SUNRISE REAL ESTATE GROUP INC
10-Ks and 10-Qs
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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 September 30, 2010
o
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)
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Texas
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75-2713701
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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Suite
701, No. 333, Zhaojiabang Road
Shanghai,
PRC 200032
(Address
of principal executive offices Zip Code)
Registrant’s
telephone number: + 86-21-6422-0505
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
x
No
o
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):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
x
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Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act): Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: November 15, 2010 -
23,691,925 shares of Common Stock
FORM
10-Q
For
the Quarter Ended September 30, 2010
INDEX
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Page
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| PART I. FINANCIAL INFORMATION |
3
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Item
1.
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Financial
Statements
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3
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Consolidated
Balance Sheets
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3
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Consolidated
Statements of Operations
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4
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Consolidated
Statements of Cash Flows
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5
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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14
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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20
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Item
4.
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Controls
and Procedures
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20
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| PART II. OTHER INFORMATION |
21
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Item
1.
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Legal
Proceedings
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21
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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21
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Item
3.
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Defaults
Upon Senior Securities
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21
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Item
4.
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(Removed
and Reserved)
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21
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Item
5.
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Other
Information
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21
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Item
6.
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Exhibits
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21
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| SIGNATURES |
22
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2
Sunrise
Real Estate Group, Inc.
Unaudited
Condensed Consolidated Balance Sheets
(Expressed
in US Dollars)
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September
30,
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December
31,
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|||||||
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2010
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2009
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(Unaudited)
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(Audited)
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ASSETS
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||||||||
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Current
assets
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||||||||
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Cash
and cash equivalents
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$ | 2,648,587 | $ | 3,444,600 | ||||
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Accounts
receivable
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1,224,263 | 651,329 | ||||||
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Promissory
deposits (Note 3)
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1,119,219 | 732,257 | ||||||
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Other
receivables and deposits (Note 4)
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360,229 | 177,001 | ||||||
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Total
current assets
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5,352,298 | 5,005,187 | ||||||
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Property,
plant and equipment – net (Note 5)
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2,565,831 | 2,291,995 | ||||||
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Investment
properties (Note 6)
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7,278,440 | 7,597,074 | ||||||
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Total
assets
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$ | 15,196,569 | $ | 14,894,256 | ||||
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LIABILITIES
AND SHAREHOLDERS’ DEFICIT
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Current
liabilities
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Bank
Loan
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$ | 0 | $ | 205,032 | ||||
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Promissory
notes payable (Note 8)
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908,167 | 1,036,119 | ||||||
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Accounts
payable
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148,458 | 316,064 | ||||||
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Amount
due to directors (Note 9)
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169,651 | 290,210 | ||||||
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Amount
due to related party (Note 9)
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130,424 | 127,996 | ||||||
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Other
payables and accrued expenses (Note 10)
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2,528,475 | 2,283,359 | ||||||
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Other
tax payable (Note 11)
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227,160 | 384,290 | ||||||
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Income
tax payable
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927,268 | 987,187 | ||||||
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Total
current liabilities
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$ | 5,039,603 | 5,630,257 | |||||
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Commitments
and contingencies (Note 12)
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0 | 0 | ||||||
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Long-term
bank loans (Note 7)
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8,207,608 | 8,054,831 | ||||||
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Deposits
received from underwriting sales (Note 13)
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3,512,631 | 4,316,655 | ||||||
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Deferred
tax liabilities
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390,459 | 0 | ||||||
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Total
liabilities
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$ | 17,150,301 | $ | 18,001,743 | ||||
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Non-controlling
interests of consolidated subsidiaries
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1,401,806 | 636,881 | ||||||
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Shareholders’ deficit
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Common
stock, par value $0.01 per share; 200,000,000 shares authorized;
23,691,925
shares issued and outstanding as of September 30, 2010 and
December
31, 2009
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236,919 | 236,919 | ||||||
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Additional
paid-in capital
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3,620,008 | 3,620,008 | ||||||
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Statutory
reserve (Note 14)
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758,035 | 759,855 | ||||||
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Accumulated
Loss
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(8,546,658 | ) | (9,023,506 | ) | ||||
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Accumulated
other comprehensive income (Note 15)
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576,158 | 662,356 | ||||||
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Total
shareholders’ deficit
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(3,355,538 | ) | (3,744,368 | ) | ||||
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Total
liabilities and shareholders’ deficit
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$ | 15,196,569 | $ | 14,894,256 | ||||
See
accompanying notes to consolidated financial statements.
3
Sunrise
Real Estate Group, Inc.
Unaudited
Condensed Consolidated Statements of Operations
(Expressed
in US Dollars)
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Three
Months Ended September 30,
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Nine
Months Ended September 30,
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|||||||||||||||
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2010
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2009
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2010
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2009
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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|||||||||||||
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Net
Revenues
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$ | 3,099,068 | $ | 5,319,508 | $ | 10,741,502 | $ | 8,575,017 | ||||||||
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Cost
of Revenues
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(1,389,320 | ) | (1,944,751 | ) | (5,512,388 | ) | (4,251,952 | ) | ||||||||
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Gross
Profit
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1,709,748 | 3,374,757 | 5,229,114 | 4,323,065 | ||||||||||||
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Operating
Expenses
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(431,990 | ) | (247,382 | ) | (1,093,597 | ) | (706,893 | ) | ||||||||
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General
and Administrative Expenses
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(698,275 | ) | (514,364 | ) | (1,813,618 | ) | (1,593,179 | ) | ||||||||
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Operating
Profit/(Loss)
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579,483 | 2,613,011 | 2,321,899 | 2,022,993 | ||||||||||||
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Interest
Income
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2,750 | 579 | 7,865 | 2,208 | ||||||||||||
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Other
Income, (Net)
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44,961 | 21,073 | 39,364 | 43,290 | ||||||||||||
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Interest
Expenses
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(142,348 | ) | (115,153 | ) | (448,455 | ) | (381,666 | ) | ||||||||
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Profit/(Loss)
Before Income Tax and Minority Interest
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484,846 | 2,519,510 | 1,920,673 | 1,686,825 | ||||||||||||
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Income
Tax
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(58,478 | ) | (25 | ) | (608,776 | ) | (23,065 | ) | ||||||||
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Profit/(Loss)
Before Minority Interest
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426,368 | 2,519,485 | 1,311,897 | 1,663,760 | ||||||||||||
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Minority
Interest
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(451,245 | ) | (82,973 | ) | (819,577 | ) | (82,688 | ) | ||||||||
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Net
Profit/(Loss)
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$ | (24,877 | ) | $ | 2,436,512 | $ | 492,320 | $ | 1,581,072 | |||||||
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Profit/(Loss)
Per Share – Basic and Fully Diluted
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$ | 0.00 | $ | 0.10 | $ | 0.02 | $ | 0.07 | ||||||||
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Weighted
average common shares outstanding
–
Basic and Fully Diluted
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23,691,925 | 23,691,925 | 23,691,925 | 23,691,925 | ||||||||||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
4
Sunrise
Real Estate Group, Inc.
