SUNRISE REAL ESTATE GROUP INC - Quarter Report: 2008 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
quarterly period ended June 30, 2008
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
transition period from __________ to __________
Commission
File Number 000-32585
SUNRISE
REAL ESTATE GROUP, INC.
(Exact
name of registrant as specified in its charter)
|
Texas
|
75-2713701
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
Suite
701, No. 333, Zhaojiabang Road
Shanghai,
PRC 200032
(Address
of principal executive offices Zip Code)
Registrant’s
telephone number: + 86-21-6422-0505
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated
filer ¨
Smaller reporting company x
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act): Yes ¨
No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: August 11, 2008 - 23,691,925
shares
of Common Stock
FORM
10-Q
For
the Quarter Ended June 30, 2008
INDEX
|
Page
|
|
|
PART
I. FINANCIAL INFORMATION
|
3
|
|
Item
1. Financial
Statements
|
3
|
|
Consolidated
Balance Sheets
|
3
|
|
Consolidated
Statements of Operations
|
4
|
|
Consolidated
Statements of Cash Flows
|
5
|
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
22
|
|
Item
4. Controls
and Procedures
|
22
|
|
PART
II. OTHER INFORMATION
|
23
|
|
Item
1. Legal
Proceedings
|
23
|
|
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
|
Item
3. Defaults
Upon Senior Securities
|
23
|
|
Item
4. Submission
of Matters to a Vote of Security Holders
|
23
|
|
Item
5. Other
Information
|
23
|
|
Item
6. Exhibits
|
23
|
|
SIGNATURES
|
23
|
2
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
Sunrise
Real Estate Group, Inc.
Consolidated
Balance Sheets
(Expressed
in US Dollars)
|
June
30,
|
|
December
31,
|
|
||||
|
|
|
2008
|
|
2007
|
|
||
|
(Unaudited)
|
(Restated)
|
||||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
922,232
|
$
|
2,281,516
|
|||
|
Restricted
cash (Note 9)
|
230,242
|
2,441,579
|
|||||
|
Accounts
receivable
|
601,476
|
842,868
|
|||||
|
Promissory
deposits (Note 3)
|
947,646
|
273,800
|
|||||
|
Amounts
due from venturers
|
-
|
79,662
|
|||||
|
Amount
due from related party (Note 11)
|
332,405
|
312,132
|
|||||
|
Other
receivables and deposits (Note 4)
|
838,006
|
602,373
|
|||||
|
|
|||||||
|
Total
current assets
|
3,872,007
|
6,833,930
|
|||||
|
Property,
plant and equipment – net (Note 5)
|
2,745,848
|
2,519,585
|
|||||
|
Equity
investment (Note 6)
|
83,101
|
78,033
|
|||||
|
Investment
properties (Note 7)
|
8,044,389
|
7,800,228
|
|||||
|
Deferred
tax asset (Note 8)
|
1,367,962
|
1,284,532
|
|||||
|
Goodwill
|
13,307
|
13,307
|
|||||
|
Total
assets
|
$
|
16,126,614
|
$
|
18,529,615
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Bank
loans (Note 9)
|
$
|
204,108
|
$
|
191,660
|
|||
|
Promissory
notes payable (Note 10)
|
517,187
|
976,435
|
|||||
|
Accounts
payable
|
267,459
|
230,654
|
|||||
|
Amount
due to director (Note 11)
|
71,481
|
171,458
|
|||||
|
Amount
due to related party (Note 11)
|
127,443
|
159,561
|
|||||
|
Other
payables and accrued expenses (Note 12)
|
1,613,595
|
1,917,022
|
|||||
|
Other
tax payable (Note 13)
|
605,002
|
546,873
|
|||||
|
Income
tax payable
|
1,044,887
|
1,238,912
|
|||||
|
Total
current liabilities
|
4,451,162
|
5,432,575
|
|||||
|
Commitments
and contingencies (Note 14)
|
|||||||
|
Long-term
bank loans (Note 9)
|
6,125,355
|
5,847,606
|
|||||
|
Long-term
promissory notes payable (Note 10)
|
57,223
|
111,112
|
|||||
|
Deposits
received from underwriting sales (Note 15)
|
8,246,164
|
7,743,240
|
|||||
|
Minority
interest
|
457,296
|
431,674
|
|||||
|
Shareholders’
equity
|
|||||||
|
Common
stock, par value $0.01 per share; 200,000,000 shares authorized;
23,691,925 and 23,691,925 shares issued and outstanding as of June
30,
2008 and December 31, 2007, respectively
|
236,919
|
236,919
|
|||||
|
Additional
paid-in capital
|
3,620,008
|
3,620,008
|
|||||
|
Statutory
reserve (Note 16)
|
729,744
|
729,744
|
|||||
|
Accumulated
losses
|
(8,465,989
|
)
|
(6,348,261
|
)
|
|||
|
Accumulated
other comprehensive income (Note 17)
|
668,732
|
724,998
|
|||||
|
Total
shareholders’ equity
|
(3,210,586
|
)
|
(1,036,592
|
)
|
|||
|
Total
liabilities and shareholders’ equity
|
$
|
16,126,614
|
$
|
18,529,615
|
|||
See
accompanying notes to consolidated financial statements.
3
Sunrise
Real Estate Group, Inc.
Consolidated
Statements of Operations
(Expressed
in US Dollars)
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
||||||||||
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
||||
|
(Unaudited)
|
|||||||||||||
|
Net
Revenues
|
$
|
2,641,681
|
$
|
1,520,047
|
$
|
3,961,226
|
$
|
2,655,202
|
|||||
|
Cost
of Revenues
|
(1,820,183
|
)
|
(1,434,946
|
)
|
(3,137,830
|
)
|
(2,622,606
|
)
|
|||||
|
Gross
Profit
|
821,498
|
85,101
|
823,396
|
32,596
|
|||||||||
|
Operating
Expenses
|
(328,489
|
)
|
(255,412
|
)
|
(639,115
|
)
|
(494,921
|
)
|
|||||
|
General
and Administrative Expenses
|
(1,098,242
|
)
|
(936,714
|
)
|
(1,991,464
|
)
|
(1,831,289
|
)
|
|||||
|
Operating
Loss
|
(605,233
|
)
|
(1,107,025
|
)
|
(1,807,183
|
)
|
(2,293,614
|
)
|
|||||
|
Interest
Income
|
3,561
|
3,344
|
9,330
|
7,571
|
|||||||||
|
Other
Income/(Expenses), Net
|
(1,394
|
)
|
(34,851
|
)
|
5,138
|
(42,242
|
)
|
||||||
|
Interest
Expenses
|
(154,836
|
)
|
(222,785
|
)
|
(298,476
|
)
|
(425,347
|
)
|
|||||
|
Loss
Before Income Tax and Minority Interest
|
(757,902
|
)
|
(1,361,317
|
)
|
(2,091,191
|
)
|
(2,753,632
|
)
|
|||||
|
Income
Tax
|
(23,388
|
)
|
(28,973
|
)
|
(28,884
|
)
|
(28,973
|
)
|
|||||
|
Loss
Before Minority Interest
|
(781,290
|
)
|
(1,390,290
|
)
|
(2,120,075
|
)
|
(2,782,605
|
)
|
|||||
|
Minority
Interest
|
(7,684
|
)
|
(38,533
|
)
|
2,347
|
(35,453
|
)
|
||||||
|
Net
Loss
|
$
|
(788,974
|
)
|
$
|
(1,428,823
|
)
|
$
|
(2,117,728
|
)
|
$
|
(2,818,058
|
)
|
|
|
Loss
Per Share – Basic and Fully Diluted
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
|
|
Weighted
average common shares outstanding –
Basic and Fully Diluted1
|
23,691,925
|
23,691,925
|
23,691,925
|
23,691,925
|
|||||||||
See
accompanying notes to consolidated
financial statements.
