hanzhong City. After the acquisition, the Company started the construction of Mingzhu Qinju Garden Projects on the acquired land lease, with a total construction Gross Floor Area of 42,476 square meters. As of June 30, 2010, 75% of Mingzhu Qinju Garden was completed and expected to be delivered to buyers in September 2010. The remaining 25% of this project is expected to be completed by the end of June 2011.
In 2009, the Company successfully acquired another land lease covering 180 acres through bidding on an auction held by the local Land Consolidation and Rehabilitation Center of Hanzhong City. After the acquisition, the Company started the construction of Mingzhu Garden Projects (Phase Five) on the acquired land lease, and as of June 30, 2010, 26.7% of the project of Mingzhu Garden (Phase Five) has been completed and the remaining 73.3% of the project is still under construction and is expected to be completed by the end of September, 2011.
All such land transactions are required to be reported to and authorized by the Xi’an Bureau of Land and Natural Resources. As to real estate project design and construction services, the Company typically selects the lowest-cost provider based on quality ensured through an open bidding process. Such service providers are numerous in China and the Company foresees no difficulties in securing alternative sources of services as needed.
Competition
The real estate industry in China is highly competitive. In Tier 2 cities that we focus on the markets are relatively more fragmented than Tier 1 cities. We compete primarily with local and regional property developers and an increasing number of large national property developers who have also started to enter these markets. Competitive factors include the geographical location of the projects, the types of products offered, brand recognition, price, designing and quality. In the regional markets which we operate, our major competitors include Wanbang Real Estate Development Co. Ltd., and other national real estate developers who have also started their projects in the local markets.
Nationally, there are numerous companies that have real estate projects across China. There are 55 housing and land development companies listed on the Shanghai and Shenzhen Stock Exchanges. However, such companies usually undertake large scale projects and are unlikely to compete with Guangsha for business as the Company targets small to medium sized projects in Tier 2 cities and counties.
In the regional market, the Company’s only direct competitor with meaningful market shares in the market is Wanbang Real Estate Development Co. Ltd. This company generally undertakes medium and small scale projects and focuses on development of commercial real estate properties, such as hotels and shopping centers. By the end of December, 2009, Wanbang had developed realty of about 600 acres across Hangzhong City and other counties surrounding. As of March 31, 2010, Wanbang has completed the construction of about 200,000 square meters of commercial properties. Since April 2010 to present, Weibang is undertaking some government supported small projects such as construction of some economic and lower priced residential apartments to target certain lower income customers.
Quality Control
We emphasize quality control to ensure that our buildings and residential units meet our standards and provide high quality service. We select only experienced design and construction companies. We, through our contracts with construction contractors, provide customers with warranties covering the building structure and certain fittings and facilities of our property developments in accordance with the relevant regulations. To ensure construction quality, our construction contracts contain quality warranties and penalty provisions for poor work quality. In the event of delay or poor work quality, the contractor may be required to pay pre-agreed damages under our construction contracts. Our construction contracts do not allow our contractors to subcontract or transfer their contractual arrangements with us to third parties. We typically withhold 2% of the agreed construction fees for two to five years after completion of the construction as a deposit to guarantee quality, which provides us assurance for our contractors’ work quality.
Our contractors are also subject to our quality control procedures, including examination of materials and supplies, on-site inspection and production of progress reports. We require our contractors to comply with relevant PRC laws and regulations, as well as our own standards and specifications. We set up a profile for each and every unit constructed and monitor the quality of such unit throughout its construction period until its delivery. We also employ independent surveyors to supervise the construction progress. In addition, the construction of real estate projects is regularly inspected and supervised by the PRC governmental authorities.
Environmental Matters
As a developer of property in the PRC, we are subject to various environmental laws and regulations set by the PRC national, provincial and municipal governments. These include regulations on air pollution, noise emissions, as well as water and waste discharge. We, as of June 30, 2010, have never paid any penalties associated with the breach of any such laws and regulations. Compliance with existing environmental laws and regulations has not had a material adverse effect on our financial condition and results of operations, and we do not believe it will have such an impact in the future.
Our projects are normally required to undergo an environmental impact assessment by government-appointed third parties, and a report of such assessment needs to be submitted to the relevant environmental authorities in order to obtain their approval before commencing construction.
Upon completion of each project, the relevant environmental authorities inspect the site to ensure the applicable environmental standards have been complied with, and the resulting report is presented together with other specified documents to the relevant construction administration authorities for their approval and record. Approval from the environmental authorities on such report is required before we can deliver our completed work to our customers. As of June 30, 2010, we have not experienced any difficulties in obtaining those approvals for commencement of construction and delivery of completed projects.
Employees
We currently have 87 full-time staff and employees.
Department | | | |
Management | | | 15 | |
Accounting staff | | | 5 | |
Sales and marketing staff | | | 60 | |
Administrative | | | 7 | |
Total | | | 87 | |
Marketing and Distribution Channel
As of June 30, 2010, we maintain a marketing and sales force for our development projects with 60 personnel specializing in marketing and sales. We also train and use outside real estate agents to market and increase the public awareness of our products, and spread the acceptance and influence of our brand. However, we still majorly let our own sales force represent our brand and project rather than rely on third party brokers or agents, for the reason that we believe our own dedicated sales representatives are better motivated to serve our customers and to control our property pricing and selling expenses.
Our marketing and sales teams work closely with each other in order to determine the appropriate advertising and selling plans for a particular project. We develop public awareness through our marketing and advertising efforts and also referrals from our satisfied customers. We utilize our customer relationship management system to track customer profiles to forecast future individual requirements and general demand for our products. This allows us to have real-time information on the status of individual customer transactions and the vacancy of product types for each project, and to anticipate the product preferences of current and future customers. We mainly develop customer awareness through advertising.
As for advertisement, we use various advertising media to market our property developments, including newspapers, magazines, television, radio, e-marketing and outdoor billboards. We also participate in real estate exhibitions to enhance our brand name and promote our property developments.
The majority of our customers purchase our properties using mortgage financing. Under current PRC laws, the minimum down payment is 30% of the total purchase price for the purchase of the first self-use residential unit with total GFA of 90 square meters or more on all existing units and those yet to be completed, and a down payment of 20% on the first residential units for self use with total GFA of under 90 square meters. The loan-to-value of the mortgage loan is also subject to change according to the economic policies of the central and local governments and banks in China of where the applicants apply for the mortgage loan.
