SUNRISE REAL ESTATE GROUP INC - Quarter Report: 2013 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, 2013

¨ 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)

No. 638, Hengfeng Road 25th Floor, Building A

Shanghai, PRC 200070

(Address of Principal Executive Offices) (Zip Code)Issuer's telephone number: + 86-21-6167-2800

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).

Yes    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):

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 16, 2013 – 28,691,925 shares of Common Stock

FORM 10-Q

For the Quarter Ended June 30, 2013

INDEX  

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Expressed in U.S. Dollars)

SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Continued)

(Expressed in U.S. Dollars)

See accompanying notes to unaudited condensed consolidated financial statements.

SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Expressed in U.S. Dollars)

See accompanying notes to unaudited condensed consolidated financial statements.

SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(Expressed in U.S. Dollars)

See accompanying notes to unaudited condensed consolidated financial statements.

SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Expressed in U.S. Dollars)

See accompanying notes to unaudited condensed consolidated financial statements.

SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Sunrise Real Estate Group, Inc. “SRRE” was incorporated in Texas on October 10, 1996 under the name of Parallax Entertainment, Inc. SRRE together with its subsidiaries and equity investment described below is collectively referred to as “the Company”, “our” or “us”. The Company is primarily engaged in the provision of property brokerage services, which include property marketing, leasing and management services; and real estate development in the People’s Republic of China (the “PRC”).

As of June 30, 2013, the Company has the following major subsidiaries and equity investment.

The accompanying condensed consolidated balance sheet as of December 31, 2012, which has been derived from the audited consolidated financial statements and the accompanying unaudited condensed consolidated financial statements, has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations and the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the financial position of the Company as of June 30, 2013 and the results of operations for the three months and six months ended June 30, 2013 and 2012, and the cash flows for the six months ended June 30, 2013 and 2012. These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2012. The results of operations for the three months and six months ended June 30, 2013 are not necessarily indicative of the results which may be expected for the entire fiscal year.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company 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.  Actual results could differ from those estimates.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and Principles of Consolidation

The condensed consolidated financial statements include the financial statements of Sunrise Real Estate Group, Inc. and its subsidiaries. All significant inter-company accounts and transactions have been eliminated on consolidation.

Investments in business entities, in which the Company does not have control but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method.

Going Concern

The Company’s condensed consolidated financial statements have been prepared on a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As of June 30, 2013, the Company has a working capital deficiency, accumulated deficit from recurring net losses, and significant short-term debt obligations currently in default or maturing in less than one year. These factors raise substantial doubts about the Company’s ability to continue as a going concern.

Management believes that the Company will generate sufficient cash flows to fund its operations and to meet its obligations on timely basis for the next twelve months by successful implementation of its business plans, obtaining continued support from its lenders to rollover debts when they became due, and securing additional financing as needed. If events or circumstances occur that the Company is unable to successfully implement its business plans, fails to obtain continued supports from its lenders or to secure additional financing, the Company may be required to suspend operations or cease business entirely.

The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Foreign Currency Translation and Transactions

The functional currency of SRRE, CY-SRRE and LRY is U.S. dollars (“$”) and their financial records are maintained and the financial statements prepared in U.S. dollars. The functional currency of the Company’s subsidiaries and affiliate in China is Renminbi (“RMB”) and their financial records and statements are maintained and 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 condensed 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 condensed consolidated statements of operations.

The financial statements of the Company’s operations based outside of the United States have been translated into U.S. dollars in accordance with ASC 830. 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 U.S. dollars, period-end exchange rates are applied to the condensed consolidated balance sheets, while average exchange rates as to revenues and expenses are applied to condensed consolidated statements of operations. The effect of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders’ equity.

The exchange rates as of June 30, 2013 and December 31, 2012 are $1: RMB6.1787 and $1: RMB6.2855, respectively.

The RMB is not freely convertible into foreign currency and all foreign exchange transaction must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rate used in translation.