1 Share amounts have been retroactively restated to reflect the effect of a 3% stock dividend of common stock for each share of common stock outstanding at August 1, 2007.
4
Sunrise
Real Estate Group, Inc.
Consolidated
Statements of Cash Flows
(Decrease)/Increase
in Cash and Cash Equivalents
(Expressed
in US Dollars)
|
Six
Months Ended June 30,
|
|||||||
|
2008
|
2007
|
||||||
|
(Restated)
|
|||||||
|
(Unaudited)
|
|||||||
|
Cash
flows from operating activities
|
|||||||
|
Net
Loss
|
$
|
(2,117,728
|
)
|
$
|
(2,818,058
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|||||||
|
Depreciation
of property, plant and equipment
|
389,097
|
240,757
|
|||||
|
(Gain)/loss
on disposal of property, plant and equipment
|
(1,019
|
)
|
848
|
||||
|
Minority
interest
|
(2,347
|
)
|
35,453
|
||||
|
Change
in:
|
|||||||
|
Accounts
receivable
|
287,701
|
4,285,194
|
|||||
|
Promissory
deposits
|
(637,376
|
)
|
(647,752
|
)
|
|||
|
Other
receivables and deposits
|
(190,911
|
)
|
(488,359
|
)
|
|||
|
Accounts
payable
|
21,202
|
(387,163
|
)
|
||||
|
Amount
with related party
|
(41,271
|
)
|
-
|
||||
|
Amounts
with venturers
|
82,420
|
578,679
|
|||||
|
Other
payables and accrued expenses
|
(415,749
|
)
|
(4,826
|
)
|
|||
|
Interest
payable on promissory notes
|
(119,142
|
)
|
186,238
|
||||
|
Interest
payable on amount due to director
|
4,403
|
(10,974
|
)
|
||||
|
Other
tax payable
|
21,965
|
(224,817
|
)
|
||||
|
Income
tax payable
|
(266,674
|
)
|
(387,064
|
)
|
|||
|
Net
cash (used in)/provided by operating activities
|
(2,980,735
|
)
|
358,156
|
||||
|
Cash
flows from investing activities
|
|||||||
|
Acquisition
of plant and equipment
|
(289,956
|
)
|
(167,373
|
)
|
|||
|
Deposits
paid for acquisition of properties
|
-
|
(1,850,424
|
)
|
||||
|
Proceeds
from disposal of property, plant and equipment
|
95,883
|
-
|
|||||
|
Restricted
cash
|
2,302,414
|
-
|
|||||
|
Net
cash provided
by/(used in) investing activities
|
2,108,341
|
(2,017,797
|
)
|
||||
|
Cash
flows from financing activities
|
|||||||
|
Bank
loans repayment
|
(99,148
|
)
|
(630,508
|
)
|
|||
|
Repayment
of promissory note
|
(393,995
|
)
|
(205,556
|
)
|
|||
|
Proceeds
from promissory note
|
-
|
2,565,903
|
|||||
|
Repayment
to director
|
(104,380
|
)
|
(79,026
|
)
|
|||
|
Advances
from director
|
-
|
250,000
|
|||||
|
Net
cash (used in)/provided by financing activities
|
(597,523
|
)
|
1,900,813
|
||||
|
Effect
of exchange rate changes on cash and cash
equivalents
|
110,633
|
62,691
|
|||||
|
Net
(decrease)/increase in cash and cash equivalents
|
(1,359,284
|
)
|
303,863
|
||||
|
Cash
and cash equivalents at beginning of
period
|
2,281,516
|
945,727
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
922,232
|
$
|
1,249,590
|
|||
|
Supplemental
disclosure of cash flow
information
|
|||||||
|
Cash
paid during the period:
|
|||||||
|
Income
tax paid
|
295,558
|
428,513
|
|||||
|
Interest
paid
|
741,558
|
250,083
|
|||||
See
accompanying notes to consolidated financial statements.
5
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed
in US Dollars)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Sunrise
Real Estate Development Group, Inc. (“CY-SRRE”) was established in the Cayman
Islands on April 30, 2004 as a limited liability company. CY-SRRE was wholly
owned by Ace Develop Properties Limited, a corporation, (“Ace Develop”), of
which Lin Chi-Jung, an individual, is the principal and controlling shareholder.
Shanghai Xin Ji Yang Real Estate Consultation Company Limited (“SHXJY”) was
established in the People’s Republic of China (the “PRC”) on August 14, 2001 as
a limited liability company. SHXJY was originally owned by a Taiwanese company,
of which the principal and controlling shareholder was Lin Chi-Jung. On June
8,
2004, all the fully paid up capital of SHXJY was transferred to CY-SRRE. On
June
25, 2004 SHXJY and two individuals established a subsidiary, namely, Suzhou
Xin
Ji Yang Real Estate Consultation Company Limited (“SZXJY”) in the PRC, at which
point in time, SHXJY held a 90% equity interest in SZXJY. On December 24, 2004,
SHXJY acquired 85% of equity interest in Beijing Xin Ji Yang Real Estate
Consultation Company Limited (“BJXJY”), a PRC company incorporated on April 16,
2003 with limited liability. On August 9, 2005, SHXJY sold a 10% equity interest
in SZXJY to a company owned by a director of SZXJY, and transferred a 5% equity
interest in SZXJY to CY-SRRE. Following the disposal and the transfer, CY-SRRE
effectively held an 80% equity interest in SZXJY. On November 24, 2006, CY-SRRE,
SHXJY, a director of SZXJY and a third party established a subsidiary, namely,
Suzhou Shang Yang Real Estate Consultation Company Limited (“SZSY”) in the PRC,
with CY-SRRE holding a 12.5% equity interest, SHXJY holding a 26% equity
interest and the director of SZXJY holding a 12.5% equity interest in SZSY.
At
the date of incorporation, SRRE and the director of SZXJY entered into a voting
agreement that SRRE is entitled to exercise the voting right in respect of
his
12.5% equity interest in SZSY. Following that, SRRE effectively holds 51% equity
interest in SZSY. On September 24, 2007, CY-SRRE sold a 5% equity interest
in
SZXJY to a company owned by a director of SZXJY. Following the disposal, CY-SRRE
effectively holds 75% equity interest in SZXJY. On November 1, 2007, SZXJY
established a wholly owned subsidiary, Suzhou Xin Ji Yang Real Estate Brokerage
Company Limited (“SZXJYB”) in the PRC as a limited liability company. On May 8,
2008, SHXJY established a wholly owned subsidiary, Kunshan Shang Yang Real
Estate Brokerage Company Limited (“KSSY”) in the PRC as a limited liability
company.
LIN
RAY
YANG Enterprise Ltd. (“LRY”) was established in the British Virgin Islands on
November 13, 2003 as a limited liability company. LRY was owned by Ace Develop,
Planet Technology Corporation (“Planet Tech”) and Systems & Technology
Corporation (“Systems Tech”). On February 5, 2004, LRY established a wholly
owned subsidiary, Shanghai Shang Yang Real Estate Consultation Company Limited
(“SHSY”) in the PRC as a limited liability company. On January 10, 2005, LRY and
a PRC third party established a subsidiary, Suzhou Gao Feng Hui Property
Management Company Limited (“SZGFH”), in the PRC, with LRY holding 80% of the
equity interest in SZGFH. On May 8, 2006, LRY acquired 20% of the equity
interest in SZGFH from the third party. Following the acquisition, LRY
effectively holds 100% of the equity interest in SZGFH. On September 11, 2007
SHSY and other third parties established a subsidiary, namely, Suzhou Bin Fen
Nian Dai Administration Consultancy Company Limited (“SZBFND”) in the PRC, with
SHSY holding a 19% equity interest in SZBFND.
