10-Q 1 v240725_10q.htm FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number 000-32585

SUNRISE REAL ESTATE GROUP, INC.

(Exact name of registrant as specified in its charter)

Texas
 
75-2713701
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
 incorporation or organization)
   

Suite 701, No. 333, Zhaojiabang Road
Shanghai, PRC 200032
(Address of principal executive offices  Zip Code)
Registrant’s telephone number: + 86-21-6422-0505

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes x      No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: November  17, 2011 - 28,691,925 shares of Common Stock

 
 

 

FORM 10-Q
 
For the Quarter Ended June 30, 2011
 
INDEX
     
Page
PART I. FINANCIAL INFORMATION
 
3
     
Item 1.
Financial Statements
 
3
 
Consolidated Balance Sheets
 
3
 
Consolidated Statements of Operations
 
4
 
Consolidated Statements of Cash Flows
 
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
20
Item 4.
Controls and Procedures
 
20
       
PART II. OTHER INFORMATION
 
21
     
Item 1.
Legal Proceedings
 
21
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
21
Item 3.
Defaults Upon Senior Securities
 
21
Item 4.
(Removed and Reserved)
 
21
Item 5.
Other Information
 
21
Item 6.
Exhibits
 
22
       
SIGNATURES
 
23
 
 
2

 

PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
Sunrise Real Estate Group, Inc.
Unaudited Condensed Consolidated Balance Sheets
(Expressed in US Dollars)
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
             
Current assets
           
Cash and cash equivalents
  $ 1,567,198     $ 2,973,997  
Restricted cash
    1,337,551       1,283,464  
Accounts receivable
    541,306       258,338  
Promissory deposits (Note 3)
    665,628       1,136,999  
Other receivables and deposits(Note4)
    547,670       378,751  
                 
Total current assets
    4,659,353       6,031,549  
                 
Property, plant and equipment – net (Note 5)
    2,470,830       2,571,516  
Investment properties (Note 6)
    7,024,371       7,208,534  
Long-term investment (Note 7)
    4,111,788       1,509,958  
                 
Total assets
  $ 18,266,342     $ 17,321,557  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
               
Current liabilities
               
Bank loans
  $ 11,015,122     $ 8,304,770  
Promissory notes payable (Note 8)
    472,359       903,983  
Accounts payable
    102,664       86,928  
Amount due to directors (Note 9)
    150,743       189,837  
Amount due to related party (Note 9)
    3,005,649       98,123  
Other payables and accrued expenses (Note 10)
    2,915,622       3,092,565  
Other tax payable(Note 11)
    259,083       266,714  
Income tax payable
    1,169,253       1,318,366  
                 
Total current liabilities
  $ 19,090,495     $ 14,261,286  
                 
Commitments and contingencies (Note 12)
    0       0  
Long-term bank loans (Note 13)
    0       2,264,937  
Deposits received from underwriting sales (Note 14)
    3,110,365       3,454,879  
Deferred tax liabilities
    0    
0 
 
                 
Total liabilities
  $ 22,200,860     $ 19,981,102  
                 
Non-controlling interests of consolidated subsidiaries
    1,046,958       1,188,110  
                 
Shareholders’ deficit
               
Common stock, par value $0.01 per share; 200,000,000 shares authorized; 28,691,925 shares issued and outstanding as of September 30, 2011 and 23,691,925 as of December 31, 2010
    286,919       236,919  
Additional paid-in capital
    4,570,008       3,620,008  
Statutory reserve (Note 15)
    787,461       787,461  
Accumulated Loss
    (11,269,476 )     (9,225,986 )
Accumulated other comprehensive income (Note 16)
    643,431       733,943  
                 
Total shareholders’ deficit
    (4,981,476 )     (3,847,655 )
                 
Total liabilities and shareholders’ deficit
  $ 18,266,342     $ 17,321,557  
 
See accompanying notes to consolidated financial statements.

 
3

 

Sunrise Real Estate Group, Inc.

Unaudited Condensed Consolidated Statements of Operations
  
(Expressed in US Dollars)
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Net Revenues
  $ 1,830,438     $ 3,099,068     $ 6,555,786     $ 10,741,502  
                                 
Cost of Revenues
  $ (1,481,513 )     (1,389,320 )     (4,766,335 )     (5,512,388 )
                                 
Gross Profit
    348,925       1,709,748       1,789,451       5,229,114  
                                 
Operating Expenses
    (290,726 )     (431,990 )     (952,032 )     (1,093,597 )
                                 
General and Administrative Expenses
    (619,907 )     (698,275 )     (1,750,966 )     (1,813,618 )
                                 
Operating Profit/(Loss)
    (561,708 )     579,483       (913,547 )     2,321,899  
                                 
Other Income, (Net)
    7,576       2,750       2,258       7,865  
                                 
Interest Income
    2,516       44,961       9,941       39,364  
                                 
Interest Expenses
    (310,935 )     (142,348 )     (971,732 )     (448,455 )
                                 
Loss Before Income Tax and Minority Interest
    (862,551 )     484,846       (1,873,080 )     1,920,673  
                                 
Income Tax
    59,324       (58,478 )     (73,306 )     (608,776 )
                                 
Profit/(Loss) Before Minority Interest
    (803,227 )     426,368       (1,946,386 )     1,311,897  
                                 
Non-controlling Interest
    97,103       (451,245 )     (96,922 )     (819,577 )
                                 
Net Profit/(Loss)
  $ (706,124 )   $ (24,877 )   $ (2,043,308 )   $ 492,320  
                                 
Profit/(Loss) Per Share – Basic and Fully Diluted
  $ (0.02 )   $ 0.00     $ (0.08 )   $ 0.02  
                                 