Major Customers

There was one customer that accounted for 29% or our net revenues during the six months ended June 30, 2013, and there were three customers that accounted for 10%, 14% and 24% of our net revenues, respectively, during the six months ended June 30, 2012. There were no accounts receivable from these customers as of June 30, 2013 and December 31, 2012.

Real Estate Property under Development

Real estate property under development, which consists of residential unit sites and commercial and residential unit sites under development, is stated at the lower of carrying amounts or fair value less selling costs.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs and engineering costs, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales value of units to the estimated total sales value times the total project costs.

Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component of total construction costs. For amenities retained by the Company, costs in excess of the related fair value of the amenity are also treated as common costs. Results of operations of amenities retained by the Company are included in current operating results.

In accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), real estate property under development is subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets.

For the three months and six months ended June 30, 2013 and 2012, the Company had not recognized any impairment for real estate property under development.

Long Term Investments

The Company accounts for long term investments in equities as follows.

Investment in Unconsolidated Affiliates

Affiliates are entities over which the Company has significant influence, but which it does not control. The Company generally considers an ownership interest of 20% or higher to represent significant influence. Investments in unconsolidated affiliates are accounted for by the equity method of accounting. Under this method, the Company’s share of the post-acquisition profits or losses of affiliates is recognized in the income statement and its shares of post-acquisition movements in other comprehensive income are recognized in other comprehensive income. Unrealized gains on transactions between the Company and its affiliates are eliminated to the extent of the Company’s interest in the affiliates; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

When the Company’s share of losses in an affiliate equals or exceeds its interest in the affiliate, the Company does not recognize further losses, unless the Company has incurred obligations or made payments on behalf of the affiliate.

The Company is required to perform an impairment assessment of its investments whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. An impairment loss is recorded when there has been a loss in value of the investment that is other than temporary. The Company recorded any impairment losses in any of the periods reported.

Other Investments

Where the Company has no significant influence, the investment is classified as other assets in the balance sheet and is carried under the cost method. Investment income is recognized by the Company when the investee declares a dividend and the Company believes it is collectible. The Company periodically evaluates the carrying value of its investment under the cost method and any decline in value is included in impairment of cost of the investment in the condensed consolidated balance sheets.

Government Subsidies

Government subsidies include cash subsidies received by the Company’s subsidiaries in the PRC from local governments.

In recognizing the benefit of government subsidies in accordance with U.S. GAAP, the Company considers intended use of and restrictions of the subsidy, the requirements for the receipt of funds, and whether or not the incentive is given for immediate financial support, or to encourage activities such as land development in specified area. Each grant is evaluated to determine the propriety of classification on the consolidated statements of operations and consolidated balance sheets. Those grants that are substantively reimbursements of specified costs are matched with those costs and recorded as a reduction in costs. Those benefits that are more general in nature or driven by business performance measures are classified as revenue.

The Company has received refundable government subsidy of $5,369,320 as of June 30, 2013. The subsidy is given to reimburse the land acquisition costs and certain construction costs incurred for the Company’s property development project in Linyi, and is repayable if the Company fails to complete the subsidized property development project according to the agreed schedules. The Company recorded the subsidy received as a deferred government subsidy.

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, fees associated to services are fixed or determinable, and collection of the fees is assured.

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 ASC 976-605 “Accounting for Sales of Real Estate” (Formerly Statement of Financial Accounting Standards No. 66) (“ASC 976-605”). The commission revenue on underwriting sales is recognized when sales have been consummated, generally when 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 income deferred.

All revenues represent gross revenues less sales and business taxes.

Net Earnings (Loss) per Common Share

The Company computes net earnings (loss) per share in accordance with ASC 260, “Earnings per Share” (“ASC 260”). Under the provisions of ASC 260, basic net earnings (loss) per share is computed by dividing net earnings (loss) 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 (loss) per share 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.