SHXJY,
SZXJY, BJXJY, SHSY, SZGFH, SZSY, SZXJYB and KSSY commenced operations in
November 2001, June 2004, January 2004, February 2004, January 2005, November
2006, November 2007 and May 2008 respectively. Each of SHXJY, SZXJY, BJXJY,
SHSY, SZGFH, SZSY, SZXJYB and KSSY has been granted a twenty-year operation
period from the PRC, which can be extended with approvals from relevant PRC
authorities.
On
August
31, 2004, Sunrise Real Estate Group, Inc. (“SRRE”), CY-SRRE and Lin Chi-Jung, an
individual and agent for the beneficial shareholder of CY-SRRE, i.e., Ace
Develop, entered into an exchange agreement under which SRRE issued 5,000,000
shares of common stock to the beneficial shareholder or its designees, in
exchange for all outstanding capital stock of CY-SRRE. The transaction closed
on
October 5, 2004. Lin Chi-Jung is Chairman of the Board of Directors of SRRE,
the
President of CY-SRRE and the principal and controlling shareholder of Ace
Develop.
Also
on
August 31, 2004, SRRE, LRY and Lin Chi-Jung, an individual and agent for
beneficial shareholders of LRY, i.e., Ace Develop, Planet Tech and Systems
Tech,
entered into an exchange agreement under which SRRE issued 10,000,000 shares
of
common stock to the beneficial shareholders, or their designees, in exchange
for
all outstanding capital stock of LRY. The transaction was closed on October
5,
2004. Lin Chi-Jung is Chairman of the Board of Directors of SRRE, the President
of LRY and the principal and controlling shareholder of Ace Develop. Regarding
the 10,000,000 shares of common stock of SRRE issued in this transaction, SRRE
issued 8,500,000 shares to Ace Develop, 750,000 shares to Planet Tech and
750,000 shares to Systems Tech.
6
As
a
result of the acquisition, the former owners of CY-SRRE and LRY hold a majority
interest in the combined entity. Generally accepted accounting principles
require in certain circumstances that a company whose shareholders retain the
majority voting interest in the combined business be treated as the acquirer
for
financial reporting purposes. Accordingly, the acquisition has been accounted
for as a “reverse acquisition” arrangement whereby CY-SRRE and LRY are deemed to
have purchased SRRE. However, SRRE remains the legal entity and the Registrant
for Securities and Exchange Commission reporting purposes. All shares and per
share data prior to the acquisition have been restated to reflect the stock
issuance as a recapitalization of CY-SRRE and LRY.
SRRE
was
initially incorporated in Texas on October 10, 1996, under the name of Parallax
Entertainment, Inc. (“Parallax”). On December 12, 2003, Parallax changed its
name to Sunrise Real Estate Development Group, Inc. On April 25, 2006, Sunrise
Estate Development Group, Inc. filed Articles of Amendment with the Texas
Secretary of State, changing the name of Sunrise Real Estate Development Group,
Inc. to Sunrise Real Estate Group, Inc., effective from May 23, 2006.
Figure
1:
Company Organization Chart
SRRE
and
its subsidiaries, namely, CY-SRRE, LRY, SHXJY, SZXJY, SZXJYB, SZSY, KSSY, BJXJY,
SHSY and SZGFH are sometimes hereinafter collectively referred to as “the
Company.”
The
principal activities of the Company are property brokerage services, real estate
marketing services, property leasing services and property management services
in the PRC.
7
Restatement
Summary
The
Company discovered errors to previously issued financial statements for the
fiscal years ended December 31, 2007 and 2006 and the quarter ended March 31,
2008. The company intends to file the restated financial statements for these
periods as soon as practicable but has not filed them. However, the current
financial statements are stated as if the correction of the error had been
made
One
restatement
relates to the recognition of revenue from underwriting sales. The Company
entered into an agreement in 2004 to underwrite an office building in Suzhou,
known as Suzhou Sovereign Building. Under the Underwriting Model, our commission
revenue is equivalent to the price difference between the final selling price
and underwriting price. In marketing of the property, the Company also launched
a promotional package by entering into leasing agreements with certain buyers
to
lease the properties for them. The leasing period started in the second quarter
of 2006, and in the leasing period the Company has the right to sublease the
leased properties to earn rental income. The Company recognised commission
revenue from underwriting service when the property developer and the buyer
complete a property sales transaction, which is normally at the time when the
property developer has confirmed that the predetermined level of sales proceeds
have been received from buyers. The Company accounted for its liability for
its
obligations under a guarantee in accordance with FASB Interpretation No. 45,
(FIN45) Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Direct Guarantees of Indebtedness of Others. It is the only
underwriting agreement the Company entered since its incorporation.
The
Securities and Exchange Commission has provided the Company with comments
concerning the Company’s Form 10-K for the fiscal year ended December 31, 2006,
particularly with respect to certain revenue recognition policies on
underwriting sales. The
Company has subsequently determined that the correct application of accounting
principles had not been applied for the
recognition of underwriting sales revenue.
In this
correction, the financial statements for the years ended December 31, 2007
and
2006 and the quarter ended March 31, 2008 were restated to increase the
Company’s deferred tax assets and deposits received from underwriting sales by
deferring revenue recognition to the consummation of the sale, generally when
the remaining maximum exposure to loss is reduced below the amount of gain
deferred. As a result, the Company’s net asset values as of December 31, 2007
and March 31, 2008 were reduced by $6,300,897 and $6,563,699, respectively.
The
correction of this error reduced the Company’s losses for the year ended
December, 2007 by $157,811 and gave no effect on the income statement of the
Company for each of the two quarters ended June 30, 2008 and 2007.
An
additional restatement relates to correct the overstatement of the minority
shareholders’ share of the Company’s result by US$106,759. As a result of the
correction of this item, the Company’s financial statements for the year ended
2007 were restated and the Company’s loss for the year ended December 31, 2007
and the accumulated losses as of December 31, 2007 were reduced by
US$106,759.
Certain
comparative figures have been reclassified in conformity of the current period’s
presentation.
NOTE
2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Accounting and Principles of Consolidation
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America and present
the
financial statements of SRRE and its subsidiaries, CY-SRRE, LRY, SHXJY, SZXJY,
SZXJYB, SZSY, KSSY, BJXJY, SHSY and SZGFH. All inter-company transactions and
balances have been eliminated.
Going
Concern
The
Company’s financial statements are prepared according to the accounting
principles generally accepted in the United States of America applicable to
a
going concern, which contemplates the realization of assets and liquidation
of
liabilities in the normal course of business. The Company has incurred losses
of
$2,117,728 for the first and second quarters of 2008 and had net working capital
deficiency of $579,155 as of June 30, 2008. The Company’s
net
working capital deficiency, recurring losses and negative cash flows from
operations raise substantial doubt about its ability to continue as a going
concern.
However,
management believes that the company is able to generate sufficient cash flow
to
meet its obligations on a timely basis and ultimately to attain successful
operations in respect of the agency sales and building management operations.
Accordingly, the accompanying financial statements do not include any
adjustments that may be necessary if the Company is unable to continue as a
going concern.
8
Foreign
Currency Translation and Transactions
The
functional currency of SRRE, CY-SRRE and LRY is United States Dollars (“US$”)
and the financial records are maintained and the financial statements prepared
in US $. The functional currency of SHXJY, SZXJY, SZXJYB, SZSY, KSSY, BJXJY,
SHSY and SZGFH is Renminbi (“RMB”) and the financial records are maintained and
the financial statements prepared in RMB.
Foreign
currency transactions during the period are translated into each company’s
denominated currency at the exchange rates ruling at the transaction dates.