Consolidated
Statements of Cash Flows
Increase/(Decrease)
in Cash and Cash Equivalents
(Expressed
in US Dollars)
|
Nine
Months Ended September 30,
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||||||||
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2010
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2009
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(Unaudited)
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(Unaudited)
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|||||||
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Cash
flows from operating activities
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Net
Profit/(Loss)
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$ | 492,320 | $ | 1,581,072 | ||||
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Adjustments
to reconcile net profit/(loss) to
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||||||||
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net
cash used in operating activities
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Depreciation
of property, plant and equipment
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645,610 | 640,562 | ||||||
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Loss/
(Gain) on disposal of property, plant and equipment
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9,270 | 16,881 | ||||||
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Minority
interest
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819,577 | 82,688 | ||||||
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Change
in:
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Accounts
receivable
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(552,102 | ) | (739,706 | ) | ||||
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Promissory deposits
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(367,431 | ) | 175,623 | |||||
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Other
receivables and deposits
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(177,151 | ) | 35,583 | |||||
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Accounts
payable
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(170,975 | ) | 1,283,517 | |||||
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Amounts
with venturers
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- | - | ||||||
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Other
payables and accrued expenses
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198,755 | (439,090 | ) | |||||
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Deposit
from underwriting sales
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(872,500 | ) | (2,568,062 | ) | ||||
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Interest payable on promissory notes
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(24,897 | ) | 6,041 | |||||
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Interest
payable on amount due to director
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1,220 | 7,709 | ||||||
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Other
tax payable
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(161,932 | ) | (17,592 | ) | ||||
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Income
tax payable
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307,100 | (27,061 | ) | |||||
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Restricted
cash
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- | 20,483 | ||||||
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Net
cash provided by/(used in) operating activities
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128,323 | 58,648 | ||||||
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Cash
flows from investing activities
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||||||||
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Acquisition
of property, plant and equipment
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(447,335 | ) | (5,094 | ) | ||||
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Equity
investment
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- | |||||||
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Proceeds
from disposal of plant and equipment
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39,095 | 18,299 | ||||||
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Net
cash provided by/(used in) investing activities
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(408,241 | ) | 13,205 | |||||
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Cash
flows from financing activities
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Bank
loans repayment
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(205,761 | ) | (204,894 | ) | ||||
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Repayment
of promissory note
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(114,166 | ) | (72,222 | ) | ||||
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Proceeds
from promissory note
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- | 146,353 | ||||||
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Repayment
to director
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(133,918 | ) | (64,895 | ) | ||||
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Advance
from director
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- | 229,838 | ||||||
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Net
cash provided by financing activities
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(453,844 | ) | 34,180 | |||||
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Effect
of exchange rate changes on cash and cash equivalents
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62,251 | 51,469 | ||||||
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Net
increase/(decrease) in cash and cash equivalents
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(796,013 | ) | 157,502 | |||||
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Cash
and cash equivalents at beginning of period
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3,444,600 | 587,468 | ||||||
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Cash
and cash equivalents at end of period
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$ | 2,648,587 | $ | 744,970 | ||||
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Supplemental
disclosure of cash flow information
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Cash
paid during the period:
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||||||||
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Income
tax paid
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668,695 | 50,044 | ||||||
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Interest
paid
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472,133 | 373,604 | ||||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
5
(Expressed
in US Dollars)
Sunrise
Real Estate Development Group, Inc. (“CY-SRRE”) was established in the Cayman
Islands on April 30, 2004 as a limited liability company. CY-SRRE was wholly
owned by Ace Develop Properties Limited, a corporation, (“Ace Develop”), of
which Lin Chi-Jung, an individual, is the principal and controlling
shareholder. Shanghai Xin Ji Yang Real Estate Consultation Company Limited
(“SHXJY”) was established in the People’s Republic of China (the “PRC”) on
August 14, 2001 as a limited liability company. SHXJY was originally
owned by a Taiwanese company, of which the principal and controlling shareholder
was Lin Chi-Jung. On June 8, 2004, all the fully paid up capital of SHXJY was
transferred to CY-SRRE. On June 25, 2004 SHXJY and two individuals established a
subsidiary, namely, Suzhou Xin Ji Yang Real Estate Consultation Company Limited
(“SZXJY”) in the PRC, at which point in time, SHXJY held a 90% equity interest
in SZXJY. On December 24, 2004, SHXJY acquired 85% of equity interest in Beijing
Xin Ji Yang Real Estate Consultation Company Limited (“BJXJY”), a PRC company
incorporated on April 16, 2003 with limited liability. On August 9,
2005, SHXJY sold a 10% equity interest in SZXJY to a company owned by a director
of SZXJY, and transferred a 5% equity interest in SZXJY to
CY-SRRE. Following the disposal and the transfer, CY-SRRE effectively
held an 80% equity interest in SZXJY. On November 24, 2006, CY-SRRE, SHXJY, a
director of SZXJY and a third party established a subsidiary, namely, Suzhou
Shang Yang Real Estate Consultation Company Limited (“SZSY”) in the PRC, with
CY-SRRE holding a 12.5% equity interest, SHXJY holding a 26% equity interest and
the director of SZXJY holding a 12.5% equity interest in SZSY. At the date of
incorporation, SRRE and the director of SZXJY entered into a voting agreement
that SRRE is entitled to exercise the voting right in respect of his 12.5%
equity interest in SZSY. Following that, SRRE effectively holds 51% equity
interest in SZSY. On September 24, 2007, CY-SRRE sold a 5% equity interest in
SZXJY to a company owned by a director of SZXJY. Following the
disposal, CY-SRRE effectively holds 75% equity interest in SZXJY. On
November 1, 2007, SZXJY established a wholly owned subsidiary, Suzhou Xin Ji
Yang Real Estate Brokerage Company Limited (“SZXJYB”) in the PRC as a limited
liability company. On May 8, 2008, SHXJY established a wholly owned
subsidiary, Kunshan Shang Yang Real Estate Brokerage Company Limited (“KSSY”) in
the PRC as a limited liability company.
LIN RAY
YANG Enterprise Ltd. (“LRY”) was established in the British Virgin Islands on
November 13, 2003 as a limited liability company. LRY was owned by
Ace Develop, Planet Technology Corporation (“Planet Tech”) and Systems &
Technology Corporation (“Systems Tech”). On February 5, 2004, LRY
established a wholly owned subsidiary, Shanghai Shang Yang Real Estate
Consultation Company Limited (“SHSY”) in the PRC as a limited liability company.