Recently Adopted Accounting Standards

In December 2011, the FASB issued ASU No. 2011-11, Topic 210 - Balance Sheet: Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 became effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In February 2013, the FASB issued ASU 2013-12, Topic 220 - Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 changes the presentation requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding effect on net income. For other significant amounts that are not required to be reclassified in their entirety, the standard requires the company to cross-reference to related footnote disclosures. ASU 2013-02 became effective for the company on January 1, 2013. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In March 2013, the FASB issued ASU 2013-05 Topic 830 – Foreign Currency Matters (“ASU 2013-05”). ASU 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-02 became effective for the company prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s condensed consolidated financial statements.

The FASB has issued ASU 2013-04 Topic 405 - Liabilities: Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s condensed consolidated financial statements.

NOTE 3 – RESTRICTED CASH

The Company is required to maintain certain deposits with the bank that provides secured loans to the Company. As of June 30, 2013 and December 31, 2012, the Company held cash deposits of $1,382,168 and $1,352,319, respectively, as security for its bank loans (see Note 12). These balances are subject to withdrawal restrictions and are not covered by insurance.

NOTE 4 - PROMISSORY DEPOSITS

Promissory deposits are paid to property developers in respect of the real estate projects where the Company has been appointed as sales agent. The balances are unsecured, interest free and recoverable on completion of the respective projects.

NOTE 5 – REAL ESTATE PROPERTY UNDER DEVELOPMENT

Real estate property under development represents the Company’s real estate development project in Linyi, the PRC (“Linyi Project”), which is located on the junction of Xiemen Road and Hongkong Road in Linyi City Economic Development Zone, Shandong Province, PRC. This project covers a site area of approximately 103,385 square meters for the development of villa-style residential housing buildings. The Company acquired the site and commenced construction of this project during the fiscal year of 2012.

As of June 30, 2013, land use rights included in real estate property under development totaled $11,730,607.

Real estate property under development as of June 30, 2013 has been pledged as collateral for the Company’s bank loans (See Note 14).

NOTE 6 - OTHER RECEIVABLES AND DEPOSITS, NET

Other receivables and deposits as of June 30, 2013 and December 31, 2012 are stated net of allowance for doubtful accounts of $75,141 and $73,864, respectively.

NOTE 7 – PROPERTY AND EQUIPMENT, NET

Depreciation and amortization expense for property and equipment amounted to $286,372 and $ 152,787 for the six months ended June 30, 2013 and 2012, respectively.

All properties as of June 30, 2013 and December 31, 2012 were pledged as collateral for the Company’s bank loans (See Note 12).

NOTE 8 – INVESTMENT PROPERTIES, NET

Depreciation and amortization expense for investment properties amounted to $272,716 and $163,844 for the six months ended June 30, 2013 and 2012, respectively.

All investment properties as of June 30, 2013 and December 31, 2012 were pledged as collateral for the Company’s bank loans (See Note 10).

NOTE 9 – INVESTMENT IN AND AMOUNT DUE FROM AN UNCONSOLIDATED AFFILIATE

In 2011, the Company invested $4,147,027 for acquiring 49% equity interest in WHYYL to expand its operations to real estate development business. WHYYL is developing a real estate project in Wuhan, the PRC on a parcel of land covering approximately 27,950 square meters with a 3-year planned construction period. The Company has accounted for this investment using the equity method as the Company has the ability to exercise significant influence over their activities.

As of June 30, 2013, the net investment in WHYYL was $3,857,022, which included its equity in net loss of WHYYL, net of income taxes, totaling $3,468,342 as of June 30, 2013. The Company’s equity in net loss of the unconsolidated affiliate, net of income taxes, during the three months ended June 30, 2013 and 2012 amounted to $79,765 and $36,801, respectively; and during the six months ended June 30, 2013 and 2012 amounted to $272,787 and $201,843, respectively.

The following table sets forth the movements of the investment in an unconsolidated affiliate.

The following table sets forth the financial information of WHYYL.