Gain
and loss resulting from foreign currency transactions are included in the
consolidated statement of operations. Assets and liabilities denominated in
foreign currencies at the balance sheet date are translated into each company’s
denominated currency at period end exchange rates. All exchange differences
are
dealt with in the consolidated statements of operations.
The
financial statements of the Company’s operations based outside of the United
States have been translated into US$ in accordance with SFAS 52. Management
has
determined that the functional currency for each of the Company’s foreign
operations is its applicable local currency. When translating functional
currency financial statements into US$, period-end exchange rates are applied
to
the consolidated balance sheets, while average period rates are applied to
consolidated statements of operations. Translation gains and losses are recorded
in translation reserve as a component of shareholders’ equity.
The
exchange rate between US$ and RMB had a little fluctuation during the periods
presented. The rates as of June 30, 2008 and December 31, 2007 are US$1:
RMB6.8591 and US$1: RMB7.3046, respectively.
Property,
Plant, Equipment and Depreciation
Property,
plant and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows:
|
Estimated Useful Life (in years)
|
||
|
Furniture
and fixtures
|
5-10
|
|
|
Computer
and office equipment
|
5
|
|
|
Motor
vehicles
|
5
|
|
|
Properties
|
20
|
Maintenance,
repairs and minor renewals are charged directly to the statement of operations
as incurred. Additions and improvements are capitalized. When assets are
disposed of, the related cost and accumulated depreciation thereon are removed
from the accounts and any resulting gain or loss is included in the statement
of
operations.
Investment
property
Investment
properties are stated at cost. Depreciation is computed using the straight-line
method to allocate the cost of depreciable assets over the estimated useful
lives of 20 years.
Significant
additions that extend property lives are capitalized and are depreciated over
their respective estimated useful lives. Routine maintenance and repair costs
are expensed as incurred. The Company reviews its investment property for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an investment property may not be recoverable.
9
Goodwill
SFAS
No.
142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested
for impairment on an annual basis (December 31 for us) and between annual tests
if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value. These events
or circumstances could include a significant change in the business climate,
legal factors, operating performance indicators, competition, sale or
disposition of a significant portion of a company. Application of the goodwill
impairment test requires judgment, including the determination of the fair
value
of a company. The fair value of a company is estimated using a discounted cash
flow methodology. This requires significant judgments including estimation
of
future cash flows, which is dependent on internal forecasts, estimation of
the
long-term rate of growth for our business, the useful life over which cash
flows
will occur, and the determination of our weighted average cost of capital.
Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for a
company.
Revenue
Recognition
Agency
commission revenue from property brokerage is recognized when the property
developer and the buyer complete a property sales transaction, and the property
developer grants
confirmation to us to be able to invoice them accordingly. The time when we
receive the commission is
normally at the time when the property developer receives from the buyer a
portion of the sales proceeds in accordance with the terms of the relevant
property sales agreement, or the balance of the bank loan to the buyer has
been
funded, or recognized under the sales schedule or other specific items of agency
sales agreement with developer. At no point does the Company handle any monetary
transactions nor act as an escrow intermediary between the developer and the
buyer.
Revenue
from marketing consultancy services is recognized when services are provided
to
clients.
Rental
revenue from property management and rental business is recognized on a
straight-line basis according to the time pattern of the leasing
agreements.
The
Company accounts for underwriting sales in accordance with SFAS No. 66
“Accounting for Sales of Real Estate” (SFAS 66). The gain on underwriting sales
is recognized when the criteria in SFAS No. 66 have been met, generally at
the
title is transferred and the Company no longer has substantial continuing
involvement with the real estate asset sold. If the Company provides certain
rent guarantees or other forms of support where the maximum exposure to loss
exceeds the gain, it defers the related commission income and expenses by
applying the deposit method. In future periods, the commission income and
related expenses are recognized when the remaining maximum exposure to loss
is
reduced below the amount of gain deferred.
All
revenues represent gross revenues less sales and business tax.
Net
Earnings per Common Share
The
Company computes net earnings per share in accordance with SFAS No. 128,
“Earnings per Share.” Under the provisions of SFAS No. 128, basic net earnings
per share is computed by dividing the net earnings available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net earnings
per
share gives recognizes common stock equivalents, however; potential common
stock
in the diluted EPS computation is excluded in net loss periods, as their effect
is anti-dilutive.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109 “Accounting
for Income Taxes.” Under SFAS No. 109, deferred tax liabilities or assets at the
end of each period are determined using the tax rate expected to be in effect
when taxes are actually paid or recovered. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
10
We
continue to account for income tax contingencies
using a benefit recognition model. Beginning
January 1, 2007, if we consider that a tax position is 'more likely than not'
of
being sustained upon audit, based solely on the technical merits of the
position, we recognize the benefit. We measure the benefit by determining the
amount that is greater than 50% likely of being realized upon settlement,
presuming that the tax position is examined by the appropriate taxing authority
that has full knowledge of all relevant information. These assessments can
be
complex and we often obtain assistance from external advisors.
Under
the
benefit recognition model, if our initial assessment fails to result in the
recognition of a tax benefit, we regularly monitor our position and subsequently
recognize the tax benefit if there are changes in tax law or analogous case
law
that sufficiently raise the likelihood of prevailing on the technical merits
of
the position to more likely than not; if the statute of limitations expires;
or
if there is a completion of an audit resulting in a settlement of that tax
year
with the appropriate agency.
Uncertain
tax positions, represented by liabilities on our balance sheet, are now
classified as current only when we expect to pay cash within the next 12 months.
Interest and penalties, if any, continue to be recorded in Provision for taxes
on income and are classified on the balance sheet with the related tax
liability.
Historically,
our policy had been to account for income tax contingencies based on whether
we
determined our tax position to be 'probable' under current tax law of being
sustained, as well as an analysis of potential outcomes under a given set of
facts and circumstances. In addition, we previously considered all tax
liabilities as current once the associated tax year was under
audit.
Non-employee
stock based compensation
The
cost
of stock based compensation awards issued to non-employees for services are
recorded at either the fair value of the services rendered or the instruments
issued in exchange for such services, whichever is more readily determinable,
using the measurement date guidelines enumerated in Emerging Issues Task Force
Issue ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF 96-18").
Segment
information
The
Company believes that it operates in one business segment. Management does
with
the business as consisting of several revenue streams; however it is not
possible to attribute assets or indirect costs to the individual streams other
than direct expenses.
NOTE
3 - PROMISSORY DEPOSITS
The
balance of $947,646 represents the deposits placed with several property
developers in respect of a number of real estate projects where the Company
is
appointed as sales agent.
NOTE
4 - OTHER RECEIVABLES AND DEPOSITS
|
June 30
|
December 31,
|
|
|||||
|
|
|
2008
|
|
2007
|
|||
|
(Unaudited)
|
(Audited)
|
||||||
|
Advances
to staff
|
$
|
20,335
|
$
|
20,486
|
|||
|
Rental
deposits
|
91,341
|
101,370
|
|||||
|
Prepaid
rental
|
362,876
|
406,833
|
|||||
|
Renovation
deposit
|
279,262
|
-
|
|||||
|
Other
receivables
|
84,192
|
73,684
|
|||||
|
$
|
838,006
|
$
|
602,373
|
||||
11
NOTE
5 – PROPERTY, PLANT AND EQUIPMENT–
NET
|
June 30,
|
|
December 31,
|
|
||||
|
|
|
2008
|
|
2007
|
|
||
|
|
|
(Unaudited)
|
|
(Audited)
|
|||
|
Furniture
and fixtures
|
$
|
146,348
|
$
|
133,970
|
|||
|
Computer
and office equipment
|
318,107
|
275,988
|
|||||
|
Motor
vehicles
|
667,106
|
618,024
|
|||||
|
Properties
|
2,205,751
|
2,071,225
|
|||||
|
3,337,312
|
3,099,207
|
||||||
|
Less:
Accumulated depreciation
|
(591,464
|
)
|
(579,622
|
)
|
|||
|
$
|
2,745,848
|
$
|
2,519,585
|
||||
All
above
properties as of June 30, 2008 and as of December 31, 2007 were pledged to
secure a loan in note 9.