On January 10, 2005, LRY and a PRC third party established a subsidiary, Suzhou
Gao Feng Hui Property Management Company Limited (“SZGFH”), in the PRC,
with LRY holding 80% of the equity interest in SZGFH. On May 8, 2006, LRY
acquired 20% of the equity interest in SZGFH from the third party. Following the
acquisition, LRY effectively holds 100% of the equity interest in SZGFH. On
September 11, 2007 SHSY and other third parties established a subsidiary,
namely, Suzhou Bin Fen Nian Dai Administration Consultancy Company Limited
(“SZBFND”) in the PRC, with SHSY holding a 19% equity interest in SZBFND. On
September 18, 2008, SHSY established a wholly owned subsidiary, San Ya Shang
Yang Real Estate Consultation Company Limited (“SYSY”) in the PRC as a limited
liability company.
SHXJY,
SZXJY, BJXJY, SHSY, SZGFH, SZSY, SZXJYB, KSSY and SYSY commenced operations in
November 2001, June 2004, January 2004, February 2004, January 2005, November
2006, November 2007, May 2008 and September 2008 respectively. Each
of SHXJY, SZXJY, BJXJY, SHSY, SZGFH, SZSY, SZXJYB and KSSY has been granted a
twenty-year operation period and SYSY has been granted a thirty-year operation
period from the PRC, which can be extended with approvals from relevant PRC
authorities.
On August
31, 2004, Sunrise Real Estate Group, Inc. (“SRRE”), CY-SRRE and Lin Chi-Jung, an
individual and agent for the beneficial shareholder of CY-SRRE, i.e., Ace
Develop, entered into an exchange agreement under which SRRE issued 5,000,000
shares of common stock to the beneficial shareholder or its designees, in
exchange for all outstanding capital stock of CY-SRRE. The
transaction closed on October 5, 2004. Lin Chi-Jung is Chairman of
the Board of Directors of SRRE, the President of CY-SRRE and the principal and
controlling shareholder of Ace Develop.
Also on
August 31, 2004, SRRE, LRY and Lin Chi-Jung, an individual and agent for
beneficial shareholders of LRY, i.e., Ace Develop, Planet Tech and Systems Tech,
entered into an exchange agreement under which SRRE issued 10,000,000 shares of
common stock to the beneficial shareholders, or their designees, in exchange for
all outstanding capital stock of LRY. The transaction was closed on
October 5, 2004. Lin Chi-Jung is Chairman of the Board of Directors of SRRE, the
President of LRY and the principal and controlling shareholder of Ace
Develop. Regarding the 10,000,000 shares of common stock of SRRE
issued in this transaction, SRRE issued 8,500,000 shares to Ace Develop, 750,000
shares to Planet Tech and 750,000 shares to Systems Tech.
6
As a
result of the acquisition, the former owners of CY-SRRE and LRY hold a majority
interest in the combined entity. Generally accepted accounting
principles require in certain circumstances that a company whose shareholders
retain the majority voting interest in the combined business be treated as the
acquirer for financial reporting purposes. Accordingly, the
acquisition has been accounted for as a “reverse acquisition” arrangement
whereby CY-SRRE and LRY are deemed to have purchased SRRE. However,
SRRE remains the legal entity and the Registrant for Securities and Exchange
Commission reporting purposes. All shares and per share data prior to
the acquisition have been restated to reflect the stock issuance as a
recapitalization of CY-SRRE and LRY.
SRRE was
initially incorporated in Texas on October 10, 1996, under the name of Parallax
Entertainment, Inc. (“Parallax”). On December 12, 2003, Parallax
changed its name to Sunrise Real Estate Development Group, Inc. On
April 25, 2006, Sunrise Estate Development Group, Inc. filed Articles of
Amendment with the Texas Secretary of State, changing the name of Sunrise Real
Estate Development Group, Inc. to Sunrise Real Estate Group, Inc., effective
from May 23, 2006.
Figure 1:
Company Organization Chart
SRRE and
its subsidiaries, namely, CY-SRRE, LRY, SHXJY, SZXJY, SZXJYB, SZSY, KSSY, BJXJY,
SHSY, SZGFH and SYSY are sometimes hereinafter collectively referred to as “the
Company.”
The principal activities of the Company
are property brokerage services, real estate marketing services, property
leasing services and property management services in the
PRC
.
Basis
of Accounting and Principles of Consolidation
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America that include the
financial statements of SRRE and its subsidiaries, CY-SRRE, LRY, SHXJY, SZXJY,
SZXJYB, SZSY, KSSY, BJXJY, SHSY, SZGFH and SYSY. All inter-company
transactions and balances have been eliminated.
7
Use
of Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash in hand and all highly liquid investments with an
original maturity of three months or less.
Foreign
Currency Translation and Transactions
The
functional currency of SRRE, CY-SRRE and LRY is United States Dollars (“US$”)
and the financial records are maintained and the financial statements prepared
in US $. The functional currency of SHXJY, SZXJY, SZXJYB, SZSY, KSSY, BJXJY,
SHSY, SZGFH and SYSY is Renminbi (“RMB”) and the financial records are
maintained and the financial statements prepared in RMB.
Foreign
currency transactions during the period are translated into each company’s
denominated currency at the exchange rates ruling at the transaction dates. Gain
and loss resulting from foreign currency transactions are included in the
consolidated statement of operations. Assets and liabilities denominated in
foreign currencies at the balance sheet date are translated into each company’s
denominated currency at period end exchange rates. All exchange
differences are dealt with in the consolidated statements of
operations.
The
financial statements of the Company’s operations based outside of the United
States have been translated into US$ in accordance with
Accounting
Standards Codification (ASC) Topic 830 “Foreign Currency Matters”. Management
has determined that the functional currency for each of the Company’s foreign
operations is its applicable local currency. When translating functional
currency financial statements into US$, period-end exchange rates are applied to
the consolidated balance sheets, while average period rates are applied to
consolidated statements of operations. Translation gains and losses are recorded
in translation reserve as a component of shareholders’ equity.
The
exchange rate between US$ and RMB had 1.86% fluctuation during the periods
presented. The rates as of September 30, 2010 and December 31, 2009 are US$1:
RMB6.7011 and US$1: RMB6.8282, respectively.
Property,
Plant, Equipment and Depreciation
Property,
plant and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows:
|
Estimated
Useful Life (in years)
|
|
|
Furniture
and fixtures
|
5-10
|
|
Computer
and office equipment
|
5
|
|
Motor
vehicles
|
5
|
|
Properties
|
20
|
Maintenance,
repairs and minor renewals are charged directly to the statement of operations
as incurred. Additions and improvements are capitalized. When assets are
disposed of, the related cost and accumulated depreciation thereon are removed
from the accounts and any resulting gain or loss is included in the statement of
operations.
Investment
property
Investment
properties are stated at cost. Depreciation is computed using the straight-line
method to allocate the cost of depreciable assets over the estimated useful
lives of 20 years.