As of June 30, 2013 and December 31, 2012, the Company has a balance of $7,255,984 and $4,316,031 due from WHYYL, which bears interest at a rate of 15% per annum, is unsecured and has no fixed term of repayment. The Company recorded interest income from WHYYL of $240,174 and $373,549, respectively, for the three months and six months ended June 30, 2013. There was no interest income from WHYYL during 2012.

During the three months and six months ended June 30, 2013 and 2012, the Company had no impairment loss for investment in an unconsolidated affiliate.

NOTE 10 – AMOUNTS DUE TO DIRECTORS

The balances of unpaid salaries and reimbursements as of June 30, 2013 and December 31, 2012 were $82,374 and $35,797, respectively. The balances are unsecured, interest-free and have no fixed term of repayment.

The advances together with unpaid interest as of June 30, 2013 and December 31, 2012 were $10,205,776 and $7,647,710, respectively. The balances are unsecured and interest bearing at rates ranging from 9.6% to 36.5% per annum. Included in the balance as of June 30, 2013, advances of $611,277 were due on June 30, 2013, and the remaining balance has no fixed term of repayment. The Company is currently negotiating with Lin Chi-Jung for an extension of the repayment date. The advances from Lin Chi-Jung currently in default amount to $611,277.

The interest expense on amounts due to directors amounted to $396,612 and $242,022 for the three months ended June 30, 2013 and 2012; and $741,179 and $487,048, respectively, for the six months ended June 30, 2013 and 2012.

NOTE 11 - OTHER PAYABLES AND ACCRUED EXPENSES

Advances from unrelated parties are unsecured, interest-free and have no fixed term of repayment.

NOTE 12 – BANK LOANS

In January 2013, the Company obtained a bank loan of $1,294,771 (RMB8,000,000) from the Bank of China, bearing interest at a rate of 7.56% per annum. The loan is secured by the properties of two unrelated parties and matures on December 5, 2013. As of June 30, 2013, the outstanding balance of this loan was $1,294,771.

In August 2012, the Company entered into a 3-year revolving facility line of credit agreement with First Sino Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $5,794,099 (RMB35,800,000) as of June 30, 2013. The borrowings under this facility bear interest at a rate per annum equal to 125% of the prevailing base lending rate for periods ranging from 1 year to 3 years as announced by the People’s Bank of China (“PBOC”). The average interest rate for the six months ended June 30, 2013 was 7.6875% per annum. The credit facility is secured by all of the Company’s properties included in property and equipment (See Note 7) and the restricted cash of $1,382,168 as of June 30, 2013 and $1,352,319 as of December 31, 2012 (See Note 3), guaranteed by a director of the Company, and matures on March 31, 2015. Borrowings under this facility are renewable for an additional period not longer than 12 months and are due not later than March 31, 2015. As of June 30, 2013 and December 31, 2012, the Company had outstanding loan balances of $5,794,099 and $5,695,649, respectively, under this facility line of credit.

In April 2012, the Company entered into a 3-year non-revolving facility line of credit agreement with First Sino Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $12,138,476 (RMB75,000,000) as of June 30, 2013. The borrowings under this facility bear interest at a rate per annum equal to 125% of the prevailing base lending rate for periods ranging from 1 year to 3 years as announced by PBOC. The average interest rate for the six months ended June 30, 2013 was 7.6875% per annum. The facility of credit is secured by all of the Company’s investment properties (See Note 8) and guaranteed by a director of the Company, and matures on March 31, 2015. Borrowings under this facility are renewable for an additional period not longer than 36 months and are due not later than March 31, 2015. As of June 30, 2013 and December 31, 2012, the Company had outstanding loan balances of $12,138,476 and $11,932,225, respectively, under this facility line of credit. Under the term of the agreement, the Company is to adhere to the covenant that it agreed not to use any of its pledged assets as security for another debt obligation or other liability. The Company was not in compliance with the covenant as of June 30, 2013.