NOTE
6 – EQUITY INVESTMENT
On
September 11, 2007, SHSY invested a 19% equity interest in a PRC company named
Suzhou Bin Fen Nian Dai Administration Consultancy Company Limited (“SZBFND”).
NOTE
7 – INVESTMENT PROPERTIES
|
June 30,
|
|
December 31,
|
|
||||
|
|
|
2008
|
|
2007
|
|||
|
(Unaudited)
|
(Audited)
|
||||||
|
Investment
property
|
$
|
8,617,917
|
$
|
8,092,319
|
|||
|
Less:
Accumulated depreciation
|
(573,528
|
)
|
(292,091
|
)
|
|||
|
$
|
8,044,389
|
$
|
7,800,228
|
||||
The
investment
properties included one floor and four units of a commercial building in Suzhou,
the PRC, from which the Company derives its underwriting sales income. The
investment properties were acquired by the Company for long-term
investment purposes and were pledged to secure a loan in note 9.
As
of
August 11, 2008, the four units of the investment properties were leased to
SZBFND, a related party of the Company, and 21% of the total area of the one
remaining floor was leased out.
NOTE
8 –
DEFERRED TAX ASSET
The
net
deferred tax assets from continuing operations are determined under the
liability method based on the difference between the financial statement and
tax
basis of assets and liabilities as measured by the enacted statutory tax rates.
The deferred tax provision (benefit) is the result of changes in these temporary
differences. As of December 31, 2007 and June 30, 2008, the tax effect of the
temporary differences mainly represent the deferred tax assets arising from
the
deferred gain of the underwriting sale using the deposit method.
NOTE
9 - BANK LOANS
Bank
loans of June 30, 2008 included two bank loans, as listed below:
First,
the balance includes a bank loan of $5,819,192. This bank loan is repayable
before August 2, 2010 and bears interest at a rate of 8.217% per annum. This
bank loan is secured by the properties as mentioned in Note 7 above. The
repayment schedule of this bank loan is as follows:
|
February
1, 2010
|
$
|
1,457,917
|
||
|
August
2, 2010
|
$
|
4,361,275
|
12
Pursuant
to the relevant loan agreement, the using of the bank loan is restricted to
pay
for deposits and expenditures incurred in performing any real estate marketing
projects of the Company, and approval from the lending bank is required for
any
drawings in excess of RMB1 million from the remaining balance. This balance
is
recorded as restricted cash on the balance sheet.
Second,
the remaining bank loan of $510,271 bears interest at 6.48% per annum, and
is
repayable before December 15, 2010 in monthly installments. The bank loan is
secured by the properties as mentioned in Note 5 above.
NOTE
10 – PROMISSORY NOTES PAYABLE
There
are
three promissory notes, as listed below:
First,
the balance includes a promissory note of $190,556. This promissory note of
$190,556 bears interest at a rate of 5% per annum. The promissory note is
unsecured and will be repayable before October 31, 2009.
Second,
the balance includes a promissory note of $75,000 and accrued interest of $8,854
thereon. This promissory note of $75,000 bears interest at a rate of 5% per
annum. This promissory note is unsecured and the term of repayment is not
specifically defined.
Third,
the balance includes a promissory note of $300,000. This promissory note of
$300,000 bears interest at a rate of 15% per annum. This promissory note is
unsecured and the term of repayment is not specifically
defined.
NOTE
11 – AMOUNTS WITH RELATED PARTIES AND DIRECTORS
A
related
party is an entity that can control or significantly influence the management
or
operating policies of another entity to the extent one of the entities may
be
prevented from pursuing its own interests. A related party may also be any
party
the entity deals with that can exercise that control.
Amount
due to director
The
amount due to one of the directors with interest at a rate of 9.6% per annum.
As
of June 30, 2008, the balance includes principal of $62,742
and accrued interest of $8,739 thereon.
The
principal is unsecured and the
term
of repayment is not specifically defined.
Amount
due from related party
The
amount represents an advance to SZBFND which is unsecured, interest free and
has
no fixed term of repayment.
Amount
due to related party
The
amount represents a rental deposits received from SZBFND. Rental income of
$288,878 is generated from leasing the investment properties to SZBFND during
the period. This amount is unsecured, interest free and repayable on
demand.
NOTE
12 - OTHER PAYABLES AND ACCRUED EXPENSES
|
June 30,
|
December 31,
|
||||||
|
|
2008
|
2007
|
|||||
|
(Unaudited)
|
(Audited)
|
||||||
|
Accrued
staff commission & bonus
|
$
|
344,448
|
$
|
1,013,650
|
|||
|
Rental
deposits received
|
657,058
|
519,352
|
|||||
|
Other
payables
|
612,089
|
384,019
|
|||||
|
$
|
1,613,595
|
$
|
1,917,021
|
||||
13
NOTE
13 – OTHER TAX PAYABLE
Other
tax
payable mainly represents PRC business tax which is charged at a rate of 5%
on
the revenue from services rendered. The amount of PRC business tax charged
for
the period ended June 30, 2008 was $208,539.
Operating
Lease Commitments
During
the six months ended June 30, 2008 and 2007, the Company incurred lease expenses
amounting to $200,536 and $127,715, respectively. As of June 30, 2008, the
Company had commitments under operating leases, requiring annual minimum rentals
as follows:
|
June
30,
|
|
December
31,
|
|
||||
|
|
|
2008
|
|
2007
|
|||
|
(Unaudited)
|
(Audited)
|
||||||
|
Within
one year
|
$
|
192,562
|
$
|
132,628
|
|||
|
Two
to five years
|
111,553
|
133,847
|
|||||
|
Operating
lease commitments
|
$
|
304,115
|
$
|
266,475
|
|||
During
the year of 2005 and 2006, SZGFH entered into leasing agreements with certain
buyers of the Sovereign Building underwriting project to lease the properties
for them. These leasing agreements on
these
properties
are for
62% of the floor space that was sold to third party buyers. In
accordance with the leasing agreements, the owners of the properties can have
an
annual rental return of 8.5% and 8.8% per annum for a period of 5 years and
8
years, respectively. The leasing period started in the second quarter, 2006,
and
the Company has the right to sublease the leased properties to cover these
lease
commitments in the leasing period. As of June
30,
2008,
124 sub-leasing agreements have been signed, the area of these sub-leasing
agreements represented 95% of total area with these lease
commitments.
As
of
June 30, 2008, the lease commitments are as follows:
|
June
30,
|
December
31,
|
||||||
|
|
2008
|
2007
|
|||||
|
|
(Unaudited)
|
(Audited)
|
|||||
|
Within
one year
|
$
|
3,230,861
|
$
|
3,047,216
|
|||
|
Two
to five years
|
7,510,217
|
8,412,157
|
|||||
|
Over
five years
|
2,370,280
|
2,181,446
|
|||||
|
Operating
lease commitments arising from the promotional package
|
$
|
13,111,358
|
$
|
13,640,819
|
|||
According
to the leasing agreements, the Company has an option to terminate any agreement
by paying a predetermined compensation. As of June 30, 2008, the compensation
to
terminate all leasing agreements is $3,189,634. According to the sub-leasing
agreements that have been signed through June 30, 2008, the rental income from
these sub-leasing agreements will be $2,176,808 within one year and $3,440,809
within two to five years. However, no
assurance can be given that we can collect all of the rental
income.