A typical sales transaction usually consists of three steps. First, the customer pays a deposit to us. Within seven days after paying the deposit, the customer will sign a purchase contract with us and make down payment to us in cash. After making the down payment, the customer arranges for a mortgage loan for the balance of the purchase price. Once the loan is approved, the mortgage loan proceeds are paid to us directly by the bank. Finally, we deliver the property to the customer. Legal title, as evidenced by a property ownership certificate issued by local land and construction bureaus, will be delivered to the customer in 12 months from the property delivery date.
As is customary in the property industry in China, we provide guarantees to mortgagee banks in respect of the mortgage loans provided to the purchasers of our properties up until completion of the registration of the mortgage with the relevant mortgage registration authorities. Guarantees for mortgages on residential properties are typically discharged when the individual property ownership certificates are issued. In our experience, the issuance of the individual property ownership certificates typically takes six to twelve months, so our mortgage guarantees typically remain outstanding for up to twelve months after we deliver the underlying property.
DISCUSSION OF OPERATING RESULTS
The results of our operation for the three and nine months ended June 30, 2010 compared to the prior comparative periods are as follows:
Three Months Ended June 30, 2009 Compared2010 compared to Three Months Ended June 30, 20082009
ResultsThe following table sets forth key components of Operationsour results of operations for the periods indicated.
| | Three Months Ended June 30, 2009 | | | Three Months Ended June 30, 2008 | |
| | | | | | |
Revenues | | $ | - | | | | - | |
Cost of revenue | | | - | | | | - | |
Gross Profit | | | - | | | | - | |
Total Costs and Expenses | | | 152,599 | | | | 116,638 | |
Net income (loss) | | $ | (152,599 | ) | | $ | (116,638 | ) |
| | Three Months ended June 30, (Unaudited) | |
| | 2010 | | | 2009 | |
| | | | | | |
Real estate sale, net of sales taxes of | | $ | 7,677,121 | | | $ | 341,972 | |
$503,158 and $39,944, respectively | | | | | | | | |
| | | | | | | | |
Cost of real estate sales | | | 4,018,218 | | | | 156,254 | |
| | | | | | | | |
Gross profit | | | 3,658,903 | | | | 185,718 | |
| | | | | | | | |
| | | | | | | | |
Operating expenses | | | | | | | | |
Selling and distribution expenses | | | 40,978 | | | | 85,303 | |
General and administrative expenses | | | 306,113 | | | | 130,182 | |
Total operating expenses | | | 347,091 | | | | 215,485 | |
| | | | | | | | |
Operating income (loss) | | | 3,311,812 | | | | (29,767 | ) |
| | | | | | | | |
Other expenses (income) | | | | | | | | |
Interest expenses | | | 13,968 | | | | 27,253 | |
Interest income | | | | | | | | |
Other expenses income | | | (293 | ) | | | - | |
Total other expenses | | | 13,675 | | | | 27,253 | |
| | | | | | | | |
Income (loss) before income taxes | | | 3,298,137 | | | | (57,020 | ) |
| | | | | | | | |
Provision for income taxes | | | 133,107 | | | | 50,329 | |
| | | | | | | | |
Net income (loss) | | | 3,165,030 | | | | (107,349 | ) |
| | | | | | | | |
Other comprehensive income (loss) | | | | | | | | |
Foreign currency translation adjustment | | | 166,767 | | | | (936 | ) |
| | | | | | | | |
Comprehensive income (loss) | | $ | 3,331,797 | | | $ | (108,285 | ) |
| | | | | | | | |
Basic and diluted income (loss) per common share | | | | | | | | |
Basic | | $ | 0.07 | | | $ | 0.00 | |
Diluted | | $ | 0.07 | | | $ | 0.00 | |
| | | | | | | | |
Weighted average common shares outstanding | | | | | | | | |
Basic | | | 45,050,000 | | | | 39,000,000 | |
Diluted | | | 45,053,400 | | | | 39,000,000 | |
Revenues
Revenues, Cost of Sales and Gross Profit
Revenues
In line with FASB ASC 360-20 “Real Estate Sales”, we recognize revenue from the sale by the full accrual method at the time of the closing of each individual unit sale. This occurs when title to or possession of the property is transferred to the buyer.
The following table summarizes our revenue generated by different projects for the three months ended June 30, 2010 and 2009, respectively:
| | 2010 | | | For the three months ended June 30, | | (Unaudited) 2009 | | | | |
Project | | Revenue | | | Percentage | | Project | | Revenue | | | Percentage | |
Mingzhu | | | | | | | Mingzhu | | | | | | |
Garden | | $ | 1,228,219 | | | | 16.00 | % | Garden | | $ | 341,972 | | | | 100.00 | % |
Hanzhong | | | | | | | | | | | | | | | | | |
Mingpin | | | 1,087,960 | | | | 14.17 | % | | | | | | | | | |
Yangzhou Pearl | | | | | | | | | | | | | | | | | |
Garden | | | 5,360,942 | | | | 69.83 | % | | | ‐ | | | ‐ | |
Total | | $ | 7,677,121 | | | | 100.00 | % | Total | | $ | 341,972 | | | | 100.00 | % |
Our revenues are all derived from our sale of real estate. Real estate sales represent revenues from the sales of properties we developed. Sales tax is a one-time tariff which consists of a business tax at the rate of 5% on actual revenue. Our continuing practice is to recognize the sales tax on estimated revenue, and file tax return based on the actual result, as the local tax authority may exercise broad discretion in applying the tax amount. As a result, our accrual sales tax may differ from the actual tax clearance.
Total sales tax amounted to $503,158 and $39,944 for the three months ended June 30, 2010 and 2009, respectively, representing an increase of 1,159.6% from year to year, mainly because of the large increase of our revenue for the three months ended June 30, 2010 than in prior comparative period. Revenues increased by 2,144.9% to approximately $7.67 million for the three months ended June 30, 2010 from approximately $0.34 million for the three months ended June 30, 2009. The $7.33 million increase was mainly attributable to several reasons, including (1) the Company strengthened its advertising and sales promotion activities during the quarter ended June 30, 2010 than in prior comparative period; (2) the Company’s enhanced brand name and high quality product has won consumers’ confidence and trust; (3) the increase in local residents’ disposal income has stimulated the great market demand for new residential units in China’s Tier 2 and Tier 3 cities, where the Company is competing and focusing; (4) the Company has developed several new projects and sold to a wider variety of customers during the quarter, which has broadened the sales touch point with the buyers and exposed the Company to more sales opportunities. Among these new projects, sales of residential units in Yangzhou Pearl Garden continued to climb as this community became mature. For the three months ended June 30, 2010, total of 189 units of residential apartments, commercial shop-fronts as well as car parks from Yangzhou Pearl Garden were sold, generating 69.83% of the total revenue for the quarter ended June 30, 2010. In addition, 68 units of commercial shop-fronts, car parks as well as residential apartments from Mingzhu Garden phase V has been sold which contributed 16% of the total sales revenue for the quarter ended June 30, 2010. Also, 31 units of car parks and commercial shop-fronts from Hanzhong Mingpin Project have been sold, which accounted for more than 14% of the total sales revenue for the quarter ended June 30, 2010; and (5) Revenue was much lower for the quarter ended June 30, 2009. This was because only 14 units of residential property in Mingzhu Garden phase IV were sold to customers at lower price (at approximately $221/per square meter). However, for the three months ended June 30, 2010, there were total of 288 units of residential and commercial property as well as car parks from Yangzhou Pearl Garden, Mingzhu Garden phase V and Hanzhong Mingpin Project sold to customers at higher sales price (at approximately $448/per square meter for residential apartment and $593/per square meter for commercial shop-front). Accordingly, sales revenue for the three months ended June 30, 2010 was much higher than prior comparative period.
