Yangtze River Port & Logistics Ltd - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2014

or

For the transition period from _______________ to __________________

Commission File Number: 333-166343

KIRIN INTERNATIONAL HOLDING, INC.

(Exact name of registrant as specified in its charter)

+86 10 8455 4001 (Registrant’s telephone number, including area code)

N/A

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

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

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒     No ☐

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

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

The registrant had 20,596,546 shares of common stock, $0.0001 per share, outstanding at November 21, 2014.

KIRIN INTERNATIONAL HOLDING, INC.

QUARTERLY REPORT ON FORM 10-Q

SEPTEMBER 30, 2014

TABLE OF CONTENTS

SPECIAL NOTE REGARDING VOLUNTARY FILER STATUS

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

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

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

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

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

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

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

CERTAIN TERMS USED IN THIS REPORT

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

PART I—FINANCIAL INFORMATION

KIRIN INTERNATIONAL HOLDING, INC.

CONSOLIDATED BALANCE SHEETS

See notes to the consolidated financial statements

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

KIRIN INTERNATIONAL HOLDING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

See notes to the consolidated financial statements

KIRIN INTERNATIONAL HOLDING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to the consolidated financial statements

KIRIN INTERNATIONAL HOLDING, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Organization and Description of Business

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

As of September 30, 2014, the Company had following wholly-owned entities:

In August, 2014, two subsidiaries (Baoding Heda Kirin Real Estate Development Co., Ltd and Baoding Heda Kirin Investment Co., Ltd) were closed.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements for the three months and nine months ended September 30, 2014 and 2013 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations.  Accordingly, the reader of this Form 10-Q is referred to Kirin International Holding, Inc. (“the Company”) Form 10-K for the year ended December 31, 2013 for further information.  In the opinion of management of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for fair presentation and to ensure that the consolidated financial statements are not misleading.  The results of operations for the three month and nine months periods ended September 30, 2014 are not necessarily indicative of the operating results for the year.  The consolidated balance sheets as of September 30, 2014 and December 31, 2013, and the consolidated statements of operations and comprehensive income (loss) for the three months and nine months periods ended September 30, 2014 and 2013, the consolidated statements of cash flows for the nine months periods ended September 30, 2014 and 2013 include those of the Company, its subsidiaries and VIEs, and subsidiaries of VIEs. All material intercompany transactions and balances have been eliminated in consolidation. 

Reclassifications

Certain amounts in the September 30, 2013 condensed consolidated financial statement have been reclassified to conform to the September 30, 2014 presentation.

Use of Estimates

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

Fair Value of Financial Instruments

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

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

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

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

Reporting Currency and Foreign Currency Translation

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

Revenue Recognition

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

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

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

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

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

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

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

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

Real Estate Capitalization and Cost Allocation

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

Government Grant

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

In 2008, Xingtai Zhongding was entitled to a government grant of RMB 160,000,000 (approximately $22,981,000, translated at historical exchange rate) related to Kirin County project to subsidize the modernization of the neighborhood where the real estate project is situated, and control of property price volatility.  The Company believes the government’s demands associated with the grant are gradually fulfilled as the construction and pre-sale of Kirin County make progress, and accordingly recognizes grant income at the percentage of construction completed during the year of the total grant amount.  For the three months and nine months ended September 30, 2014 and 2013, the Company did not recognize any grant income, respectively.  All government grants related to Kirin County have been recognized as of December 31, 2012 as the construction of Kirin County completed during the year.  The local government has arranged a lump sum payment of the grant to Xingtai Jiye Business Investment Co., Ltd. (“Business Investment”), a related party of the Company, prior to the grant’s conditions being met out of financial consideration because it lacked managing staff and concerned that the funds would be re-assigned or invalidated without an immediate recipient.  Pursuant to the arrangement, Business Investment provides this grant money to Xingtai Zhongding in proportion to the percentage of the project completed as a measure to ensure that the project satisfies the grant’s guidelines.  The grant does not have refund conditions and the Company believes government will not revoke the grant or claw back cash remitted to the escrow account unless the construction and sale of Kirin County project is cancelled by the Company.  As at September 30, 2014, the Company didn’t receive any request from government demanding revocation and/or partial refund of the grant previously given, and the Company expects no development relating to the Kirin County project will cause government to request the grant’s refund in next twelve months.