NOTE
15 –DEPOSITS RECEIVED FROM UNDERWRTING SALES
The
Company accounts for its underwriting sales revenue with underwriting rent
guarantees in accordance with SFAS No. 66 “Accounting for Sales of Real Estate”
(SFAS 66). Under SFAS 66, the deposit method should be used for the revenue
from
the sales of floor space with underwriting rent guarantees until the rental
revenues generated by sub-leasing properties exceed the guaranteed rental amount
due to the purchasers.
14
NOTE
16 – STATUTORY RESERVE
According
to the relevant corporation laws in the PRC, a PRC company is required to
transfer at least 10% of its profit after taxes, as determined under accounting
principles generally accepted in the PRC, to the statutory reserve until the
balance reaches 50% of its registered capital. The statutory reserve can be
used
to make good on losses or to increase the capital of the relevant
company.
NOTE
17 – ACCUMULATED OTHER COMPREHENSIVE INCOME
As
of
June 30, 2008, the only component of accumulated other comprehensive income
was
translation reserve.
NOTE
18 – COMPARATIVE FIGURES
Certain
comparative figures have been reclassified to conform with current period’s
presentation
NOTE
19 – CONCENTRATION OF CUSTOMERS
During
the three months and six months ended June 30, 2008 and 2007, the following
customers accounted for more than 10% of total net revenue:
|
Percentage of
Net Sales
Three Months
Ended June 30,
|
Percentage of
Net Sales
Six Months
Ended June 30,
|
Percentage of
Accounts Receivable
as of June 30,
|
|||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
||||||||||||||
|
Customer
A
|
21
|
%
|
11
|
%
|
13
|
%
|
*
|
26
|
%
|
*
|
|||||||||
|
Customer
B
|
15
|
%
|
*
|
15
|
%
|
*
|
*
|
*
|
|||||||||||
|
Customer
C
|
14
|
%
|
*
|
*
|
*
|
*
|
*
|
||||||||||||
*
less
than 10%
15
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY
STATEMENT
The
following Management’s Discussion and Analysis (“MD&A”) is intended to help
the reader understand Sunrise Real Estate Group, Inc. (“SRRE”). The MD&A is
provided as a supplement to, and should be read in conjunction with, our
financial statements and the accompanying notes. The information contained
in
this quarterly report on Form 10-Q is not a complete description of our business
or the risks associated with an investment in our common stock. We urge you
to
carefully review and consider the various disclosures made by us in this report
and in our other reports filed with the Securities and Exchange Commission,
or
SEC, including but not limited to our annual report on Form 10-KSB for the
year
ended December 31, 2007, which discusses our business in greater detail.
In
this
report we make, and from time to time we otherwise make, written and oral
statements regarding our business and prospects, such as projections of future
performance, statements of management’s plans and objectives, forecasts of
market trends, and other matters that are forward-looking statements within
the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements containing the words or phrases
“will likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimates,” “projects,” “seeks”, “believes,” “expects,” “anticipates,”
“intends,” “target,” “goal,” “plans,” “objective,” “should” or similar
expressions identify forward-looking statements, which may appear in documents,
reports, filings with the Securities and Exchange Commission, news releases,
written or oral presentations made by officers or other representatives made
by
us to analysts, stockholders, current or potential investors, news organizations
and others, and discussions with management and other of our representatives,
customer and suppliers. For such statements, we claim the protection of the
safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement speaks only as of the date on which such statement
is
made. Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information
from
suppliers, government agencies and other sources that may be subject to
revision. Except as required by law, we do not undertake any obligation to
update or keep current either (i) any forward-looking statement to reflect
events or circumstances arising after the date of such statement, or (ii) the
important factors that could cause our future results to differ materially
from
historical results or trends, results anticipated or planned by us, or which
are
reflected from time to time in any forward-looking statement.
In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause
our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time
in
any forward-looking statement. Some of these important factors, but not
necessarily all important factors, include those
relating to our ability to raise money and grow our business, and potential
difficulties in integrating new acquisitions with our current operations,
especially as they pertain to foreign markets and market conditions. Please
also
refer to the section entitled “Risk Factors” in our Annual Report on Form 10-KSB
for the year ended December 31, 2007.
OVERVIEW
In
October 2004, the former shareholders of Sunrise Real Estate Development Group,
Inc. (Cayman Islands) (“CY-SRRE”) and LIN RAY YANG Enterprise Ltd. (“LRY”)
acquired a majority of our voting interests in a share exchange. Before the
completion of the share exchange, SRRE had no continuing operations, and its
historical results would not be meaningful if combined with the historical
results of CY-SRRE, LRY and their subsidiaries.
As
a
result of the acquisition, the former owners of CY-SRRE and LRY hold a majority
interest in the combined entity. Generally accepted accounting principles
require in certain circumstances that a company whose shareholders retain the
majority voting interest in the combined business be treated as the acquirer
for
financial reporting purposes. Accordingly, the acquisition has been accounted
for as a “reverse acquisition” arrangement whereby CY-SRRE and LRY are deemed to
have purchased SRRE. However, SRRE remains the legal entity and the Registrant
for Securities and Exchange Commission reporting purposes. The historical
financial statements prior to October 5, 2004 are those of CY-SRRE and LRY
and
their subsidiaries. All equity information and per share data prior to the
acquisition have been restated to reflect the stock issuance as a
recapitalization of CY-SRRE and LRY.
16
SRRE
and
its subsidiaries, namely, CY-SRRE, LRY, Shanghai Xin Ji Yang Real Estate
Consultation Company Limited (“SHXJY”), Suzhou Xin Ji Yang Real Estate
Consultation Company Limited (“SZXJY”), Beijing Xin Ji Yang Real Estate
Consultation Company Limited (“BJXJY”), Shanghai Shangyang Real Estate
Consultation Company Limited (“SHSY”), Suzhou Gao Feng Hui Property Management
Company Limited (“SZGFH”), Suzhou
Shang Yang Real Estate Consultation Company Limited (“SZSY”), Suzhou
Xin Ji Yang Real Estate Brokerage Company Limited(“SZXJYB”)
and
Kunshan
Shang Yang Real Estate Brokerage Company Limited (“KSSY”)are
sometimes hereinafter collectively referred to as “the Company,” “our,” or “us”.
The principal activities of the Company are real estate agency sales, real
estate marketing services, real estate investments, property leasing services
and property management services in the PRC.
RECENT
DEVELOPMENTS
Our
major
business was agency sales, whereby our Chinese subsidiaries contracted with
property developers to market and sell their newly developed property units.
For
these services we earned a commission fee calculated as a percentage of the
sales prices. We have focused our sales on the whole China market, especially
in
secondary cities. To expand our agency business, we have established
subsidiaries in Shanghai, Suzhou and Beijing, and branches in NanChang,
YangZhou, NanJing and ChongQing.
During
the year of 2005 and 2006, SZGFH entered into leasing agreements with certain
buyers of the Sovereign Building underwriting project to lease the properties
for them. These leasing agreements on
these
properties
are for
62% of the floor space that was sold to third party buyers. In
accordance with the leasing agreements, the owners of the properties can have
an
annual rental return of 8.5% and 8.8% per annum for a period of 5 years and
8
years, respectively. The leasing period started in the second quarter, 2006,
and
the Company has the right to sublease the leased properties to cover these
lease
commitments in the leasing period. As of August
11,
2008,
124 sub-leasing agreements have been signed, the area of these sub-leasing
agreements represented 95% of total area with these lease
commitments.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
February 2008, the FASB issued FSP FAS 157-2, which delayed the effective date
of SFAS No 157 to fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years for all non-financial assets and nonfinancial
liabilities, except those are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The Company
does
not believe that the adoption of SFAS No. 157 will significantly impact its
financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations,” (“SFAS 141R”) to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
This Statement applies to all transactions or other events in which an entity
obtains control of one or more businesses, and combinations achieved without
the
transfer of consideration. SFAS No. 141 (revised 2007) is effective for business
combinations for which the acquisition date is in on or after the beginning
of
the first annual reporting period beginning on or after December 15, 2008.