In November 2009, the Company entered into a 3-year revolving facility line of credit agreement with First Sino Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $8,901,549 (RMB55,000,000) as of June 30, 2013. The borrowings under this facility bear interest at a rate equal to 110% of the prevailing 1-year base lending rate announced by PBOC. The average interest rate for the six months ended June 30, 2013 was 7.5440% per annum. The facility of credit was secured by all of the Company’s properties included in property and equipment (See Note 7), and was guaranteed by a director of the Company and an unrelated company. This facility was cancelled and replaced by the above-mentioned 3-year non-revolving facility line of credit agreement entered by the Company in April 2012.

In March 2010, the Company entered into a 3-year revolving facility line of credit agreement with First Sino Bank. Under the terms of the agreement, the Company could borrow a maximum amount of $2,427,695 (RMB15,000,000) as of June 30, 2013. The borrowings under this facility bear interest at a rate equal to 110% of the prevailing 1-year base lending rate announced by PBOC. The average interest rate for the six months ended June 30, 2013 was 7.5440% per annum. The facility of credit was secured by all of the Company’s investment properties (See Note 8), and was guaranteed by a director of the Company and an unrelated company. This facility was cancelled and replaced by the above-mentioned 3-year non-revolving facility line of credit agreement entered by the Company in April 2012.

NOTE 13 – PROMISSORY NOTES PAYABLE

The promissory notes payable consist of the following unsecured notes to unrelated parties. Included in the balances, the promissory note and unpaid interest thereon of $3,022,898 and $3,853,052 are in default as of June 30, 2013 and December 31, 2012, respectively.

The promissory note with an outstanding principal of $3,896,869 bears interest at a rate of 12% per annum, is unsecured and has matured on January 30, 2013. The Company is currently negotiating with the note holder for an extension of the repayment date. As of June 30, 2013 and December 31, 2012, the outstanding principal in default and unpaid interest related to this promissory note amounted to $3,022,898 and $3,853,052, respectively.

The promissory note with a principal of $300,000 bears interest at a rate of 15% per annum, is unsecured and has no fixed term of repayment. As of June 30, 2013 and December 31, 2012, the outstanding principal and unpaid interest related to this promissory note amounted to $330,000 and $307,500, respectively.

The promissory notes with a principal of $935,472 (RMB5,780,000) bear interest at a rate of 15% per annum, is unsecured and has no fixed term of repayment. As of June 30, 2013 and December 31, 2012, the outstanding principal and unpaid interest related to this promissory note amounted to $1,171,363 and $1,088,219, respectively.

The promissory note with a principal of $809,232 (RMB5,000,000) bears interest at a rate of 15% per annum, is unsecured and has no fixed term of repayment. As of March 31, 2013 and December 31, 2012, the outstanding principal and unpaid interest related to this promissory note amounted to $981,665 and $905,324, respectively.

The interest expense on promissory notes amounted to $174,821 and $49,905 for the three months ended June 30, 2013 and 2012; and $405,986 and $ 123,123, respectively, for the six months ended June 30, 2013 and 2012.

NOTE 14 – LONG TERM LOAN

Long term obligations of the Company are summarized as follows:

In May 2013, the Company obtained a bank loan of $11,329,244 (RMB70,000,000) from the China Citi Bank. The loan bears interest at a rate of 14.21% per annum and is collateralized by the real estate property under development of LYSY and is guaranteed by a director of the Company and LYSY and his wife, and a director of a corporate shareholder of LYSY. The guarantors do not receive any compensation for these guarantees. The Company is obliged to repay $3,398,773 (RMB21,000,000), or higher, before May 14, 2014, $4,531,698 (RMB28,000,000), or higher, on November 14, 2014, and the remaining loan balance on May 14, 2015. As of June 30, 2013, the outstanding balance of this loan was $11,329,244. Under the term of the loan agreement, the Company is to adhere to certain covenants. The Company is to adhere to the restrictions on use of proceeds from the loan to finance construction of the real estate development project of LYSY. The Company was not in compliance with the covenant as of June 30, 2013 and therefore classified the loan as current.