Cost of Sales
The following table sets forth a breakdown of our cost of revenues for the periods indicated.
| | | Three months ended June 30, (Unaudited) | |
| | | 2010 | | | | 2009 | |
| | | USD | | | | Percentage | | | | USD | | | | Percentage | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Land use right | | $ | 1,124,417 | | | | 27.98 | % | | $ | 24,000 | | | | 15.36 | % |
Construction costs | | | 2,893,801 | | | | 72.02 | % | | | 132,254 | | | | 84.64 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 4,018,218 | | | | 100.00 | % | | $ | 156,254 | | | | 100.00 | % |
Our cost of real estate sales consists primarily of the cost of land use rights and construction costs. Costs of real estate sales are capitalized and allocated to development projects using the specific identification method. Costs are recorded based on the ratio of the sales value of the relevant units completed and sold to the estimated total project sales value, multiplied by the total project costs.
Cost of sales was approximately $4.0 million for the three months ended June 30, 2010 compared to $0.15 million for the three months ended June 30, 2009. The $3.86 million increase in cost of sales was mainly attributable to the increased sales of our real estate property, especially the costs associated with the increased sales in Yangzhou Pearl Garden, Mingzhu Garden phase V and Hanzhong Mingpin Project. For the three months ended June 30, 2010, costs of sales was allocated based on sales of 288 residential or commercial units. Cost of sales was much lower in the prior period due to much lower revenue recognized for the period because only 14 residential apartments were sold, and accordingly lower amount of costs has been allocated.
Land use rights costs
Land use rights costs include the premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights costs vary for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Our land use rights costs for the three months ended June 30, 2010 are $1,124,417, representing an increase of $1.1 million or 4,585% compared to the three months ended June 30, 2009. The increase in our land use rights costs was primarily because we allocated more of such costs to our cost of sales account based on our large increase of sales revenue for the three months ended June 30, 2010. For the three months ended June 30, 2010, we reported sales revenue from three pr ojects, i.e. Yangzhou Pearl Garden, Mingzhu Garden Phase V, and Hanzhong Mingpin Project. However, for the same period in 2009, our revenue only came from the sales of 14 residential apartment at Mingzhu Garden Phase IV. Our land use rights costs was much lower in the three months ended June 30, 2009 because our sales revenue was lower for that period. For the past several years, our land use rights costs have been steadily increasing due to rising property prices in Hanzhong City and increased competition from other bidders at government land auctions. In order to control our costs and maintain our competitive advantage, we have been trying to acquire land use leases at favorable prices and keep as much the land reserve as we can whenever such opportunities emerge.
Construction costs
We had no revenuesoutsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials, equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the three months ended June 30, 2010 were $2.89 million, representing an increase of $2.76 million or 2,088.1% compared to that of th e three months ended June 30, 2009. The increase in our construction costs for the three months ended June 30, 2010 was primarily due to our increased sales revenue as well as increased raw material prices and direct labor costs as compared to the same period in 2009.
As a result of the above factors, the total cost of real estate sales increased by 2,471.6% or $3,861,964 to $4,018,218 for the three months ended June 30, 2010, compared to $156,254 of the three months ended June 30, 2009. The total cost of sales as a percentage of revenue for the three months ended June 30, 2010 basically remains within a normal stable range as compared to that of the prior comparative period.
Gross Profit
Gross profit was approximately $3.65 million for the three months ended June 30, 2010 compared to $0.18 million for the three months ended June 30, 2009, an increase of $3.86 million attributed to our increased sales revenue. Our overall gross profit as a percentage of revenues decreased to 47.65% in the three months ended June 30, 2010 compared to no revenues for54.31% in the samecomparable period onein prior year ago. Going forward we will not be able to manufacture product at our existing plantmainly due to our higher cost of sales incurred in line with the new “chemical zone” regulation. Therefore, if we are not able to contract with a third party to utilize a qualified manufacturing facility to produceclimbing revenue. The gross margin of our products we will be not be able to manufacture productprojects is normally in the future and we will not have any revenues during those periods. Building a new manufacturing facility in a “chemical zone” would be at a substantial costrange of 40% to the company and our management does not believe that is likely to occur and we may seek an alternative business in the future.55%.
CostThe following table sets forth the gross margin of Saleseach of our Projects for the indicated period:
Our cost | |
| | For the three months ended June 30 |
| | 2010 | | | | | | | | | 2009 | | | | |
Project | | Gross Profit | | | Gross Margin | | | Project | | | Gross Profit | | | Gross Margin | |
Yangzhou Pearl Garden | | | 2,259,556 | | | | 29.43 | % | | Yangzhou Pearl Garden | | | | - | | | | - | |
Mingzhu Garden | | | 826,290 | | | | 10.76 | % | | Mingzhu Garden | | | | 185,718 | | | | 54.31 | % |
Hanzhong Mingpin | | | 573,057 | | | | 7.46 | % | | | - | | | | - | | | | - | |
Total gross profit margin | | | 3,658,903 | | | | 47.66 | % | | Total gross profit margin | | | | 185,718 | | | | 54.31 | % |
Total Revenue | | | 7,677,121 | | | | 47.66 | % | | Total Revenue | | | | 341,972 | | | | 54.31 | % |
| | | | | | | | | | | | | | | | | | | | |
Operating Expenses
Total operating expenses increased to approximately $0.34 million for the three months ended June 30, 2010 from $0.21 million for the three months ended June 30, 2009. As a percentage of salesrevenues, operating expenses decreased to 4.52% for the three months ended June 30, 2010 compared to 63.01% for the three months ended June 30, 2009, were $0this was because we have better managed our business operation which led to work efficiency and better cost control.