Capitalization of Interest

In accordance with ASC 360, Property, Plant and Equipment, interest incurred during construction is capitalized to properties under development. For the nine months ended September 30, 2014 and the year ended December 31, 2013, $130,328 and $326,259 were capitalized as properties under development, respectively.

Cash and Cash Equivalents

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

Restricted Cash

There are two important timings for mortgage business of PRC banks: (1) Execution of mortgage agreement: PRC banks grant mortgage loans to home purchasers and will credit the full amount to the Company account once the bank and the purchaser enter into mortgage agreement, which generally will be before the completion of the construction of projects.  (2) Issuance of House Ownership Certificate to the purchasers. At the time of execution of mortgage agreement, there are no House Ownership Certificate therefore the purchaser has no legal right to the house and therefore they cannot mortgage the house to banks. Banks will ask the developer to provide guarantee to the loan instead. When the House Ownership Certificate is issued, banks will release the guarantee ability of the developer and mortgage the house in question.  If the condominiums are not completed and the new homebuyers have no House Ownership Certificate, to secure the loan, as a common practice in China, the banks will release only 95% loan to the Company and will require that the Company open a separate account with the bank and deposit and freeze the remaining 5% of the mortgage amount to further secure the bank’s interests before the mortgage of the house with House Ownership Certificate. Because bank requires the freeze of the 5% deposit, the amount therein shall be classified on the balance sheet as restricted cash. Interest earned on the restricted cash is credited to the Company’s normal bank account. The bank will release the restricted cash after homebuyers have obtained the House Ownership Certificate and mortgage the house to bank. Total restricted cash amounted to $13,469,418 and $8,362,905 as at September 30, 2014 and December 31, 2013, respectively. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts.

Investments

Investments in securities of private companies the Company does not have a controlling interest in and is unable to exercise significant influence over are accounted for using cost method of accounting. The Company evaluates at each period end whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investments. If a decline in fair value is determined to be other than temporary, an impairment loss is recognized to reduce an investment’s cost to its fair value.

Property and Equipment, Net

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

Income Taxes

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

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

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

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

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

Land Appreciation Tax (“LAT”)

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

Earnings per Share

Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants and convertible preferred stock, to issue common stock were exercised and converted into common stock. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.  The Company had losses, therefore, exclude all dilutive securities in the calculation for the three months and nine months ended September 30, 2014.

Advertising Expenses

Advertising costs are expensed as incurred. For the three months ended September 30, 2014 and 2013, the Company recorded an advertising expense of $791,467 and $668,035, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded an advertising expense of $1,789,192 and $1,886,130, respectively.

Property Warranty

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

The Company constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proven that the faults are caused by them. In addition, the Company withholds up to 5% of the contract total payment from contractors for periods of two to five years. These amounts are included in liabilities, and are only paid to the extent that there have been no warranty claims against the Company relating to the work performed or materials supplied by the contractors.  As at September 30, 2014 and December 31, 2013, the Company retained $113,921 and $140,661 contract payment to contractors, and the Company didn’t experience any incidences where the withheld amounts were less than the amounts the Company had to pay for the defects of properties.  The Company didn’t provide any warranty reserve as prospective expenditure amount on property warranty by the Company is insignificant.  For the three months and nine months ended September 30, 2014 and 2013, the Company didn’t incur incidental costs in addition to the amount retained from contractors.

Impairment Losses

Completed real estate properties and land lots are reported in the balance sheet at the lower of their carrying amount or fair value less costs to sell. Land to be developed or under development is assessed for impairment when management believes that events or changes in circumstances indicate that its carrying amount may not be recoverable. Based on this assessment, a property that is considered impaired is written down to its fair value less costs to sell. Impairment losses are recognized through a charge to expense. No impairment of completed real estate properties or land lots was recognized for the three months and nine months ended September 30, 2014 and 2013.

Stock-Based Compensation

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

Recently Issued Accounting Pronouncements

The Company does not believe recently issued but not yet effective accounting standards from ASU 2014-01 to ASU 2014-17, if currently adopted, would have a material effect of the consolidated financial position, results of operation and cash flows.