Significant
additions that extend property lives are capitalized and are depreciated over
their respective estimated useful lives. Routine maintenance and repair costs
are expensed as incurred. The Company reviews its investment property for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an investment property may not be recoverable.
8
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”. The commission revenue on underwriting
sales is recognized when the criteria in ASC 976-605 have been met, 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 tax.
Net
Earnings per Common Share
The
Company computes net earnings per share in accordance with ASC 260, “Earnings
per Share.” Under the provisions of ASC 260, basic net earnings per share
is computed by dividing the net earnings available to common shareholders for
the period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net earnings per share recognizes
common stock equivalents, however; potential common stock in the diluted EPS
computation is excluded in net loss periods, as their effect is
anti-dilutive.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 “Accounting for
Income Taxes.” Under ASC 740, deferred tax liabilities or assets at the end of
each period are determined using the tax rate expected to be in effect when
taxes are actually paid or recovered. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
We
continue to account for income tax
contingencies using a
benefit recognition model.
Beginning January 1,
2007, if we considered that a tax position is 'more likely than not' of being
sustained upon audit, based solely on the technical merits of the position, we
recognize the benefit. We measure the benefit by determining the amount that is
greater than 50% likely of being realized upon settlement, presuming that the
tax position is examined by the appropriate taxing authority that has full
knowledge of all relevant information. These assessments can be complex and we
often obtain assistance from external advisors.
Under the
benefit recognition model, if our initial assessment fails to result in the
recognition of a tax benefit, we regularly monitor our position and subsequently
recognize the tax benefit if there are changes in tax law or analogous case law
that sufficiently raise the likelihood of prevailing on the technical merits of
the position to more likely than not; if the statute of limitations expires; or
if there is a completion of an audit resulting in a settlement of that tax year
with the appropriate agency.
Uncertain
tax positions, represented by liabilities on our balance sheet, are now
classified as current only when we expect to pay cash within the next 12 months.
Interest and penalties, if any, continue to be recorded in Provision for taxes
on income and are classified on the balance sheet with the related tax
liability.
Historically,
our policy had been to account for income tax contingencies based on whether we
determined our tax position to be 'probable' under current tax law of being
sustained, as well as an analysis of potential outcomes under a given set of
facts and circumstances. In addition, we previously considered all tax
liabilities as current once the associated tax year was under
audit.
9
Segment
information
The
Company believes that it operates in one business segment. Management views the
business as consisting of several revenue streams; however it is not possible to
attribute assets or indirect costs to the individual streams other than direct
expenses.
Recent
Accounting Pronouncements
On August
17, 2010, the FASB and IASB issued an ED on lease accounting. The ED, released
by the FASB as a proposed ASU, creates a new accounting model for both lessees
and lessors and eliminates the concept of operating leases. The profosed ASU, if
finalized, would converge the FASB’s and IASB’s accounting for lease contracts
in most significant areas.
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities
on purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance became effective for us with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
us with the reporting period beginning July 1, 2011. Other than requiring
additional disclosures, adoption of this new guidance did not have a material
impact on our financial statements.
In
October 2009, the FASB issued guidance on revenue recognition that will become
effective for us beginning July 1, 2010, with earlier adoption permitted.
Under the new guidance on arrangements that include software elements, tangible
products that have software components that are essential to the functionality
of the tangible product will no longer be within the scope of the software
revenue recognition guidance, and software-enabled products will now be subject
to other relevant revenue recognition guidance. Additionally, the FASB
issued guidance on revenue arrangements with multiple deliverables that are
outside the scope of the software revenue recognition guidance. Under the new
guidance, when vendor specific objective evidence or third party evidence for
deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. The new guidance includes
new disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition.
On
July 1, 2009, we adopted guidance issued by the FASB that changes the
accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control are to be accounted for as equity transactions. In addition,
net income attributable to a non-controlling interest is to be included in net
income and, upon a loss of control, the interest sold, as well as any interest
retained, is to be recorded at fair value with any gain or loss recognized in
net income. Adoption of the new guidance did not have a material impact on our
financial statements.
In June
2009, the FASB issued guidance on the consolidation of variable interest
entities, which is effective for us beginning July 1, 2010. The new
guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of control over such entities, and
additional disclosures for variable interests. We believe adoption of this new
guidance will not have a material impact on our financial
statements.
The
Company does not anticipate that the adoption of these statements will have a
material effect on the Company's financial condition and results of
operations.
The
balance of $671,532 represents the deposits placed with several property
developers in respect of a number of real estate projects where the Company is
appointed as sales agent.
The
balance of $447,688 represents the deposit for participating in a land auction
in SanDong, the PRC.
As of
September 30, 2010, $373,073 out of the total promissory deposits was pledged to
secure a promissory note payable in note 8.
10
|
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Advances
to staff
|
$ | 8,932 | $ | 80,288 | ||||
|
Rental
deposits
|
156,227 | 72,870 | ||||||
|
Other
receivables
|
195,071 | 23,843 | ||||||
| $ | 360,229 | $ | 177,001 | |||||
|
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Furniture
and fixtures
|
$ | 82,473 | $ | 80,938 | ||||
|
Computer
and office equipment
|
364,692 | 349,964 | ||||||
|
Motor
vehicles
|
802,873 | 491,799 | ||||||
|
Real
Properties
|
2,256,542 | 2,214,539 | ||||||
| 3,506,580 | 3,137,240 | |||||||
|
Less:
Accumulated depreciation
|
(940,749 | ) |
（
845,245)
|
|||||
| $ | 2,565,831 | $ | 2,291,995 | |||||
All above
real properties as of September 30, 2010 and as of December 31, 2009 were
pledged to secure a loan in note 7.
|
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Investment
property
|
$ | 9,240,397 | $ | 9,068,396 | ||||
|
Less:
Accumulated depreciation
|
(1,961,957 | ) | (1,471,322 | ) | ||||
| $ | 7,278,440 | $ | 7,597,074 | |||||
The
investment properties included one floor and four units of a commercial building
in Suzhou, the PRC. The investment properties were acquired by the Company for
long-term investment purposes and were pledged to secure a loan in note 7. The
carrying amount of one floor as $2,471,781 was pledged to a promissory note
payable in note 7.
As of
November 10, 2010, the four units of the investment properties were leased to
SZBFND, a related party of the Company, and 78% of the total area of the one
remaining floor was leased out.
The
balance includes one bank loan of $8,207,608., The interest rate is 10% above
the prime rate as announced by the People’s Bank of China and the current rate
is 5.84%., The loan is secured by the properties as mentioned in Note 6 above.
The term of this bank loan is 3 years from November 10,2009 to November 30,2012
and can be extended for additional 3 years
automatically.
There are
five promissory notes, as listed below:
First,
the balance includes a promissory note of $300,000 with an interest payable of
$11,250. This promissory note of $300,000 bears interest at a rate of 15% per
annum. This promissory note is unsecured and the term of repayment is not
specifically defined.