The $0.13 million increase in total operating expenses was due to several reasons: (1) increased consulting, legal and accounting expenses related to our up-listing goal and efforts during the three months ended June 30, 2010 as compared to $0prior comparative period; (2) the increase in salaries expenses paid to administrative staff in line with our expanded business operations and real estate project development; (3) We recognized stock-based compensation expenses of $7,716 because we granted stock options to three independent directors since January 2010, and the $7,716 represent expenses incurred for current quarter; and (4) We were required to pay more deputy food fund and flood control fund to relevant government authorities based on our increased sales revenue. These funds are controlled and managed by local government authorities and legally levied based on sales revenue level and will be used to stabilize the value of Chinese deputy food market and anti natural disasters. For the same period a year ago, we paid lower amount of such expenses due to our limited sales revenue reported.
These changes are summarized below:
| | Three months ended June 30, (Unaudited) | |
| | 2010 | | | 2009 | |
General and administrative expenses | | $ | 306,113 | | | $ | 130,182 | |
Selling and distribution expenses | | | 40,978 | | | | 85,303 | |
Total operating expenses | | $ | 347,091 | | | $ | 215,485 | |
Selling and Distribution Expenses
Selling and distribution expenses decreased by $44,325, or 51.96%, to $40,978 for the three months ended June 30, 2008. We did not2010 from $85,303 for the three months ended June 30, 2009. The decrease in selling and distribution expenses was attributable to our decreased advertising expenses incurred for the quarter ended June 30, 2010 because we have any costsuccessfully established our brand name awareness among customers and many of our sales transactions were completed based on our old customers’ referral, especially on our Yangzhou Pearl Garden and Mingzhu Garden Phase V. The decrease in our selling and distribution expenses was also affected by our decreased salary, sales commissions incurred because our brand name awareness among customers helped us to reduce our employment of sales forand marketing promotion activities. In addition, we have also taken advantage of outsourced marketing efforts to introduce our properties located in Yang County and Hanzhong City, in an effort to broaden the three-month periodslocal awareness of our brand and to gain more public acceptance in the regions. The price of using outsourced marketing efforts is much lower than solely relying on our own sales forces. For the three months ended June 30, 2009, we relied mainly on our own sales force which led to relatively higher advertising and 2008 because we did not sell any products during these periods.promotion expenditures.
Gross ProfitOur selling and distribution expenses include:
(1) Advertising and promotion expenses, such as billboard and other physical advertising cost, and costs associated with our showrooms and model apartments;
(2) Staff costs, which primarily consist of salaries and sales commissions as well as annual bonuses; and
(3) Other related expenses.
As of June 30, 2010 we employed more than 60 full time sales and marketing personnel including 45 representing our properties in the city of Hanzhong, 10 representing properties in Yang County and 5 representing properties in Weinan. We had no gross profit duringexpect our selling and marketing expense to increase in the three-month periodsnear future as we increase our sales efforts, launch more projects and target new markets to expand our operations.
General and Administrative Expenses
For the three months ended June 30, 20092010, our general and administrative expenses were $306,113, representing an increase of $175,931 or 2008 because135.1%, as compared to the general and administrative expenses for the three months ended June 30, 2009. The increase is primarily due to the increased office expenses incurred in order to better manage our expanded business operation, as well as salary expenses incurred in support of our increased sales activities during the quarter ended June 30, 2010. The increase in our general and administrative expenses for the three months ended June 30, 2010 was also affected by our up-listing efforts in the Nasdaq Capital Market, which led to increased consulting, legal and accounting expenses. For the three months ended June 30, 2010, we did not manufacture any products during these two periods.were still a private Company and there were no such expenses in curred. In addition, we were required to pay more deputy food fund and flood control fund to relevant government authorities based on our increased sales revenue. These funds are controlled and managed by local government authorities and legally levied based on sales revenue level and will be used to stabilize the value of Chinese deputy food market and anti natural disasters. For the same period a year ago, we paid lower amount of such expenses due to our limited sales revenue reported.
Our General and administrative expenses principally include:
(1) Staff salaries and benefits;
(2) Traveling and entertainment expenses;
(3) Professional fees, such as audit and legal fees, and
(4) Other associated fees.
Total CostsWe expect that general and Expensesadministrative expenses will increase as we expand our business and operations, especially when we launch more development projects and expand our business into nearby areas. In addition, as a result of our shares of common stock being quoted on the Over-the-Counter Bulletin Board, we will need to enhance our management’s skills and levels to adapt to the complex business environment because our Company will be subject to the rules and regulations of the United States securities laws, corporate governance and internal controls compliance requirements. We believe that we will need to hire more personnel as our business continues to grow, and we believe that we will need to incur additional general and administrative costs in the near future.
Our total costs and expenses were $152,599Interest Expense
Net interest expense was $13,968 for the three months ended June 30, 2010 compared to $27,253 for the three months ended June 30, 2009, representing an increasea 48.7% decrease. The decrease of $35,961 or 30% as compared to that of $116,638 for the same period one year ago. For the period ended June 30, 2009, our total costs and expenses consisted of general and administrative expenses of $135,924 andnet interest expense of $12,675.
Our general and administrative expenses primarily consisted of amortized costs related to financial consulting expenses, and depreciation expense, salaries and wages. We believe our total costs and expenses of $152,599 for the three months ended June 30, 2009 are fairly indicative2010 was because we have repaid portion of our total costs andshort-term loans back to the bank during the quarter ended December 31, 2009 which reduced our outstanding bank loan balance. Accordingly, our interest expenses for a three-month period in which we do not manufacture any products.have been lowered.
Net Income (Loss)Taxes
Net lossThe Company is 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. However, as approved by the local tax authority of Hanzhong City, the Company’s corporate income tax was assessed annually at a predetermined fixed rate as an incentive to stimulate local economy and encourage entrepreneurship. Currently, our income taxes are assessed at only 3.7% on our taxable income, instead of statutory rate of 25%. As a result, income tax expenses for the three months ended June 30, 2010 was $133,107, representing a 164.5% increase as compared to $50,329 for the three months ended June 30, 2009. The lower income taxes expenses for t he three months ended June 30, 2009 totaled $152,599was because we were only required to pay such taxes based on assessed amount granted by our local tax authority. For the three months ended June 30, 2010, we accrued the income tax expenses based on 4% of our taxable income. Therefore, the increase was a result of our higher realized taxable income.
Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. Management believes that the possibility of any reevaluation of income taxes is remote based on the fact that the Company has obtained the written tax clearance from the local tax authority. Thus, no additional taxes payable has been recorded for the difference between the taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the fixed rate method. It is the Company’s policy that if such reevaluation of income taxes becomes probable and the amount of additional taxes due can be reasonabl y estimated, additional taxes shall be recorded in which period the amount can be reasonably estimated and shall not be charged retroactively to an earlier period.
Net Income (loss)
We realized $3,165,030 in net income for the three months ended June 30, 2010, a $3,272,379 increase as compared to net loss of $116,638$107,349 for the comparable period onethree months ended June 30, 2009. The increase in our net income was primarily due to our increased sales revenue and effective cost management for the respective periods. We expect to experience the ongoing positive trend in our financial performance to continue through fiscal year ago.2010.
Other Comprehensive Income (loss)
We operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”). The differenceRMB is attributablenot freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation. Translation adjustments resulting from this process amounted to gain of $166,767 and a loss of $936 for the three months ended June 30, 2010 and 2009, respectively. The balance sheet amounts with the exception of equity at June 30, 2010 were translated at 6.8086 RMB to 1.00 USD as compared to 6.8448 RMB to 1.00 USD at June 30, 2009. The equity accounts were stated at their historical rate. The average translation rates applied to the difference in our total costsincome statements accounts for the periods ended June 30, 2010 and expenses. We anticipate this net loss to be fairly indicative of future quarters in which we do not manufacture our own products.2009 were 6.8335 RMB and 6.8399 RMB, respectively.
Nine Months Ended June 30, 2009 Compared2010 compared to Ninenine Months Ended June 30, 20082009
ResultsThe following table sets forth key components of Operationsour results of operations for the periods indicated.
| | Nine Months Ended June 30, 2009 | | | Nine Months Ended June 30, 2008 | |
| | | | | | |
Revenues | | $ | - | | | | - | |
Cost of revenue | | | - | | | | - | |
Gross Profit | | | - | | | | - | |
Total Costs and Expenses | | | 413,545 | | | | 282,147 | |
Net income (loss) | | $ | (413,545 | ) | | $ | (282,147 | ) |
| | Nine Months ended June 30, (Unaudited) | |
| | 2010 | | | 2009 | |
| | | | | | |
Real estate sale, net of sales taxes of $2,036,584 and $650,864, respectively | | $ | 31,104,335 | | | $ | 10,039,544 | |
| | | | | | | | |
Cost of real estate sales | | | 16,954,696 | | | | 5,388,836 | |
| | | | | | | | |
Gross profit | | | 14,149,639 | | | | 4,650,708 | |
| | | | | | | | |
| | | | | | | | |
Operating expenses | | | | | | | | |
Selling and distribution expenses | | | 484,148 | | | | 228,489 | |
General and administrative expenses | | | 1,366,867 | | | | 395,743 | |
Total operating expenses | | | 1,851,015 | | | | 624,232 | |
| | | | | | | | |
Operating income | | | 12,298,624 | | | | 4,026,476 | |
| | | | | | | | |
Other expenses (income) | | | | | | | | |
Interest expenses | | | 41,962 | | | | 95,926 | |
Interest income | | | (1,412 | ) | | | - | |
Other expenses (income) | | | (586 | ) | | | 309 | |
Total other expenses | | | 39,964 | | | | 96,235 | |
| | | | | | | | |
Income before income taxes | | | 12,258,660 | | | | 3,930,241 | |
| | | | | | | | |
Provision for income taxes | | | 534,583 | | | | 195,674 | |
| | | | | | | | |
Net income | | | 11,724,077 | | | | 3,734,567 | |
| | | | | | | | |
Other comprehensive income | | | | | | | | |
Foreign currency translation adjustment | | | 173,231 | | | | 27,098 | |
| | | | | | | | |
Comprehensive income | | $ | 11,897,308 | | | $ | 3,761,665 | |
| | | | | | | | |
Basic and diluted income per common share | | | | | | | | |
Basic | | $ | 0.26 | | | $ | 0.10 | |
Diluted | | $ | 0.26 | | | $ | 0.10 | |
| | | | | | | | |
Weighted average common shares outstanding | | | | | | | | |
Basic | | | 45,050,000 | | | | 39,000,000 | |
Diluted | | | 45,057,659 | | | | 39,000,000 | |
| | | | | | | | |
Revenues, Cost of Sales and Gross Profit
Revenues
In line with the provisions of FASB guidance “Accounting for Sales of Real Estate,” we recognize revenue from the sale by the full accrual method at the time of the closing of each individual unit sale. This occurs when title to or possession of the property is transferred to the buyer.
The following table summarizes our revenue generated by different projects for the nine months ended June 30, 2010 and 2009, respectively:
| | | | | For the nine months ended June 30, (Unaudited) | | | | |
| | 2010 | | | | | | | 2009 | | | | |
Project | | Revenue | | | Percentage | | Project | | Revenue | | | Percentage | |
Mingzhu | | | | | | | Mingzhu | | | | | | |
Garden | | $ | 7,946,427 | | | | 25.55 | % | Garden | | $ | 3,426,149 | | | | 34.13 | % |
Yangzhou Pearl | | | | | | | | | Yangzhou | | | | | | | | |
Garden | | | 22,070,145 | | | | 70.96 | % | Pearl Garden | | ‐ | | | ‐ | |
| | | | | | | | | Weinan Lijing | | | | | | | | |
Mingpin Project | | | 1,087,762 | | | | 3.50 | % | Garden | | | 6,169,000 | | | | 61.45 | % |
| | | | | | | | | Central Plaza | | | 444,395 | | | | 4.43 | % |
Total | | $ | 31,104,334 | | | | 100.00 | % | | | $ | 10,039,544 | | | | 100.00 | % |
Total sales tax amounted to $2,036,584 and $650,864 for the nine months ended June 30, 2010 and 2009, respectively, representing an increase of 212.9% from year to year, mainly because of the increase in our revenue. Revenues increased by 209.8% to approximately $31.1 million for the nine months ended June 30, 2010 from approximately $10 million for the nine months ended June 30, 2009. The $20 million increase was mainly attributable to several reasons, including (1) the Company strengthened its advertising and sales promotion activities during the nine months ended June 30, 2010 (2) the Company’s enhanced brand name and high quality product has won consumers’ confidence and trust; (3) the increase in local residents’ disposal income has stimulated the great market demand for new residential units in C hina’s Tier 2 and Tier 3 cities, where the Company is competing and focusing; (4) the Company has developed several new projects and sold to a wider variety of customers during the nine months ended June 30, 2010, which has broadened the sales touch point with the buyers and exposed the Company to more sales opportunities and (5) Revenue was much lower for the nine months ended June 30, 2009. Among the Company's new projects, sales of residential units in Yangzhou Pearl Garden continued to climb as this community became mature and more attractive. For the same reasons stated above, we did not have any revenuesnine months ended June 30, 2010, sales from Yangzhou Pearl Garden accounted for 70.96% of the total sales revenue reported. In addition, Mingzhu Garden phase V has been brought to the market for sale in the second quarter of fiscal year 2010, which generated approximately 25.55% of the total sales revenue for the nine months ended June 30, 2010. In the third quarter ended June 30, 2010, Hanzhong Mingpin Project has also been sold to customers, which accounted for approximately a 3.5% increase in the total sales revenue for the nine months ended June 30, 2010. Revenue in the nine months ended June 30, 2009 comparedwas lower because a smaller number of residential or commercial property units were developed by the Company and brought to no revenuesthe market for sale. A total of 1,087 residential and commercial units from Mingzhu Garden Phase IV, Weinan Lijing Garden as well as Central Plaza were sold during the nine months ended June 30, 2009. However, for the same nine-month period one year ago. We do not expectnine months ended June 30, 2010, there were 1,017 units of residential and commercial units as well as car parks from Yangzhou Pearl Garden, Mingzhu Garden phase V and Hanzhong Mingpin Project sold to generate revenues unless we are able to begin producing products utilizingcustomers at much higher prices. As a third party’s manufacturing facility. We do not have any arrangements to produce product at any third parties’ facilities and do not believe it is likely that we will be able to make such an arrangement due to our current inability to payresult, sales revenue for the use of such facilities.nine months ended June 30, 2010 was much higher than the prior comparative period.