Note 3 – Variable Interest Entities

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

Summary information regarding consolidated VIEs is as follows:

For the nine months ended September 30, 2014 and 2013, the financial performance of VIEs reported in the consolidated statements of operations and comprehensive loss includes sales of approximately $82,260,000 and $102,300,000, respectively, cost of sales of approximately $70,400,000 and $91,200,000, respectively, operating expenses of approximately $8,370,000 and $9,100,000, respectively, and net loss of approximately $1,560,000 and $4,000,000, respectively.

Note 4 – Accounts Receivable

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

As at September 30, 2014, accounts receivable due from complete properties represents revenue in excess of billings balances of Kirin County project as the construction is completed and related condominium units are available for delivery to customers.

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

Note 5 – Notes receivable

The Promissory note with original principle amount of $600,000 will be due on August 16, 2016, at the rate of 3% per annum.

Note 6 – Revenue in Excess of Billings

Revenue in excess of billings represents the amount revenue recognized for certain residential and commercial units in commercial building of Kirin County, No.79 Courtyard and Kirin Bay projects in accordance with the percentage-of-completion method over the cumulative payments received from respective customers.  Pursuant to sales contracts, customers are required to pay a minimum 20% of the full contract amount as a down payment, and pay the remaining balances before delivery of the properties by the Company, which is expected to be within the next 12 to 24 months, depending on construction progress of related real estate properties. As of September 30, 2014 and December 31, 2013, revenue in excess of billings is $8,405,855 and $10,059,251, respectively.

Note 7 – Prepayments

Prepayments consisted of the following:

Pursuant to financing service contracts entered into between the Company, XingtaiChengjiao Rural Credit Cooperative Union Association, and Industrial and Commercial Bank of China, Xingtai Branch, the Company paid service fees for the origination of several long-term loans before they were released to the Company. The financing service fees are regarded as prepaid loan interest and amortized over the respective terms of the loans.

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

The prepayment to related parties is regarding to construction contract. In certain area, the related parties have more bargain power with the construction contractors. The construction contractors will provide construction service.

Note 8 – Other Receivables

The components of other receivables were as follows:

Working capital borrowings by contractors are unsecured, bear no interest and become payable before the completion of the related construction. There was no allowance for doubtful accounts as at September 30, 2014 and December 31, 2013.

Note 9 – Real Estate Properties and Land Lots under Development

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

As at September 30, 2014, the Company has obtained certificates representing titles of the land use rights used for the development of Kirin County, No. 79 Courtyard and Kirin Bay projects.  All our land use rights are assigned to real estate projects.

Part of Company’s real estate properties under development and land lots under development were pledged as collateral for financial institution loans (Note 16).

The Residential buildings of Kirin County are fully completed in December, 2012. As of September 30, 2014 and December 31, 2013, the real estate property completed is $888,295 and $1,427,910, respectively.

Kong Village Relocation Program

Pursuant to incentive policies issued by Xingtai local government encouraging modernization of villages situated in urban vicinity, the Company participated in Kong Village Relocation Program (the “Program”) in which the Company constructs a real property and transfers to local government at no costs, and reimburses costs incurred by local government compensating villagers and zoning and developing vacated land lots. In exchange, the Company will be invited to bid for vacated land parcels for residential and commercial use at public auction at market price, and majority of the proceeds received by local government will be refunded to the Company. The Company capitalizes all expenditures attributable to the Program as land lots under development. The Company expects to secure land use rights through the auctions and will use acquired land use rights for the development of Kirin Bay and other project. In July 2011 the Company obtained the certificate of land use rights for a piece of land covered by the Program through the aforementioned public auction, and used it for the development of Kirin Bay project. Other land lots covered by the Program are expected to be auctioned and obtained by the Company in the near future. As at September 30, 2014 and December 31, 2013 capitalized expenditures under the Program, representing accumulated costs of the land use rights to be obtained by the Company in the future, were $63,732,743 and $55,559,989, respectively.