11
Second,
the balance includes a promissory note of $149,229. This promissory note of
$149,229 bears interest at a rate of 15% per annum. This promissory note is
unsecured and the term of repayment is not specifically defined.
Third,
the balance includes a promissory note of $447,688. This promissory note of
$447,688 bears interest at a rate of 18% per annum. This promissory note is
secured by the promissory deposit of $373,073 as mentioned in Note 3 above and
one floor of the investment properties as mentioned in Note 6 above and the term
of repayment is not specifically defined.
A related
party is an entity that can control or significantly influence the management or
operating policies of another entity to the extent one of the entities may be
prevented from pursuing its own interests. A related party may also be any party
the entity deals with that can exercise that control.
Amount due to
director
s
As of
September 30, 2010, the balance includes one loan and advances obtained
from Lin Chin-Jung.
The loan includes
principal of
$103,288 and accrued interest of
$32,786
thereon
. The principal is unsecured and
bears interest at a rate
of 9.6% per annum
and
th
e term of repayment is not specifically
defined
.
The
advances and reimbursements of $33,577 represented the salary payable and rental
reimbursement to Lin Chin-Jung outstanding as of September 30,
2010.
Amount due to related
party
The
amount includes a rental deposit received from SZBFND. This amount is unsecured,
interest free and repayable on demand.
|
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Accrued
staff commission & bonus
|
$ | 678,017 | $ | 694,717 | ||||
|
Rental
deposits received
|
702,780 | 596,090 | ||||||
|
Accrual
for onerous contracts
|
10,130 | 39,352 | ||||||
|
Other
payables
|
1,137,548 | 953,201 | ||||||
| $ | 2,528,475 | $ | 2,283,359 | |||||
Other tax
payable mainly represents the outstanding payables of business tax, urban real
estate tax and land appreciation tax in the PRC.
Operating Lease
Commitments
During the nine
months ended September 30, 2010 and
2009, the Company incurred lease expenses amounting to
$
260,240 and
$
216,610
, respectively. As of September 30,
2010, the Company had commitments under operating leases, requiring annual
minimum rentals as follows:
|
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Within
one year
|
$ | 238,095 | $ | 31,878 | ||||
|
Two
to five years
|
53,723 | 4,394 | ||||||
|
Operating
lease commitments
|
$ | 291,818 | $ | 36,272 | ||||
12
During
the year of 2005 and 2006, SZGFH entered into leasing agreements with
certain buyers of the Sovereign Building underwriting project to lease the
properties for them. These leasing agreements on these properties are for 62% of
the floor space that was sold to third party buyers. In accordance with the
leasing agreements, the owners of the properties can have a rental return of
8.5% and 8.8% per annum for a period of 5 years and 8 years, respectively. In
regards to the leasing agreements, we have negotiated with the buyers and have
lowered the annual rental return rate for the remaining leasing period from
8.5% for 5 years to 5.8%, and from 8.8% for 8 years to 6%. Till the
reporting date 67% of the buyers agreed upon the lowered rate and 22% of the
buyers agreed to cancel the leasing agreements. The leasing period started in
the second quarter, 2006, and the Company has the right to sublease the leased
properties to cover these lease commitments in the leasing period. As of
September 30, 2010, 122 sub-leasing agreements have been signed, the area
of these sub-leasing agreements represented 91.2% of total area with these lease
commitments.
As of
September 30, 2010, the lease commitments are as follows:
|
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Within
one year
|
$ | 1,808,548 | $ | 2,141,087 | ||||
|
Two
to five years
|
3,080,736 | 4,478,477 | ||||||
|
Operating
lease commitments arising from the promotional package
|
$ | 4,889,284 | $ | 6,619,564 | ||||
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. The accrual for
onerous contracts was $10,130 as of September 30, 2010 and $39,352 as of
December 31, 2009.
According
to the leasing agreements, the Company has an option to terminate any
agreement by paying a predetermined compensation. As of September 30, 2010, the
compensation to terminate all leasing agreements is $1,630,241. According to the
sub-leasing agreements that have been signed through September 30, 2010, the
rental income from these sub-leasing agreements will be $930,136 within one year
and $361,875 within two to five years. However, no assurance can be given that
we can collect all of the rental income.
The
Company accounts for its underwriting sales revenue with underwriting rent
guarantees in accordance with ASC976-605 Accounting for Sales of Real Estate .
Under ASC976-605 the deposit method should be used for the 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.
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.
As of
September 30, 2010, the only component of accumulated other comprehensive income
was translation reserve.
13
During
the three months and nine months ended September 30, 2010 and 2009, the
following customers accounted for more than 10% of total net
revenue:
|
Percentage
of
Net
Sales
Three
Months
Ended
September 30,
|
Percentage
of
Net
Sales
Nine
Months
Ended
September 30,
|
Percentage
of
Accounts
Receivable
as
of September 30,
|
|||||||||
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||
|
Customer
A
|
21%
|
*
|
18%
|
*
|
18%
|
*
|
|||||
|
Customer
B
|
11%
|
*
|
*
|
*
|
26%
|
*
|
|||||
|
Customer
C
|
10%
|
*
|
*
|
*
|
*
|
*
|
|||||
* less
than 10%
CAUTIONARY
STATEMENT
The
following Management’s Discussion and Analysis (“MD&A”) is intended to help
the reader understand Sunrise Real Estate Group, Inc. (“SRRE”). The MD&A is
provided as a supplement to, and should be read in conjunction with, our
financial statements and the accompanying notes. The information contained in
this quarterly report on Form 10-Q is not a complete description of our business
or the risks associated with an investment in our common stock. We urge you to
carefully review and consider the various disclosures made by us in this report
and in our other reports filed with the Securities and Exchange Commission, or
SEC, including but not limited to our annual report on Form 10-K for the year
ended December 31, 2008, which discusses our business in greater
detail.
In this
report we make, and from time to time we otherwise make, written and oral
statements regarding our business and prospects, such as projections of future
performance, statements of management’s plans and objectives, forecasts of
market trends, and other matters that are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements containing the words or phrases
“will likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimates,” “projects,” “seeks”, “believes,” “expects,” “anticipates,”
“intends,” “target,” “goal,” “plans,” “objective,” “should” or similar
expressions identify forward-looking statements, which may appear in documents,
reports, filings with the Securities and Exchange Commission, news releases,
written or oral presentations made by officers or other representatives made by
us to analysts, stockholders, current or potential investors, news organizations
and others, and discussions with management and other of our representatives,
customer and suppliers. For such statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement speaks only as of the date on which such statement is
made. Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information from
suppliers, government agencies and other sources that may be subject to
revision. Except as required by law, we do not undertake any obligation to
update or keep current either (i) any forward-looking statement to reflect
events or circumstances arising after the date of such statement, or (ii) the
important factors that could cause our future results to differ materially from
historical results or trends, results anticipated or planned by us, or which are
reflected from time to time in any forward-looking statement.