NOTE 15 – DEFERRED GOVERNMENT SUBSIDY

Deferred government subsidy consists of the cash subsidy provided by the local government.

Government subsidy received as of June 30, 2013 and December 31, 2012 was $5,369,320 and $5,273,314, respectively. The subsidy is given to reimburse the land acquisition costs and certain construction costs incurred for the Company’s property development project, and is repayable if the Company fails to complete the subsidized property development project before the agreed date. The entire government subsidy is deferred and included as deferred government subsidy in the condensed consolidated balance sheets.

NOTE 16 – DEPOSITS RECEIVED FROM UNDERWRTING SALES

The Company accounts for its underwriting sales revenue with underwriting rent guarantees using the deposit method in accordance with ASC 976-605 (formerly SFAS No.66). Revenue from the sales of floor space with underwriting rent guarantees until the revenues generated by sub-leasing properties exceed the guaranteed rental amount due to the purchasers.

NOTE 17 – 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.

According to the Law of the PRC on Enterprises with Wholly-Owned Foreign Investment, the Company PRC’s subsidiaries are required to make appropriations from after-tax profits as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to non-distributable reserves. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion reserve and (iii) a staff bonus and welfare fund. A wholly-owned PRC subsidiary is not required to make appropriations to the enterprise expansion reserve but annual appropriations to the general reserve are required to be made at 10% of the profit after tax as determined under PRC GAAP at each year-end, until such fund has reached 50% of its respective registered capital. The staff welfare and bonus reserve is determined by the board of directors. The general reserve is used to offset future losses. The subsidiary may, upon a resolution passed by the stockholders, convert the general reserve into capital. The staff welfare and bonus reserve are used for the collective welfare of the employees of the subsidiary. The enterprise expansion reserve is for the expansion of the subsidiary operations and can be converted to capital subject to approval by the relevant authorities. These reserves represent appropriations of the retained earnings determined in accordance with Chinese law.

In addition to the general reserve, the Company’s PRC subsidiaries are required to obtain approval from the local PRC government prior to distributing any registered share capital. Accordingly, both the appropriations to general reserve and the registered share capital of the Company’s PRC subsidiary are considered as restricted net assets and are not distributable as cash dividends. As of June 30, 2013 and December 31, 2012, the Company’s statutory reserve fund was $782,987.

NOTE 18 - COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company leases certain of its office properties under non-cancellable operating lease arrangements. Payments under operating leases are expensed on a straight-line basis over the periods of their respective terms, and the terms of the leases do not contain rent escalation, or contingent rent, renewal, or purchase options. There are no restrictions placed upon the Company by entering into these leases. Rental expenses under operating leases were $45,694 and $10,428 for the three months ended June 30, 2013 and 2012, respectively; and $95,522 and $$23,360 for the six months ended June 30, 2013, respectively.

As of June 30, 2013, the Company had the following operating lease obligations falling due.

During 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 a 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 of 2006 and the Company had the right to sublease these properties to cover these lease commitments in the leasing periods. In 2009, we agreed with certain buyers to amend the agreed 5-year annual return rate from 8.5% to 5.8% and the agreed 8-year annual return rate from 8.8% to 6% for the remaining lease, or to terminate their lease agreements early. As of June 30, 2013, the Company has the following leasing commitment related to these properties.

An accrual for onerous contracts was recognized which is equal to the difference between the present value of the sublease income and the present value of the associated lease expense at the appropriate discount rate. During the three months and six months ended June 30, 2013 and 2012, the Company had no significant provision for onerous contracts.

According to the leasing agreements, the Company has an option to terminate any agreement by paying a predetermined compensation. As of June 30, 2013, the compensation to terminate all leasing agreements is $990,489. According to the sub-leasing agreements that have been signed through June 30, 2013, the rental income from these sub-leasing agreements will be $804,660 within one year and $0 within two to five years. However, no assurance can be given that we can collect all of the rental income.