Note 10 – Investments

As of September 30, 2014 and December 31, 2013, investment in Xingtai Rural Commercial Bank (“Xintai RC Bank”) was $7,147,498 and $7,196,598, consisting 31,000,000 shares, or 6.02%, of the common stock of Xingtai RC Bank

The Company used the cost method of accounting to record its investment in Xingtai RC Bank. The Company determined that there was no impairment on this investment during period ended September 30, 2014. The Company received RMB3,100,000 (approximately $505,000) and RMB1,280,000 (approximately $206,000) as dividend income from Xingtai RC Bank for the nine months ended September 30, 2014 and 2013, respectively.

As of September 30, 2014 and December 31, 2013, the Company has deposit balances (including restricted cash) of approximately $6,654,000 and $6,672,000 in Xingtai RC Bank, respectively.

In November 2013, the Company invested $700,000 to Hopkins Kirin Facilities Group, LLC (“Hopkins”) representing 22.5% of Hopkins’s membership interest.

The Company used the equity method of accounting to record its investment in Hopkins. The Company determined that there was no impairment on these investments during the nine months ended September 30, 2014. There is no transaction in 2014 for Hopkins Kirin Facilities Group, LLC. The Company didn’t receive investment income from Hopkins Kirin Facilities Group, LLC.

In January, 2014, the Company entered into an Operation agreement with ALFA IDG LLC for Archway Development Group LLC. As of September 30, 2014, the Company paid a deposit of $578,000 for Archway Development Group LLC to be formed.

In January, 2014, the Company entered into an Operation agreement with Archway Development Group LLC for HHC-6055 Center Drive LLC. As of September 30, 2014, the Company paid a deposit of $238,000 for HHC-6055 Center Drive LLC to be formed.

Note 11 – Accounts Payable

The Company agreed to pay $22,649,880 (translated as historical rate) to compensate additional costs incurred by Kong Village Committee for the Program (see Note 9).  At September 30, 2014, unpaid balance plus accrued interest was $2,436,647. 

Note 12 – Other Payables and Accrued Liabilities

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

Note 13 – Customer Deposits

Customer deposits consist of amounts received from customers relating to the sale of residential and commercial units. In the PRC, customers generally obtain financing for the purchase of their residential unit prior to the completion of the project. The lending institutions will provide the funds to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized. As of September 30, 2014 and December 31, 2013, the Company received $89,652,380 and $87,713,585 deposits from customers, respectively.

Note 14 – Income Taxes

(1)  Corporate income tax

The Company is incorporated in the State of Nevada in the U.S., and is subject to a progressive U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax. Kirin China is incorporated in the British Virgin Islands.  Under the current laws of the British Virgin Islands, Kirin China is not subject to tax on income or capital gains.  In addition, no British Virgin Islands withholding tax is imposed upon payments of dividends by Kirin China. Kirin Development is incorporated in Hong Kong.  Kirin Development did not earn any income that was derived in Hong Kong for the period from its date of incorporation to September 30, 2014 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

The Company’s subsidiaries Spectrum International Enterprise, LLC, Brookhollow Lake, LLC, Greenfield International Corporation, Kirin Hopkins Real Estate Group, LLC and Newport Property Holding, LLC were incorporated in State of California, United States of America and are subject to California taxes.

The Company’s subsidiaries and VIEs in China are subject to PRC Enterprise Income Tax (EIT) on taxable income. According to PRC tax laws and regulations, China subsidiaries and VIEs are subject to EIT with the tax rate 25%, except that deemed profit method is applied to XingtaiZhongding Construction Project Management Co., Ltd., which local tax authorities levy income tax based on deemed profit of 8% of revenue. A withholding income tax rate of 5% is applied if Kirin Management, the wholly-owned foreign enterprise, distributes dividends to its immediate holding company, Kirin Development. The Company has not recorded tax provision for U.S. tax purposes as they have no assessable profits arising in or derived from the United States and intends to permanently reinvest accumulated earnings in the PRC operations in the foreseeable future.