14
In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time in
any forward-looking statement. Some of these important factors, but not
necessarily all important factors, include those relating to our ability to
raise money and grow our business, and potential difficulties in integrating new
acquisitions with our current operations, especially as they pertain to foreign
markets and market conditions. Please also refer to the section
entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2008.
OVERVIEW
In
October 2004, the former shareholders of Sunrise Real Estate Development Group,
Inc. (Cayman Islands) (“CY-SRRE”) and LIN RAY YANG Enterprise Ltd. (“LRY”)
acquired a majority of our voting interests in a share
exchange. Before the completion of the share exchange, SRRE had no
continuing operations, and its historical results would not be meaningful if
combined with the historical results of CY-SRRE, LRY and their
subsidiaries.
As a
result of the acquisition, the former owners of CY-SRRE and LRY hold a majority
interest in the combined entity. Generally accepted accounting
principles require in certain circumstances that a company whose shareholders
retain the majority voting interest in the combined business be treated as the
acquirer for financial reporting purposes. Accordingly, the
acquisition has been accounted for as a “reverse acquisition” arrangement
whereby CY-SRRE and LRY are deemed to have purchased SRRE. However,
SRRE remains the legal entity and the Registrant for Securities and Exchange
Commission reporting purposes. The historical financial statements
prior to October 5, 2004 are those of CY-SRRE and LRY and their
subsidiaries. All equity information and per share data prior to the
acquisition have been restated to reflect the stock issuance as a
recapitalization of CY-SRRE and LRY.
SRRE and
its subsidiaries, namely, CY-SRRE, LRY, Shanghai Xin Ji Yang Real Estate
Consultation Company Limited (“SHXJY”), Suzhou Xin Ji Yang Real Estate
Consultation Company Limited (“SZXJY”), Beijing Xin Ji Yang Real Estate
Consultation Company Limited (“BJXJY”), Shanghai Shangyang Real Estate
Consultation Company Limited (“SHSY”), Suzhou Gao Feng Hui Property Management
Company Limited (“SZGFH”), Suzhou Shang Yang Real Estate Consultation Company
Limited (“SZSY”), Suzhou Xin Ji Yang Real Estate Brokerage Company
Limited(“SZXJYB”), Kunshan Shang Yang Real Estate Brokerage Company Limited
(“KSSY”) and San Ya Shang Yang Real Estate Consultation Company Limited (“SYSY”)
are sometimes hereinafter collectively referred to as “the Company,” “our,” or
“us”.
The
principal activities of the Company are real estate agency sales, real estate
marketing services, real estate investments, property leasing services and
property management services in the PRC
.
RECENT
DEVELOPMENTS
Our major
business is agency sales, whereby our Chinese subsidiaries contracted with
property developers to market and sell their newly developed property
units. For these services we earned a commission fee calculated as a
percentage of the sales prices. We have focused our sales on the whole China
market, especially in secondary cities. To expand our agency business, we have
established subsidiaries in Shanghai, Suzhou, Beijing, Kunshan and Hainan, and
branches in NanChang, YangZhou, NanJing and ChongQing.
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. In regards to
the leasing agreements, we have negotiated with the buyers and have lowered the
annual rental return rate for the remaining leasing period from 8.5% for 5
years to 5.8%, and from 8.8% for 8 years to 6%. As of September 30,
2010, 54% of the buyers have agreed upon the lowered rate and 16% of the buyers
agreed to cancel the leasing agreements. The leasing period started in the
second quarter of 2006, and the Company has the right to sublease the leased
properties to cover these lease commitments in the leasing period. As of
November 10, 2010, 85 sub-leasing agreements have been signed and the area of
these sub-leasing agreements represented 83% of total area with these lease
commitments.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities
on purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance became effective for us with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
us with the reporting period beginning July 1, 2011. Other than requiring
additional disclosures, adoption of this new guidance did not have a material
impact on our financial statements.
15
We
adopted guidance issued by the FASB that changes the accounting and reporting
for non-controlling interests. Non-controlling interests are to be reported as a
component of equity separate from the parent’s equity, and purchases or sales of
equity interests that do not result in a change in control are to be accounted
for as equity transactions. In addition, net income attributable to a
non-controlling interest is to be included in net income and, upon a loss of
control, the interest sold, as well as any interest retained, is to be recorded
at fair value with any gain or loss recognized in net income. Adoption of the
new guidance did not have a material impact on our financial
statements.
In June
2009, the FASB issued guidance on the consolidation of variable interest
entities, which is effective for us beginning July 1, 2010. The new
guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of control over such entities, and
additional disclosures for variable interests. We believe adoption of this new
guidance will not have a material impact on our financial
statements.
In May
2009, the FASB Issued guidance on accounting for and disclosure of subsequent
events. The objective of this guidance is to establish general standards of
accounting and disclosure of events after the balance sheet date but before
financial statements are issued or are available to be issued.
The
Company does not anticipate that adoption of the above guidance will have a
material effect on the Company’s financial condition and results of
operations.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Critical accounting policies for us include revenue
recognition, net earnings per common share, income taxes and segment
information.
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 the FASB guidance of
ASC Topic 360, “Property, Plant and Equipment”. The commission revenue on
underwriting sales is recognized when the criteria in ASC 360 have been met,
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 tax.
Net
Earnings per Common Share
The
Company computes net earnings per share in accordance with SFAS No. 128,
“Earnings per Share.” Under the provisions of SFAS No. 128, basic net
earnings per share is computed by dividing the net earnings available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net earnings per
share 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.
16
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109 “Accounting
for Income Taxes.” Under SFAS No. 109, deferred tax liabilities or assets at the
end of each period are determined using the tax rate expected to be in effect
when taxes are actually paid or recovered. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
Segment
Information
The
Company believes that it operates in one business segment. Management views the
business as consisting of several revenue streams; however it is not possible to
attribute assets or indirect costs to the individual streams other than direct
expenses.
We
provide the discussion and analysis of our changes in financial condition and
results of operations for the three and nine months ended September 30, 2010,
with comparisons to the historical three and nine months ended September 30,
2009.