Other commitments

As of June 30, 2013, the Company had outstanding commitments of $26,570,648 with respect to non-cancellable construction contracts for real estate development.

Contingencies

As of June 30, 2013, the Company was contingently liable for $809,232 in a guarantee executed on May, 2013. The Company provided a loan guarantee to an unaffiliated third-party lender for the borrowing of $809,232 (RMB5,000,000) by Lin Chi-Jung, a director of the Company. The Company provided the guarantee in order to secure a loan to the Company for $809,232 from Lin Chi-Jung. Lin Chi-Jung obtained the loan from the third party lender and, in turn, lent the funds to the Company on the same terms as his loan from the third-party lender. The loan to the Company bears interest at a rate of 20% per annum and matures in December 2013. The guarantee is secured by the use right of the Company’s investment properties located in Shanghai, and expires in December 2013. No loss has been experienced or is anticipated under this guarantee.

NOTE 19 - SEGMENT INFORMATION

The Company's chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company's chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

The Company evaluates performance based on several factors, including net revenue, cost of revenue, operating expenses, loss from operations and net loss. The following tables show the operations of the Company's operating segments:

NOTE 19 – RESTATEMENTS

Subsequent to the issuance of the Company’s condensed consolidated financial statements for the three months and six months ended June 30, 2012, the Company determined that it incorrectly recognized the government subsidy and overstated the equity in net loss of an unconsolidated affiliate in the condensed consolidated statement of operations.

The Company recognized the government subsidy received in the condensed consolidated statement of operations for the three months and six months ended June 30, 2012. In consideration of the intended use and restrictions of the subsidy that the subsidy is given to reimburse the land acquisition costs and certain construction cost of the Company’s real estate development project in Linyi, and is repayable if the Company fails to complete the project by the agreed date, the Company determined that the government subsidy should be deferred. As a result, the net profit attributable to non-controlling interests was decreased.

The Company’s unconsolidated affiliate charged the interest expense to its statement of operations for the three months and six months ended June 30, 2012. The Company reconsidered the affiliate’s interest expense that was incurred in relation to the construction of a real estate development project of the affiliate, and determined that the interest expense should be capitalized as part of the project development cost. Accordingly, the Company should decrease its equity in net loss of the unconsolidated affiliate for the three months and six months ended June 30, 2012.

Additionally, the Company has made an immaterial adjustment to correct a consolidation error in additional paid-in capital and accumulated other comprehensive income and an error in classifying the Company’s equity in net loss of an unconsolidated affiliate as loss on disposal of property and equipment, and reclassified certain items in the condensed consolidated financial statements for the three months and six months ended June 30, 2012 to be comparable with the classification for the three months and six months ended March 31, 2013.

The Company has restated its condensed consolidated financial statements for the three months and six months ended June 30, 2012 to reflect the correction of the above errors and reclassifications. The impacts of these restatements decrease the net income by $777,215, and result in a net loss of $825,277, for the three months ended June 30, 2012; and decrease the net income by $2,202,570, and result in a net loss of $2,209,482 for the six months ended June 30, 2012. Additionally, due to these restatements, the Company’s total assets and total liabilities as of June 30, 2012 increase by $420,253 and $1,832,756, respectively, while the total stockholders’ equity as of June 30, 2012 is decreased by $2,622,823.

The impacts of these restatements on the Company’s unaudited condensed consolidated balance sheet as of June 30, 2012, its unaudited condensed consolidated statement of operations and cash flows for the six months ended June 30, 2012 are set forth below.

Unaudited Condensed Consolidated Balance Sheet as of June 30, 2012

Unaudited Condensed Consolidated Statement of Operations For The Three Months Ended June 30, 2012

Unaudited Condensed Consolidated Statement of Operations For The Six Months Ended June 31, 2012

Unaudited Condensed Consolidated Statement of Cash Flows For The Six Months Ended June 30, 2012