Cost of Sales
OurThe following table sets forth a breakdown of our cost of revenues for the periods indicated.
| Nine months ended June 30, (Unaudited) | |
| 2010 | | | 2009 | |
| USD | | | Percentage | | | USD | | | Percentage | |
Land use right | $ | 2,954,521 | | | | 17.43 | % | | $ | 1,306,549 | | | | 24.25 | % |
Construction costs | | 14,000,175 | | | | 82.57 | % | | | 4,082,287 | | | | 75.75 | % |
Total | $ | 16,954,696 | | | | 100.00 | % | | $ | 5,388,836 | | | | 100.00 | % |
Cost of sales was approximately $16.9 million for the nine months ended June 30, 2010 compared to $5.38 million for the nine months ended June 30, 2009. The $11.5 million increase in cost of sales was mainly attributable to the increased sales of our real estate property, especially the costs associated with the increased sales in Yangzhou Pearl Garden and Mingzhu Garden phase V. Over the past two years as the Chinese real estate market becomes more and more competitive, costs for land use leases as well as construction labor, materials, equipment costs, etc. have been rising.
Land use lease costs
Land use lease costs include the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights costs vary for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Our land use rights costs for the nine months ended June 30, 2010 are $2,954,521, representing an increase of $1,647,972 or 126.1% compared to that of the nine months ended June 30, 2009. The increase in our land use rights costs was primarily because we acquired land use leases at higher prices through the auction bid process than we did for the prior comparative period. In addition, we have more real estate projects for the nine months ended June 30, 2010 than in the prior comparative period, which led to more land use costs being recognized and allocated to properties sold. For the past several years, our land use rights costs have been steadily increasing due to rising property prices in Hanzhong City and increased competition from other bidders at government land auctions. In order to control our costs and maintain competitive advantages, we have been trying to acquire land use leases at favorable prices and keep as much the land reserve as we can whenever such opportunities emerge.
Construction costs
We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials, equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the nine months ended June 30, 2010 were $14,000,175, representing an increase of $9,917,888 or 242.9% compared to that of the nine m onths ended June 30, 2009. The increase in our construction costs for the nine months ended June 30, 2010 was primarily due to increased development projects, increased raw material prices and direct labor costs as compared to the same period in 2009.
As a result of the above factors, our total cost of real estate sales increased by 214.6% or $11,565,860 to $16,954,696 for the nine months ended June 30, 2010, compared to $5,388,836 of the nine months ended June 30, 2009. However, the total cost of sales as a percentage of revenue for the nine months ended June 30, 2010 basically remains stable compared to that of the prior year.
Gross Profit
Gross profit was approximately $14.1 million for the nine months ended June 30, 2010 compared to $4.6 million for the nine months ended June 30, 2009, were $0an increase of $9.4 million attributed to our increased sales revenue. Our overall gross profit as a percentage of revenues decreased to 45.49% in the nine months ended June 30, 2010 compared to nil for46.32% in the samecomparable period onein prior year ago. As noted above, we did not have anymainly due to our higher cost of sales during these periods because we did not have any sales during these nine-month periods.incurred. The gross margin of our projects is normally in the range of 40% to 55%.
Gross ProfitThe following table sets forth the gross margin of each of our Projects for the indicated period:
For the nine months ended June 30, (Unaudited) |
| | 2010 | | | | | | | 2009 | | | | |
Project | | Revenue | | | Percentage | | Project | | Revenue | | | Percentage | |
Mingzhu Garden | | $ | 7,946,427 | | | | 25.55 | % | Yangzhou Pearl Garden | | $ | 3,426,149 | | | | 34.13 | % |
Yangzhou Pearl Garden | | | 22,070,145 | | | | 70.96 | % | Mingzhu Garden | | | - | | | | - | |
Mingpin Project | | | 1,087,762 | | | | 3.5 | % | Weinan Lijing Garden | | | 6,169,000 | | | | 61.45 | % |
| | | | | | | | | Central Plaza | | | 444,395 | | | | 4.43 | % |
Total | | $ | 31,104,334 | | | | 100 | % | Total Revenue | | $ | 10,039,544 | | | | 100 | % |
Operating Expenses
Our gross profit was nilTotal operating expenses increased to approximately $1.85 million for the nine months ended June 30, 2009 and 2008 because we did not manufacture any products during these two periods.