Income tax expenses for the three months and nine months ended September 30, 2014 and 2013 are summarized as follows:

A reconciliation between taxes computed at the PRC statutory rate of 25% and the Company’s effective tax rate for the nine months ended September 30, 2014 and 2013 is as follows: 

(2)  Liability for unrecognized tax benefit

A reconciliation of the beginning and ending amount of liability associated with unrecognized tax benefit for the nine months ended September 30, 2014 and 2013 is as follows:

The liability for unrecognized tax benefit is related to the government grant earned by the Company for the development of Kirin County project.  Because the grant is given by local government which received proceeds of the related land use rights through public auction, it is prevailing practice that the entities receive such grants do not include earned grant in taxable income. The Company believes that the possibility exists for local or higher tax authorities re-evaluate this tax position and reverse current practice. The unrecognized tax benefit, if ultimately recognized, will impact the effective tax rate. The Company did not accrue potential penalties and interest related to the unrecognized tax benefit on the basis that tax authorities would unlikely levy penalties and interest. The Company does not expect changes in unrecognized tax benefit as of September 30, 2014 to be material in the next twelve months.

In accordance with PRC tax administration law and regulations, tax authorities generally have up to five years to claw back underpaid tax plus penalties and interests.  In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation.  Accordingly, the Company’s PRC subsidiary and VIEs tax years from 2009 to 2013 remains subject to examination by tax authorities. The Company’s offshore subsidiaries also are subjected to examination by Internal Revenue Service. 

(3)  Deferred tax

The tax effects of temporary differences that give rise to the following approximate deferred tax assets and liabilities as of September 30, 2014 and December 31, 2013 are presented below.

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

Deferred taxes assets and liabilities associated with application of revenue recognized pursuant to percentage-of-completion will reverse when the construction progress of related projects proceeds to completion, which is expected to be December 2014 for No. 79 Courtyard (Phase I) and Kirin Bay (Phase I) projects, when the difference between accumulated revenue and cost of sales recognized based on percentage-of-completion method and enterprise income tax accrued pursuant to tax laws, converges.  Enterprise income tax comprises multiple interim prepayments determined predominately by periodic customer deposits collected and deemed profit ratio when a real estate project is under construction, followed by a closing to adjust to actual profit realized, after the construction is completed.  Deferred taxes assets and liabilities associated with application of revenue recognized pursuant to percentage-of-completion will also increase or decrease when the Company reevaluates and makes upward or downward adjustments to a project’s total revenue or cost estimate.  The Company believes deferred tax assets related to revenue recognized based on percentage-of-completion and excess of interest expense will be fully realizable.

Entities established in the PRC had total deferred tax assets associated with net operating loss carry forward of $3,427,608 as of September 30, 2014, which will expire on various dates between December 31, 2014 and December 31, 2019. As of September 30, 2014, the Company provided a valuation allowance of $2,655,923 based on projected future revenue available to utilize net operating loss carried forward. Entities established out of the PRC had total deferred tax assets associated with operating loss carry forward of $1,283,848 and a 100% valuation allowance has been provided.

Note 15 – Other Taxes Payable

Other taxes payable consisted of the following: 

Note 16 – Loans Payable

Loans payable as of September 30, 2014 and December 31, 2013 consisted of the following:

ICBC 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2012 are floating rate loans whose rates are set at 10% above 1-to-3 year base borrowing rate stipulated by the People’s Bank of China at the date of each drawdown, and are subject to revision every 12 months.  The Company also paid financing service fees for ICBC 2012 Loans, ICBC 2013 Loans and Syndicated Loans 2012.  The financing service fees were paid prior to financial institution releasing loans to the Company as prepaid interest, and have been included in the determination of respective loans’ effective interest rates. Credit Union 2014 Short-term Loan was guaranteed by an unrelated company as arranged by the financial institution. 

As of September 30, 2014 and December 31, 2013, Syndicated loans 2014, ICBC 2012 Loans and ICBC 2013 Loans were secured by the Company’s real estate held for development with carrying value of approximately $126,210,000 and $134,340,000, respectively.

The aggregate maturities of loans payable for each of years subsequent to September 30, 2014 are as follows:

Note 17 – Restricted Stock Compensation

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

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

Restricted Stock Awards activity as of and for the nine months ended September 30, 2014 is as follows:

The Company recognized $nil and $nil of share-based compensation expense related to the Restricted Stock Awards for the nine months ended September 30, 2014 and 2013, respectively.