Revenue
The
following table shows the net revenue detail by line of business:
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||||||||||||||||||
|
2010
|
%
to total
|
2009
|
%
to total
|
%
change
|
2010
|
%
to total
|
2009
|
%
to total
|
%
change
|
||||||||||
|
Agency
sales
|
2,026,092
|
65
|
1,262,677
|
24
|
60
|
7,680,044
|
71
|
2,947,978
|
34
|
161
|
|||||||||
|
Underwriting
sales
|
422,129
|
14
|
3,351,684
|
63
|
(87)
|
1,138,736
|
11
|
3,351,684
|
39
|
(66)
|
|||||||||
|
Property
Management
|
650,847
|
|
21
|
|
705,147
|
|
13
|
|
(8)
|
|
1,922,722
|
|
18
|
|
2,275,355
|
|
27
|
|
(15)
|
|
Net
revenue
|
3,099,068
|
|
100
|
|
5,319,508
|
|
100
|
|
(42)
|
|
10,741,502
|
|
100
|
|
8,575,017
|
|
100
|
|
25
|
The net
revenue in the third quarter of 2010 was $
3,
099
,
068
, which decreased 42% from
$5,319,508 in the third quarter of 2009. The total net revenue of the first
three quarters of 2010 was $
1
0,
741
,
502
, which increased 25% from
$8,575,017 of the first three quarters of 2009. In the third quarter of 2010,
agency sales represented 65% of the total net revenue and underwriting sales
represented 14% and property management represented 21%. In the first three
quarters of 2010, agency sales represented 71% of the total net revenue and
underwriting sales represented 11% and property management represented 18%. The
drop in net revenue in the third quarter was mainly because of the decrease in
underwriting sales. However, agency sales increased 60% as compared to the third
quarter of 2009 which resulted in the total increase of net revenue for first
three quarters.
Agency
sales
17
In the
third quarter and first three quarters of 2010, 65% and 71%, respectively, of
our net revenue was due to agency sales. As compared with same period in 2009,
net revenue of agency sales in the third quarter and first three quarters of
2009 increased 60% and 161% respectively.
Because
of our diverse market locations, the current macro economic policies had little
impact on our agency sales business, and we are seeking stable growth in our
agency sales business in 2010. However, there can be no assurance that we will
be able to do so.
Underwriting
Sales
In
February 2004, SHSY entered into an agreement to underwrite an office building
in Suzhou, known as Suzhou Sovereign Building. Being the sole
distribution agent for this office building, SHSY committed to a sales target of
$56.53 million. Property underwriting sales are comparatively a higher risk
business model compared to our pure commission based agency business. Under this
higher risk business model, the Underwriting Model, our commission is not
calculated as a percentage of the selling price; instead, our commission revenue
is equivalent to the price difference between the final selling price and
underwriting price. We negotiate with a developer for an underwriting price that
is as low as possible, with the guarantee that all or a majority of the units
will be sold by a specific date. In return, we are given the flexibility to
establish the final selling price and earn the price difference between the
final selling price and the underwriting price. The risk of this kind of
arrangement is that if there is any unsold unit on the expiration date of the
agreement, we may have to absorb the unsold property units from developers at
the underwriting price and hold them in our inventory or as
investments.
We
started selling units in the Sovereign Building in January, 2005. As of
December 31, 2006, we have achieved the sales target by selling 46,779 square
meters with a total sales price of $70.45 million. However, there are still
unsold properties with floor area of 314 square meters, which represents 1% of
total floor area underwritten, as of December 31, 2006. As of the end
of February, 2007, we have sold or acquired all of the units in the building,
and we have achieved the sales target by selling 47,093 square meters with a
total sales price of $75.96 million.
The
Company accounts for its underwriting sales revenue with underwriting rent
guarantees in accordance with SFAS No. 66 “Accounting for Sales of Real Estate”
(SFAS 66). Under SFAS 66, the deposit method should be used for the revenue from
the sales of floor space with underwriting rent guarantees until the revenues
generated by sub-leasing properties exceed the guaranteed rental amount due to
the purchasers. Based on this accounting principle, a significant portion of
underwriting revenue was deferred. In early 2009, the Company negotiated
the rental payments with purchasers. As of September 2010, over two thirds of
the purchasers signed the new agreement with lower rent guarantees. Based on the
new agreement, significant portion of underwriting sales can be realized. In the
third quarter of 2010, $422,129 of underwriting revenue was
recognized.
Property
Management
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. In regards to
the leasing agreements, we have negotiated with the buyers and have lowered the
annual rental return rate for the remaining leasing period from 8.5% for 5
years to 5.8%, and from 8.8% for 8 years to 6%.Till the reporting
date 54% of the buyers agreed upon the lowered rate and 16% of the buyers agreed
to cancel the leasing agreements. The leasing period started in the second
quarter, 2006, and the Company has the right to sublease the leased properties
to cover these lease commitments in the leasing period. As of September 30,
2010, 122 sub-leasing agreements have been signed, the area of these
sub-leasing agreements represented 91.2% of total area with these lease
commitments.
We expect
that the income from the sub-leasing business will be on a stable growth trend
in 2010 and that it can cover the lease commitments in the leasing period as a
whole. However there can be no assurance that we will achieve these
objectives.
Cost of
Revenue
The
following table shows the cost of revenue detail by line of
business:
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||||||||||||||||||
|
2010
|
%
to total
|
2009
|
%
to total
|
%
change
|
2010
|
%
to total
|
2009
|
%
to total
|
%
change
|
||||||||||
|
Agency
sales
|
563,780
|
41
|
603,755
|
31
|
(7)
|
3,139,666
|
57
|
1,140,441
|
27
|
175
|
|||||||||
|
Underwriting
sales
|
98,684
|
7
|
783,630
|
40
|
(87)
|
266,238
|
5
|
783,630
|
18
|
(66)
|
|||||||||
|
Property
Management
|
726,856
|
52
|
557,366
|
29
|
30
|
2,106,484
|
38
|
2,327,881
|
55
|
(10)
|
|||||||||
|
Cost
of revenue
|
1,389,320
|
100
|
1,944,751
|
100
|
(29)
|
5,512,388
|
100
|
4,251,952
|
100
|
30
|
|||||||||
The cost
of revenue of the third quarter of 2010 was $
1,
389
,
320
, which decreased 29%
from $
1,994,751
of the
third quarter of 2009. The total cost of revenue of the first three quarters of
2010 was $5,512,388, which increased 30% from $4,251,952 of the first three
quarters of 2009. In the third quarter of 2010, agency sales represented 41% of
the total cost of revenue, underwriting sales represented 7%, and property
management represented 52%. In the first three quarters of 2010, agency sale
represented 57% of the total cost of revenue, underwriting sales represented 5%,
and property management represented 38%. The decrease in cost of revenue in the
third quarter of 2010 was because there was a big decrease in of the revenue for
underwriting sales. The increase in cost of revenue in the first three quarters
of 2010 was due to the increase in our agency sales.
Agency
sales
18
As
compared with the same period in 2009, net revenue of agency sales in the third
quarter and first three quarters of 2010 increased 60% and 161%
respectively, and the cost of revenue in the same period decreased 7% and
increased 175% accordingly. The main reason for the change was that in the
first three quarter of 2010, our staff cost and designing fees increased
$1,221,945 and $960,958 respectively, compared to the same period in
2009.
Underwriting
sales
The cost
of underwriting sales represents selling costs, such as staff costs and
advertising expenses, associated with underwriting sales.