Total Costs and Expenses
Our2010 from $0.62 million for the nine months ended June 30, 2009. As a percentage of revenues, operating expenses decreased to 5.95% for the nine months ended June 30, 2010 compared to 6.22% for the nine months ended June 30, 2009. The $1.22 million increase in total operating expenses was due to several reasons: (1) increased advertising expenses to raise our brand awareness among customers, especially related to advertising expenses incurred in Yangzhou Mingzhu Project and Hanzhong Mingpin Project to stimulate customer’s purchase; (2) the increase in administrative expenses primarily related to the Company’s public listing as well as up-listing efforts in the U.S., including travel expenses, consulting fees, audit and accounti ng fees, legal fees, as well as increased office expenses in order to better manage our business operations; (3) we recognized stock-based compensation expenses of $30,863 because we granted stock options to three independent directors starting from January 2010; (4) the increase in salaries expenses due to the accrued annual bonus for employees to encourage and motivate them for more endeavors and salaries expenses paid to more sales representatives to promote the sales of our development in Yangzhou Pearl Garden as well as Mingzhu Garden phase V, which was in line with our increased sales revenue; and (5) we were $413,545required to continue more to the deputy food and flood control fund established by relevant government authorities based on our increased sales revenue. These funds are controlled and managed by local government authorities and legally levied based on sales revenue level and will be used to stabilize the food prices during a natural disaster. For the same period a year ago, we paid lowe r amount of such expenses due to our limited sales revenue reported.
These changes are summarized below:
| | Nine months ended June 30, (Unaudited) | |
| | 2010 | | | 2009 | |
General and administrative expenses | | $ | 1,366,867 | | | $ | 395,743 | |
Selling and distribution expenses | | | 484,148 | | | | 228,489 | |
Total operating expenses | | $ | 1,851,015 | | | $ | 624,232 | |
Selling and Distribution Expenses
Selling and distribution expenses increased by $255,659, or 111.9%, to $484,148 for the nine months ended June 30, 2010 from $228,489 for the nine months ended June 30, 2009. The increase in selling and distribution expenses was attributable to our increased advertising expenses incurred for the nine months ended June 30, 2010 to enhance our brand name image and promote our sales of residential units in Yangzhou Pearl Garden, Mingzhu Garden Phase V and Hanzhong Mingpin Project. The increase in our selling and distribution expenses was also affected by our increased salary, sales commissions and annual bonus expenses incurred in line with our increased sales volume. Our selling and distribution expenses were lower in the prior comparative period because we relied mainly on our own sales force which allowed us to effectively manage our m arketing expenses level and we granted fewer bonuses to our employees in that period. During the nine months ended June 30, 2010, in addition to using our own marketing force, we have also taken advantage of outsourced marketing efforts to introduce our properties located in Yang County and Hanzhong City, in an effort to broaden the local awareness of our brand and to gain more public acceptance in the region.
General and Administrative Expenses
For the nine months ended June 30, 2010, our general and administrative expenses were $1,366,867 representing an increase of $971,124 or 245.4%, as compared to the general and administrative expenses for the nine months ended June 30, 2009. The increase is primarily due to the increased office expenses incurred in order to better manage the business operation, the increased expenses incurred in connection with our company’s going public and up-listing efforts, and related consulting, legal, accounting services, as well as salary and annual bonus expenses incurred in support of our increased sales activities during the nine months ended June 30, 2010. In addition, we were required to pay more deputy food fund and flood control fund to relevant government authorities based on our increased sales revenue. These funds are con trolled and managed by local government authorities and legally levied based on sales revenue level and will be used to stabilize the value of Chinese deputy food market and anti natural disasters. For the same period a year ago, we paid lower amount of such expenses due to our limited sales revenue reported.
Interest Expense
Net interest expense was $41,962 for the nine months ended June 30, 2010 compared to $95,926 for the nine months ended June 30, 2009, representing a 46.5%56.25% decrease. The decrease of net interest expense for the nine months ended June 30, 2010 was because the Company repaid portion of its short-term loans back to the bank during the first quarter of fiscal year 2010 which reduced our outstanding bank loan balance. However, our outstanding balance of bank loan was much higher in the prior comparative period.
Income Taxes
The Company is 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. However, as approved by the local tax authority of Hanzhong City, the Company’s corporate income tax was assessed annually at a predetermined fixed rate as an incentive to stimulate local economy and encourage entrepreneurship. Currently, our income taxes are assessed at only 3.7% on our taxable income, instead of statutory rate of 25%. As a result, income tax expenses for the nine months ended June 30, 2010 was $534,583, representing a 173.2% increase as compared to $195,674 for the same period one year ago of $282,147. For the nine-month period endingnine months ended June 30, 2009, our operating2009. The lower income taxes expenses consisted of general and administrative expenses of $379,071, and interest expense of $34,474.
Our general and administrative expenses primarily consisted of amortized costs related to financial consulting expenses, and depreciation expense, salaries and wages.
We believe our total costs and expenses of $413,545 for the nine months ended June 30, 2009 are fairly indicativewas because we were only required to pay such taxes based on assessed amount granted by our local tax authority. For the nine months ended June 30, 2010, we accrued the income tax expenses based on 4.% to 4.5% of our taxable income. Therefore, the increase was a result of our higher realized taxable income.
Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. Management believes that the possibility of any reevaluation of income taxes is remote based on the fact that the Company has obtained the written tax clearance from the local tax authority. Thus, no additional taxes payable has been recorded for the difference between the taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the fixed rate method. It is the Company’s policy that if such reevaluation of income taxes becomes probable and the amount of additional taxes due can be reason ably estimated, additional taxes shall be recorded in which period the amount can be reasonably estimated and shall not be charged retroactively to an earlier period.
Net Income
We realized $11,724,077 in net income for the nine months ended June 30, 2010, a 213.9% or $7,989,510 increase as compared to $3,734,567 for the nine months ended June 30, 2009. The increase in our net income was primarily due to our increased sales revenue and effective cost management for the respective periods. We expect to experience the ongoing positive trend in our financial performance to continue through fiscal year 2010.
Other Comprehensive Income
We operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”). The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation. Translation adjustments resulting from this process amounted to $173,231 and $27,098 for the nine months ended June 30, 2010 and 2009, respectively. The balance sheet amounts with the exception of equity at June 30, 2010 were translated at 6.8086 RMB to 1.00 USD as compared to 6.8448 RMB to 1.00 USD at June 30, 2009. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements a ccounts for the periods ended June 30, 2010 and 2009 were 6.8352 RMB and 6.8466 RMB, respectively.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flows from operations, and borrowings from banks are limited.