The
impact of adopting SFAS 141R will depend on the nature and size of the future
business combinations the Company consummates after the effective
date.
FASB
statement No. 160 “Noncontrolling Interests in Consolidated Financial
Statements- an amendment of ARB No. 51” was issued December of 2007. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. The Company believes that this new pronouncement
will have an immaterial impact on the Company’s financial statements in future
periods.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Critical accounting policies for us include revenue
recognition, net earnings per common share, income taxes and segment
information.
17
Revenue
Recognition
Agency
commission revenue from property brokerage is recognized when the property
developer and the buyer complete a property sales transaction, and the property
developer grants
confirmation to us to be able to invoice them accordingly. The time when we
receive the commission is
normally at the time when the property developer receives from the buyer a
portion of the sales proceeds in accordance with the terms of the relevant
property sales agreement, or the balance of the bank loan to the buyer has
been
funded, or recognized under the sales schedule or other specific items of agency
sales agreement with developer. At no point does the Company handle any monetary
transactions nor act as an escrow intermediary between the developer and the
buyer.
Revenue
from marketing consultancy services is recognized when services are provided
to
clients.
Rental
revenue from property management and rental business is recognized on a
straight-line basis according to the time pattern of the leasing
agreements.
The
Company accounts for its underwriting sales revenue with underwriting rent
guarantees in accordance with SFAS No. 66 “Accounting for Sales of Real Estate”
(SFAS 66). Under SFAS 66, the deposit method should be used for the revenue
from
the sales of floor space with underwriting rent guarantees until the rental
revenues generated by sub-leasing properties exceed the guaranteed rental amount
due to the purchasers.
All
revenues represent gross revenues less sales and business tax.
Net
Earnings per Common Share
The
Company computes net earnings per share in accordance with SFAS No. 128,
“Earnings per Share.” Under the provisions of SFAS No. 128, basic net earnings
per share is computed by dividing the net earnings available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net earnings
per
share gives recognizes common stock equivalents, however; potential common
stock
in the diluted EPS computation is excluded in net loss periods, as their effect
is anti-dilutive.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109 “Accounting
for Income Taxes.” Under SFAS No. 109, deferred tax liabilities or assets at the
end of each period are determined using the tax rate expected to be in effect
when taxes are actually paid or recovered. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
Segment
Information
The
Company believes that it operates in one business segment. Management does
with
the business as consisting of several revenue streams; however it is not
possible to attribute assets or indirect costs to the individual streams other
than direct expenses.
18
We
provide the discussion and analysis of our changes in financial condition and
results of operations for the three and six months ended June 30, 2008, with
comparisons to the historical three and six months ended June 30,
2007.
Revenue
The
following table shows the net revenue detail by line of business:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
2008
|
% to
total
|
2007
|
% to
total
|
%
change |
2008
|
% to
total
|
2007
|
% to
total
|
%
change |
||||||||||||||||||||||
|
Agency sales
|
1,761,165
|
67
|
1,226,165
|
81
|
44
|
2,507,942
|
63
|
2,000,537
|
75
|
25
|
|||||||||||||||||||||
|
Underwriting
sales
|
-
|
-
|
34,592
|
2
|
(100
|
)
|
-
|
-
|
214,654
|
8
|
(100
|
)
|
|||||||||||||||||||
|
Property
Management
|
880,516
|
33
|
259,290
|
17
|
239
|
1,453,284
|
37
|
440,011
|
17
|
230
|
|||||||||||||||||||||
|
Net
revenue
|
2,641,681
|
100
|
1,520,047
|
100
|
73
|
3,961,226
|
100
|
2,655,202
|
100
|
49
|
|||||||||||||||||||||
The
net
revenue in the second quarter of 2008 was $$2,641,681, which increased 73%
from
$1,520,047 in the second quarter of 2007. The total net revenue of the first
two
quarters of 2008 was $3,961,226, which increased 49% from $2,655,202 of the
first two quarters of 2007. In the second quarter of 2008, agency sales
represented 67% of the total net revenue and property management represented
33%. In the first two quarters of 2008, agency sales represented 63% of the
total net revenue and property management represented 37%. The increase in
net
revenue in the second quarter and first two quarters of 2008 was due to the
both
increase in our agency sales and property management.
Agency
sales
In
the
second quarter and first two quarters of 2008, 67% and 63%, respectively, of
our
net revenue was due to agency sales. As compared with same period in 2007,
net
revenue of agency sales in the second quarter and first two quarters of 2007
increased 44% and 25% respectively. The primary reason for the change was
that:
|
1)
|
In
the first two quarter of 2008, the net revenue from SZSY was $779,455,
which increased 215% from the same period in
2007.
|
|
2)
|
There
was one project began to contribute net revenue from the second quarter,
2008. The net revenue of this project in the second quarter, 2008
was
$329,553.
|
Because
of our diverse market locations, the current macro economic policies had little
impact on our agency sales business, and we are seeking stable growth in our
agency sales business in 2008. However, there can be no assurance that we will
be able to do so.
Underwriting
sales
As
the
Sovereign Building Project was closed in 2007, there was no net revenue of
underwriting sales in 2008.
Property
Management
During
the year of 2005 and 2006, SZGFH entered into leasing agreements with certain
buyers of the Sovereign Building underwriting project to lease the properties
for them. These leasing agreements on
these
properties
are for
62% of the floor space that was sold to third party buyers. The
leasing period started in the second quarter, 2006, and the Company has the
right to sublease the leased properties to cover these lease commitments in
the
leasing period. As of June
30,
2008,
124 sub-leasing agreements have been signed, the area of these sub-leasing
agreements represented 95% of total area with these lease commitments. We expect
that the income from the sub-leasing business will be on a stable growth trend
in 2008 and that it can cover the lease commitments in the leasing period as
a
whole. However there can be no assurance that we will achieve these
objectives.
19
Cost
of Revenue
The
following table shows the cost of revenue detail by line of
business:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
2008
|
% to
total
|
2007
|
% to
total
|
%
change
|
2008
|
% to
total
|
2007
|
% to
total
|
%
change
|
||||||||||||||||||||||
|
Agency
sales
|
1,003,271
|
55
|
514,587
|
36
|
95
|
1,537,593
|
49
|
1,023,979
|
39
|
50
|
|||||||||||||||||||||
|
Underwriting
sales
|
-
|
-
|
39,978
|
3
|
(100
|
)
|
-
|
-
|
12,370
|
1
|
(100
|
)
|
|||||||||||||||||||
|
Property
Management
|
816,912
|
45
|
880,381
|
61
|
(7
|
)
|
1,600,237
|
51
|
1,586,257
|
60
|
1
|
||||||||||||||||||||
|
Cost
of revenue
|
1,820,183
|
100
|
1,434,946
|
100
|
27
|
3,137,830
|
100
|
2,622,606
|
100
|
20
|
|||||||||||||||||||||
The
cost
of revenue of the second quarter of 2008 was $1,820,183, which increased 27%
from $1,434,946 of the second quarter of 2007. The total cost of revenue of
the
first two quarters of 2008 was $3,137,830, which increased 20% from $2,622,606
of the first two quarters of 2007. In the second quarter of 2008, agency sales
represented 55% of the total cost of revenue and property management represented
45%. In the first two quarters of 2008, agency sale represented 49% of the
total
cost of revenue and property management represented 51%. The increase in cost
of
revenue in the second quarter and first two quarters of 2008 was due to the
increase in our agency sales.