Property
management
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. In regards to
the leasing agreements, we have negotiated with the buyers and have lowered the
annual rental return rate for the remaining leasing period from 8.5% for 5
years to 5.8%, and from 8.8% for 8 years to 6%. As of September 30,
2010, 54% of the buyers agreed upon the lowered rate and 16% of the buyers
agreed to cancel the leasing agreements. The leasing period started in the
second quarter, 2006, and the Company has the right to sublease the leased
properties to cover these lease commitments in the leasing period. As of
September 30, 2010, 122 sub-leasing agreements have been signed, the area
of these sub-leasing agreements represented 91.2% of total area with these lease
commitments. We expect that these properties will be leased out in 2010; the
gross margin will be improved. However, no assurance can be given that this will
be the case.
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. The accrual for
onerous contracts was $10,130 as of September 30, 2010 and $39,352 as of
December 31, 2009.
Operating
Expenses
The
following table shows operating expenses detail by line of
business:
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||||||||||||||||||
|
2010
|
%
to total
|
2009
|
%
to total
|
%
change
|
2010
|
%
to total
|
2009
|
%
to total
|
%
change
|
||||||||||
|
Agency
Sales
|
407,280
|
94
|
146,816
|
92
|
177
|
1,000,809
|
92
|
543,841
|
77
|
84
|
|||||||||
|
Property
Management
|
24,710
|
6
|
100,566
|
8
|
(75)
|
92,788
|
8
|
163,052
|
23
|
(43)
|
|||||||||
|
Operating
Expenses
|
431,990
|
100
|
247,382
|
100
|
75
|
1,093,597
|
100
|
706,893
|
100
|
55
|
|||||||||
The
operating expenses of the third quarter of 2010 were $431,990, which increased
75% from $247,382 of the third quarter of 2009. The total operating expenses of
the first three quarters of 2010 were $1,093,597, which increased 55% from
$706,893 of the first three quarters of 2009. In the third quarter of 2010,
agency sales represented 94% of the total operating expenses and property
management represented 6%. In the first three quarters of 2010, agency sale
represented 92% of the total operating expenses and property management
represented 8%. The increase in the operating expenses in the third quarter and
first three quarters of 2010 was due to the increase in our agency sales
operation.
Agency
sales
When
compared to 2009, the operating expenses for agency sales in the third quarter
and first three quarters of 2010 increased 177% and 84% respectively. The
primary reason for the change was that in the third quarter of 2010, compared to
the same period in 2009, our salary and commission expense increased by 70% and
21% respectively in the third quarter of 2010. For the first three quarters of
2010, marketing and commission expense increased 72% and 54%
respectively.
Property
management
When
compared to 2009, the operating expenses for property management in the third
quarter and first three quarters of 2010 decreased 75% and 43% respectively. The
primary reason for the change was that in the third quarter of 2010, our salary
expenses and leasing expenses of property management decreased $64,157 and
$32,503 respectively, and in the first three quarter of 2010, our salary
expenses and leasing expenses decreased $25,088 and $32,503 respectively,
compared to the same period in 2009.
19
General and Administrative
Expenses
When
compared to 2009, the general and administrative expenses in the third quarter
and first three quarters of 2010 increased 36% and 14% respectively.
The primary reason for the change was the increase in our consulting and other
expenses. In the third quarter and first three quarters of 2010, our consulting
expense increased $76,593 and $52,252; other expenses increased $77,936 and
$142,258, compared to the same period in 2009.
Interest Exp
enses
When
compared to 2009, the interest expenses in the third quarter and first three
quarters of 2010 increased 24% and 17% respectively. The interest expenses
relate to bank loans and promissory notes payable.
In the
first three quarters of 2010, our principal sources of cash were revenues from
our agency sales and property management business. Most of our cash resources
were used to fund our revenue related expenses, such as salaries and commissions
paid to the sales force, daily administrative expenses and the maintenance of
regional offices, and the repayments of our bank loans and promissory
notes.
We ended
the period with a cash position of $2,648,587.
The
Company’s operating activities provided cash in the amount of $128,323, which
was primarily attributable to accounts receivable and deposit from underwriting
sales.
The
Company’s investing activities used cash resources of $408,241, which was
primarily attributable to the acquisition of plant and equipment.
The
Company’s financing activities used cash resources of $453,844, which was
primarily attributable to the bank note repayment.
The
potential cash needs for the fourth quarter of 2010 and for 2011 will be the
repayments of our bank loans and promissory notes, the rental guarantee
payments and promissory deposits for various property projects.
If our
business otherwise grows more rapidly than we currently predict, we plan to
raise funds through the issuance of additional shares of our equity securities
in one or more public or private offerings. We will also consider raising funds
through credit facilities obtained with lending institutions. There can be no
guarantee that we will be able to obtain such funds through the issuance of debt
or equity that are with terms satisfactory to management and our board of
directors. We have no present understandings or commitments with respect to any
such financings.
OFF BALANCE SHEET
ARRANGEMENTS
The
Company has no off-balance sheet arrangements.
A smaller
reporting company is not required to provide the information required by this
item.
Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of September 30,
2010. Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures
were effective at September 30, 2010, to ensure that information required to be
disclosed in reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There were no
changes in our internal controls over financial reporting during the quarter
ended September 30, 2010, that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
20
The
Company is not a party to any legal proceedings of a material
nature.
None.
None.
None.
|
Exhibit
Number
|
Description |
|
31.1
|
Section
302 Certification by the Corporation's Chief Executive
Officer.
|
|
31.2
|
Section
302 Certification by the Corporation's Chief Financial
Officer.
|
|
32.1
|
Section
1350 Certification by the Corporation's Chief Executive Officer and
Corporation's Chief Financial
Officer.
|
21
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| SUNRISE REAL ESTATE GROUP, INC. | |||
|
Date:
November 18, 2010
|
By:
|
/s/ Lin, Chi-Jung | |
| Lin, Chi-Jung, Chief Executive Officer | |||
| Date: November 18, 2010 | By: | /s/ Wang Wen-Yan | |
| Wang Wen-Yan, Chief Financial Officer | |||
22
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsNote 1 Organization and Description Of BusinessNote 2 Summary Of Significant Accounting PoliciesNote 3 - Promissory DepositsNote 4 - Other Receivables and DepositsNote 5 Property, Plant and Equipment NetNote 6 Investment PropertiesNote 7 Long-term Bank LoansNote 8 Promissory Notes PayableNote 9 Amounts with Related Parties and DirectorsNote 10 - Other Payables and Accrued ExpensesNote 11 Other Tax PayableNote 12- Commitments and ContingenciesNote 13 Deposits Received From Underwrting SalesNote 14 Statutory ReserveNote 15 Accumulated Other Comprehensive IncomeNote 16 Concentration Of CustomersItem 2. Management S Discussion and Analysis Of Finanical Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. (removed and Reserved.)Item 5. Other InformationItem 6. Exhibits