Note 18 – Revenue

The Company’s revenue is recognized under percentage-of-completion methods for the nine months and three months ended at September 30, 2014 and 2013 from pre-sale of real estate projects. Property service revenue is recognized when related service are provided. Revenue recognized for each real estate project, including adjustments made pursuant to change of estimates for the nine months and three months ended September 30, 2014 and 2013 was as follows:

Note 19 – Loss per Share

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares comprise shares issuable upon the exercise of Series A Warrants, Series B Warrants, Agent Warrants and unvested and unissued Restricted Stock Award, using the treasury stock method.

Series A Warrants, Series B Warrants and Agent Warrants to acquire 392,090 shares of common stock, and unvested and unissued Restricted Stock Award were not included in the computation of diluted EPS because the effect would have been anti-dilutive.  Series A Warrants, Series B Warrants and Agent Warrants were still outstanding as of September 30, 2014.

Note 20 – Non-controlling interest

Non-controlling interests represent the non-controlling interest stockholders’ proportionate share of the equity of Brookhollow Lake, LLC, Greenfield International Corporation and Newport Property Holding, LLC. The non-controlling interests in the nine months ended at September 30, 2014 and 2013 are summarized as below:

The non-controlling interests in Brookhollow Lake, LLC, Greenfield International Corporation and Newport Property Holding, LLC that are not owned by the Company are shown as “non-controlling interests” in the consolidated balance sheets as of September 30, 2014 and “net loss attributable to non-controlling interests” in the consolidated statements of operations and comprehensive loss for the period ended September 30, 2014.

Note 21 – Related Party Transactions and Balances

(1) Loan to a related party

In August 2013, Kirin entered into a loan agreement with HuaxiaHuifeng Ventures Capital Management (Beijing) Co., Ltd. (“HuaxiaHuifeng”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to HuaxiaHuifeng for $35,953,000. On October 15, 2013, the Company signed a supplement loan agreement in amount of $27,610,000 (RMB 170,000,000) which bears 18% interest rate and has a term of one year. On October 14, 2014, Kirin signed a supplemental agreement with HuaxiaHuifeng, both parties agree to extend the term of loan to October 14, 2015.

As of September 30, 2014, the balance of the loan to HuaxiaHuifeng was $36,696,307 (RMB 196,560,000 for original loan and RMB 29,342,466 for interest income).

In August 2014, the Company entered into a loan agreement with Zhuolu Huada Real Estate Development Co., Ltd. (“Huada Real Estate”), a related company ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to Huada Real Estate for RMB 29,750,000 ($4,832,684), at 20% interest rate and has a term of one year.

(2) Government grant escrowed by Business Investment

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

For the years ended December 31, 2012, 2011, 2010 and 2009, XingtaiZhongding was entitled to receive RMB2,800,000, RMB43,000,000, RMB63,000,000, and RMB51,200,000, respectively ($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at respective years’ historical rates) earned government grant from Business Investment, representing total amount of the government grant. The Company has the right to determine how to utilize the earned government grant. As at September 30, 2014 and December 31, 2013, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($25,990,903 and $26,169,447) was used to repay working capital provided by Jianfeng Guo for the support of other real estate projects’ development.

(3) Working capital provided by Jianfeng Guo

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

At each balance sheet date, affiliate companies and individuals who have working capital transactions with the Company’s VIEs assigned their balances to Jianfeng Guo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered into between Jianfeng Guo, related affiliate companies and individuals, and the Company’s VIEs. Xingtai Zhongding also chooses to use its accumulated government grant receivable from Business Investment, to repay working capital provided by Jianfeng Guo.  As at September 30, 2014 and December 31, 2013, the working capital provided by Jianfeng Guo was RMB130,218,029 and RMB134,029,025 ($21,153,026 and $21,921,659 translated at respective historical rates).  Accordingly, the Company is entitled to present netted balance with Jianfeng Guo on its consolidated balance sheets.

Gross amount of working capital provided by and to affiliate companies and individuals designated by Jianfeng Guo as at September 30, 2014 and December 31, 2013 were as follows:

(4) Short-term Loans to Related party

As of December 31, 2013, the ending balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these are all wired to five related companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies are ultimately controlled by Jianfeng Guo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin.