Agency
sales
As
compared with same period in 2007, cost of revenue of agency sales in the second
quarter and first two quarters of 2008 increased 95% and 50% respectively.
The
primary reason for the change was the increase in our marketing expenses and
consulting fees of agency sales. In the second quarter and first two quarters
of
2008, our marketing expenses increased $48,023 and $124,263, and consulting
fees
increased $257,599 and $227,709, compared to the same period in
2007.
Underwriting
sales
As
the
Sovereign Building Project was closed in 2007, there was no cost of underwriting
sales in 2008.
Property
management
During
the year of 2005 and 2006, SZGFH entered into leasing agreements with certain
buyers of the Sovereign Building underwriting project to lease the properties
for them. These leasing agreements on
these
properties
are for
62% of the floor space that was sold to third party buyers. In
accordance with the leasing agreements, the owners of the properties can have
an
annual rental return of 8.5% and 8.8% per annum for a period of 5 years and
8
years, respectively. The leasing period started in the second quarter, 2006,
and
we recognized the rental return under these leasing agreements as our
cost.
Operating
Expenses
The
following table shows operating expenses detail by line of
business:
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
2008
|
%
to
total
|
2007
|
%
to
total
|
%
change
|
2008
|
%
to
total
|
2007
|
%
to
total
|
%
change
|
||||||||||||||||||||||
|
Agency
sales
|
298,123
|
91
|
193,414
|
76
|
54
|
576,574
|
90
|
369,512
|
75
|
56
|
|||||||||||||||||||||
|
Underwriting
sales
|
-
|
-
|
21,679
|
8
|
(100
|
)
|
-
|
-
|
54,757
|
11
|
(100
|
)
|
|||||||||||||||||||
|
Property
Management
|
30,366
|
9
|
40,319
|
16
|
(25
|
)
|
62,541
|
10
|
70,652
|
14
|
(11
|
)
|
|||||||||||||||||||
|
Operating
expenses
|
328,489
|
100
|
255,412
|
100
|
29
|
639,115
|
100
|
494,921
|
100
|
29
|
|||||||||||||||||||||
20
The
operating expenses of the second quarter of 2008 were $328,489, which increased
29% from $255,412 of the second quarter of 2007. The total operating expenses
of
the first two quarters of 2008 were $639,115, which increased 29% from $494,921
of the first two quarters of 2007. In the second quarter of 2008, agency sales
represented 91% of the total operating expenses and property management
represented 9%. In the first two quarters of 2008, agency sale represented
90%
of the total operating expenses and property management represented 10%. This
increase was due to the increase in our agency sales.
Agency
sales
When
compared to 2007, the operating expenses for agency sales in the second quarter
and first two quarters of 2008 increased 54% and 56% respectively. The primary
reason for the change was the increase in our staff cost and traveling expenses
of agency sales. In the second quarter and first two quarters of 2008, our
staff
cost increased $39,113 and $96,143, and traveling expenses increased $30,836
and
$31,022, compared to the same period in 2007.
Underwriting
sales
As
the
Sovereign Building Project was closed in 2007, there was no operating expense
of
underwriting sales in 2008.
Property
management
When
compared to 2007, the operating expenses for property management in the second
quarter and first two quarters of 2008 decreased 25% and 11% respectively.
The
primary reason for the change was the decrease in our agency commissions of
property management. In the second quarter and first two quarters of 2008,
the
agency commissions decreased $29,122 and $43,128, compared to the same period
in
2007.
General
and Administrative Expenses
When
compared to 2007, the general and administrative expenses in the second quarter
and first two quarters of 2008 increased 17% and 9% respectively. The primary
reason for the change was the increase in our staff cost and depreciation
expenses. In the second quarter and first two quarters of 2008, our staff cost
increased $104,916 and $44,166, and depreciation expenses increased $40,960
and
$144,952, compared to the same period in 2007.
Interest
Expenses
When
compared to 2007, the interest expenses in the second quarter and first two
quarters of 2008 decreased 30% and 30% respectively. The interest expenses
relate to bank loans and promissory notes payable. The decrease was mainly
due
to the decrease in interest on promissory notes payable.
In
the
first two quarters of 2008, our principal sources of cash were revenues from
our
agency sales business. We expect these sources of revenues will continue to
meet
our cash requirements, including debt service, operating expenses and promissory
deposits for various property projects.
Most
of
our cash resources were used to fund our revenue related expenses, such as
salaries and commissions paid to the sales force, daily administrative expenses,
the maintenance of regional offices and promissory deposits, and the repayments
of our bank loans and promissory notes.
We
ended
the period with a cash position of $1,152,474 (including cash and cash
equivalents of $922,232 and restricted cash of $230,242). The Company’s
operating activities used cash in the amount of $2,980,735 in the first two
quarters of 2008, which was primarily attributable to the Company’s net loss and
payment of promissory deposits.
21
The
Company’s investing activities generated cash in the amount of $2,108,341 in the
first two quarters of 2008, which was primarily attributable to the decreased
in
restricted cash balance.
The
Company’s financing activities used cash in the amount of $597,523 in the first
two quarters of 2008, which was primarily attributable to the repayment of
promissory notes.
The
potential cash needs for 2008 will be the repayments of our bank loans and
promissory notes, the rental guarantee payments and promissory deposits for
various property projects.
We
anticipate that our current available funds, cash inflows from our agency sales
and property management, and proceeds from our investment properties will be
sufficient to meet our anticipated needs for working capital expenditures,
business expansion and the potential cash needs during 2008.
If
our
business grows more rapidly than we currently predicted, we plan to raise funds
through the issuance of additional shares of our equity securities in one or
more public or private offerings. We will also consider raising funds through
credit facilities obtained with lending institutions. There can be no guarantee
that we will be able to obtain such funds through the issuance of debt or equity
that are with terms satisfactory to management and our board of
directors.
OFF
BALANCE SHEET ARRANGEMENTS
The
Company has no off-balance sheet arrangements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
A
smaller
reporting company is not required to provide the information required by this
item.
ITEM
4. CONTROLS AND PROCEDURES
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of
our disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), as of June 30, 2008. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of June 30, 2008, our
disclosure controls and procedures were ineffective
in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act.
In
the
course of evaluating our internal controls over financial reporting as at June
30, 2008, management has identified the significant
deficiencies related to the failure to correctly apply accounting principle
in
underwriting revenue recognition and to recognize the minority interest.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. 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.
We
rely
on certain compensating controls, including substantive periodic review of
the
financial statements by our Chief Executive Officer, Chief Financial Officer
and
Audit Committee.
There
were no changes in our internal controls over financial reporting during the
quarter ended June 30, 2008, that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
22
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
Company is not a party to any legal proceedings of a material
nature.
ITEM
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5.
OTHER INFORMATION
None.
ITEM
6. EXHIBITS
|
Exhibit
|
||
|
Number
|
Description
|
|
|
31.1
|
Section
302 Certification by the Corporation's Chief Executive
Officer.
|
|
|
31.2
|
Section
302 Certification by the Corporation's Chief Financial
Officer.
|
|
|
32.1
|
Section
1350 Certification by the Corporation's Chief Executive Officer
and
Corporation's Chief Financial
Officer.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUNRISE
REAL ESTATE GROUP, INC.
|
Date:
August 19, 2008
|
By:
/s/ Lin, Chi-Jung
|
|
|
Lin,
Chi-Jung, Chief Executive Officer
|
||
|
Date:
August 19, 2008
|
By:
/s/ Wang, Wen-Yan
|
|
|
Wang,
Wen-Yan, Chief Financial Officer
|
||
23