Total current assets increased to approximately $62 million as of June 30, 2010 from $48 million as of September 30, 2009. The primary changes in our current assets during this period were from changes in cash and cash equivalents, restricted cash, loans to outside parties, real estate property development completed and real estate property under development. The increase of cash and cash equivalents from $820,783 at September 30, 2009 to the amount of $9,830,972 as of June 30, 2010 was due to our increased sales revenue causing a rapid collection of cash which increased the cash on hand and bank deposit. The increase of loans to outside parties from $1,762,022 at September 30, 2009 to $5,328,937 as of June 30, 2010 was attributable to our financial support to strengthen the relationship with our construction material suppliers. Manage ment believes that these cash advance primarily made to one of our long-term partnered material suppliers was temporary in nature and collectible. Real estate property completed increased from $2,392,003 at September 30, 2009 to $8,769,396 as of June 30, 2010, a 266.6% increase, attributable to our several construction projects being completed as scheduled by relevant contracts at the same time which increased our residential units inventory for future sales. On the other hand, because of our rapid expansion into multiple projects in different areas, our real estate property under development at June 30, 2010 decreased by $4,865,089 to $37,657,198, an 11.4% decrease as compared to the amount as of September 30, 2009. The decrease in our real estate property under development was because several of our construction projects have been completed and accordingly been transferred into real estate property completed account as inventory for future sales.
Our total costs andcurrent liabilities as of June 30, 2010 amounted to $20.8 million, representing a 10.29% increase as compared to $18.83 million for the fiscal year ended September 30, 2009. The increase in our current liabilities was affected by the increase in accrued expenses from $125,742 at September 30, 2009 to $719,820 as of June 30, 2010. The increase in our accrued expenses for the nine months ended June 30, 2010 was because we accrued the annual bonus which is an award to be paid to our employees as an incentive to motivate them for greater endeavors in the fiscal year 2010 and beyond. The increase in our current liabilities was also due to an increase in our tax payable from $1,380,694 at September 30, 2009 to $3,116,628 at June 30, 2010, a nine-month period125.73% increase, because we accrued more tax liability based on our increased amount of 0; taxable income. The increase in whichour current liabilities was also affected by an increase in our accounts payable from $730,838 at September 30, 2009 to $845,593 at June 30, 2010. This was because we do not manufacture any products.purchased some construction-related materials on account from several outside vendors. In addition to the above factors, our current liabilities were affected by a decrease in our customer deposits by $244,425 as well. This was because these amounts have been transferred into sales revenue when conditions of revenue recognition have been met.
Based on our current operating plan, we believe that existing cash and cash equivalents balances, as well as cash forecast by management to be generated by operations will be sufficient to meet our working capital and capital requirements for our current operations.
Cash Flow
Comparison of cash flows results for the nine months ended June 30, 2010 to the nine months ended June 30, 2009, is summarized as follows:
| | Nine months ended June 30, | |
| | 2010 | | | 2009 | |
Net cash provided by (used in) operating activities | | | 9,067,132 | | | | (1,154,303 | ) |
Net cash used in investing activities | | | (7,681 | ) | | | (343,779 | ) |
Net cash used in financing activities | | | (87,781 | ) | | | (58,423 | ) |
Effect of change of foreign exchange rate on cash and cash equivalent | | | 38,519 | | | | 2,782 | |
Net cash increase (decrease) in cash and cash equivalent | | | 9,010,189 | | | | (1,553,723 | ) |
Cash and cash equivalent, beginning of year | | | 820,783 | | | | 2,121,060 | |
Cash and cash equivalent, end of period | | $ | 9,830,972 | | | $ | 567,337 | |
| | | | | | | | |
Operating Activities
Net Income (Loss)cash provided by operating activities during the nine months ended June 30, 2010 amounted to $9,067,132, which consists of our net income of $11,724,077, adds back noncash adjustments of $82,233 and offset by net changes in operating assets and liabilities due to our expanded operating activities, including increase in our restricted cash of $(1) affected by increased sales and required by banks that provided mortgage loans to our customers, increase in our loans to outside parties of $3,545,569 in order to maintain good relationship with these material suppliers, increase of our real estate property completed of $6,342,444 due to several of our construction projects have been completed as scheduled, decrease of our real estate property under development of $5,026,582 because several of our projects have been completed as of June 3 0, 2010 and accordingly have been transferred into inventory account, decrease of advance from customers in the amount of $306,694 which was attributable to increased sales resulted in recognition of the related amounts as revenues after meeting all conditions of revenue recognition method, and increase of tax payable of $1,723,326 because we accrued more taxes in line with our increased sales revenue and taxable income.
Net loss forcash used in operations during the nine months ended June 30, 2009 totaled $413,545,$1,154,303, which consists of our net income of $3,734,567, adds back noncash adjustments of $44,214 and offset by net changes in operating assets and liabilities due to our expanded operating activities, including decrease in our restricted cash of $185,167, decrease in our loans to outside parties of $203,287 because we collected back some advances previously made to our material suppliers aiming at maintaining good relationship with them, decrease of our real estate property completed of $5,388,836 because our increased sales during this period reduced our inventory balance, increase of our real estate property under development of $11,739,403 because several of our new construction projects have been launched during this period of time which increased ou r expenditures in land costs and relevant construction costs, and a decrease of advance from customers in the amount of $10,772 which was attributable to recognition of the related amounts as revenues after meeting all conditions of revenue recognition method. Net cash provided by operating activities at June 30, 2010 increased by $10,221,435 or 885.51% compared to net lossthe same period of $282,147 for2009.
Investing Activities
Net cash used in investing activities in the comparable period one year ago. The difference is largely attributable to higher general and administrative expenses for the nine-month periodnine months ended June 30, 2009. We anticipate2010 amounted to $7,681 which represented purchase of fixed assets and addition of property and equipment. Net cash used in investing activities amounted to $343,779 during the nine months ended June 30, 2009, representing the addition of property and equipment of $343,779 into the Company’s fixed assets as the Company’s headquarter office.
Financing Activities
Net cash flows used in financing activities amounted to $87,781 in the nine months ended June 30, 2010, which consist of repayment of our net lossshort-term bank loan by $87,781. Cash flows used in financing activities amounted to $58,423 in the nine months ended June 30, 2009, which consist of $413,545repayment of shareholder loan of $438,174 and shareholder’s capital contribution in the amount of $438,174 as well as a repayment of bank loan in the amount of $58,423. Cash flows used in financing activities for the most recent nine monthmonths ended June 30, 2010 increased by $29,358 or 50.3% compared to the same period to be fairly indicative of future nine-month periods in which we do not manufacture our own products.2009.
As of now, we do not have any operations, income, or expenses in the United States, and, therefore, we do not owe any income taxes in the United States and we are not accruing for income taxes in the United States. If it changes in the future and we become subject to income taxes in the United States and either pay or accrue such taxes it will have a negative impact on our net income (loss).
We did not make a provision for income taxes in China, since we have not made profits.