On December 30, 2013, Hebei Zhongding entered into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing Cathay Kirin Assets Management Company and Beijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000. On December 30, 2013, Business Service entered into loan agreements with Beijing Cathay Kirin Hospitality Management Company, and Cathay Brother (Beijing) Investment Management Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000, respectively. The maturity date of the loan agreements is January 2, 2014. On January 2, 2014 the Company received RMB 74,900,000 short-term loans from related party companies.

(5) Prepayment to related party

Please see Note 7 – Prepayments

Note 22 – Contingencies and Commitments

As at September 30, 2014 and December 31, 2013, the Company provided approximately $121,710,000 and $77,130,000 guarantees to mortgage bank loans granted to homebuyers of the Company’s real estate properties. Guarantees commence when the banks release mortgage to the Company and end when House Ownership Certificates are issued and pledged to banks instead. The fair value of the guarantees is insignificant because the possibility of the homebuyers’ default is remote, and in case of default, the Company can repossess the related properties to cover repayments of outstanding principal, interest and penalty to mortgage banks, and accordingly, the Company did not recognize fair value of these guarantees.

Note 23 – Subsequent Events

The Company evaluated subsequent events up until the time the financial statement were filed with SEC.

In October 2014, the Company received RMB 24,000,000 (approximately $3,900,000) three-year term loan from Xingtai Rural Commercial Bank with an annual effective interest rate of 7.38%.

The following discussion and analysis of the results of operations and financial condition for the nine months ended September 30, 2014 and 2013 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Forward-Looking Statements.”

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

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

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

Recent Developments

At September 30, 2014, we have the following projects under development:

Furthermore, in 2014, we started the constructions of No. 79 Courtyard (Phase IV).

Financial Performance Highlights

The following summarizes certain key financial information for the nine months ended September 30, 2014.

Factors Affecting our Operating Results

Growth of China’s Economy. We operate and derive all of our revenue from sales in China. Economic conditions in China, therefore, affect our operations, including the demand for our properties and the availability and prices of our raw materials among other expenses. China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 9.2% in 2011, 7.8% in 2012 and 7.7% in 2013. China is expected to experience continued growth in all areas of investment and consumption. However, if the Chinese economy were to become significantly affected by a negative stimulus, China’s growth rate would likely to fall and our revenue could correspondingly decline.

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

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

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

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

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

According to the National Bureau of Statistics of China, China’s national inflation rate was 5.4% in 2011, 2.6% in 2012 and 2.6% in 2013. Inflation could result in increases in the price of raw materials and labor costs. We do not believe that inflation or deflation has affected our business materially.

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

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

Significant Accounting Policies

There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2014 compared with those contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Result of operations” included in our Annual Report on Form 10-K for the year ended December 31, 2013. 

Recently Issued Accounting Pronouncements

The Company does not believe recently issued but not yet effective accounting standards from ASU 2014-01 to ASU 2014-17, if currently adopted, would have a material effect of the consolidated financial position, results of operation and cash flows.

Results of Operations

Comparison of Nine and Three Months Ended September 30, 2014 and 2013

Our net loss for the nine months ended September 30, 2014 was $2.8 million, a decrease of $1.9 million, from net loss of $4.7 million for the nine months ended September 30, 2013. Net Loss decreased because of the following reasons: 1) in the nine months ended September 30, 2014, Kirin Bay Phase III and No.79 Courtyard Phase III became the main revenue resource and contributed most of the increased gross profit; 2) for the nine months ended September 30, 2014, the interest expenses decreased substantially due to the interest income  increased by $3.7 million in the nine months ended September 30, 2014; 3) in the nine months ended September 30, 2014, the company received more investment income from Xingtai Rural commercial bank.

Our net loss for the three months ended September 30, 2014 was $1.4 million, a decrease of $1.0 million, from net loss of $2.4 million for the three months ended September 30, 2013. Net loss decreased because in the three months ended September 30, 2014, the gross profit increased by $0.8 million and interest expense decreased by $1.1 million, meanwhile, income tax expenses increased by $0.5 million and operating expenses increased by $0.3 million as compared with the same period ended September 30, 2013.

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

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

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

Revenues and Gross Profit