Weighted average common shares outstanding – Basic and Fully Diluted
    28,691,925         23,691,925       28,691,925         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,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities
           
Net Profit/(Loss)
    (2,043,308 )   $ 492,320  
Adjustments to reconcile net profit/(loss) to
               
net cash used in operating activities
               
Depreciation of property, plant and equipment
    689,903       645,610  
Loss/ (Gain) on disposal of property, plant and equipment
    14,170       9,270  
Minority interest
    96,922       819,577  
Change in:
               
Accounts receivable
    (266,073 )     (552,102 )
Promissory deposits
    507,817       (367,431 )
Other receivables and deposits
    416,958       (177,151 )
Accounts payable
    11,806       (170,975 )
Amounts with venturers
    0       -  
Other payables and accrued expenses
    (300,481 )     198,755  
Deposit from underwriting sales
    (479,282 )     (872,500 )
Interest payable on promissory note
    7,500       (24,897 )
Interest payable on amount due to director
    0       1,220  
Interest payable on amount due to related party
    358,900       0 )
Other tax payable
    (18,454 )     (161,932 )
Income tax payable
    (200,150 )     307,100  
Net cash provided by/(used in) operating activities
    (1,203,772 )     128,323  
                 
Cash flows from investing activities
               
Acquisition of property, plant and equipment
    (10,203 )     (447,335 )
Long-term investment
    (2,482,150 )     0  
Funds provided for investee
    (566,538 )     0  
Proceeds from disposal of property, plant and equipment
    4,375       39,095  
                 
Net cash provided by/(used in) investing activities
    (3,054,515 )     (408,241 )
                 
Cash flows from financing activities
               
Funds received from capital increase
    1,000,000          
Bank loans repayment
    0       (205,761 )
Repayment of promissory note
    0       (114,166 )-
Proceeds from promissory note
    2,008,300          
Profit return to minority interest in subsidiary
    (226,210 )     0  
Repayment to director
    (40,802 )     (133,918 )-
Net cash provided by financing activities
    2,741,288       (453,844 )
                 
Effect of exchange rate changes on cash and cash equivalents
    110,200       62,251  
                 
Net increase/(decrease) in cash and cash equivalents
    (1,406,799 )     (796,013 )
Cash and cash equivalents at beginning of period
    2,973,997       3,444,600  
Cash and cash equivalents at end of period
  $ 1,567,198     $ 2,648,587  
                 
Supplemental disclosure of cash flow information
               
Cash paid during the period:
               
Income tax paid
    222,419       668,695  
Interest paid
    662,307       472,133  
 
See accompanying notes to unaudited condensed consolidated financial statements.

 
5

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Sunrise Real Estate Development Group, Inc. (“CY-SRRE”) was established in the Cayman Islands on April 30, 2004 as a limited liability company. CY-SRRE was wholly owned by Ace Develop Properties Limited, a corporation, (“Ace Develop”), of which Lin Chi-Jung, an individual, is the principal and controlling shareholder. Shanghai Xin Ji Yang Real Estate Consultation Company Limited (“SHXJY”) was established in the People’s Republic of China (the “PRC”) on August 14, 2001 as a limited liability company.  SHXJY was originally owned by a Taiwanese company, of which the principal and controlling shareholder was Lin Chi-Jung. On June 8, 2004, all the fully paid up capital of SHXJY was transferred to CY-SRRE. On June 25, 2004 SHXJY and two individuals established a subsidiary, namely, Suzhou Xin Ji Yang Real Estate Consultation Company Limited (“SZXJY”) in the PRC, at which point in time, SHXJY held a 90% equity interest in SZXJY. On December 24, 2004, SHXJY acquired 85% of equity interest in Beijing Xin Ji Yang Real Estate Consultation Company Limited (“BJXJY”), a PRC company incorporated on April 16, 2003 with limited liability.  On August 9, 2005, SHXJY sold a 10% equity interest in SZXJY to a company owned by a director of SZXJY, and transferred a 5% equity interest in SZXJY to CY-SRRE.  Following the disposal and the transfer, CY-SRRE effectively held an 80% equity interest in SZXJY. On November 24, 2006, CY-SRRE, SHXJY, a director of SZXJY and a third party established a subsidiary, namely, Suzhou Shang Yang Real Estate Consultation Company Limited (“SZSY”) in the PRC, with CY-SRRE holding a 12.5% equity interest, SHXJY holding a 26% equity interest and the director of SZXJY holding a 12.5% equity interest in SZSY. At the date of incorporation, SRRE and the director of SZXJY entered into a voting agreement that SRRE is entitled to exercise the voting right in respect of his 12.5% equity interest in SZSY. Following that, SRRE effectively holds 51% equity interest in SZSY. On September 24, 2007, CY-SRRE sold a 5% equity interest in SZXJY to a company owned by a director of SZXJY.  Following the disposal, CY-SRRE effectively holds 75% equity interest in SZXJY.  On November 1, 2007, SZXJY established a wholly owned subsidiary, Suzhou Xin Ji Yang Real Estate Brokerage Company Limited (“SZXJYB”) in the PRC as a limited liability company. On May 8, 2008, SHXJY established a wholly owned subsidiary, Kunshan Shang Yang Real Estate Brokerage Company Limited (“KSSY”) in the PRC as a limited liability company.

LIN RAY YANG Enterprise Ltd. (“LRY”) was established in the British Virgin Islands on November 13, 2003 as a limited liability company.  LRY was owned by Ace Develop, Planet Technology Corporation (“Planet Tech”) and Systems & Technology Corporation (“Systems Tech”). On February 5, 2004, LRY established a wholly owned subsidiary, Shanghai Shang Yang Real Estate Consultation Company Limited (“SHSY”) in the PRC as a limited liability company. On January 10, 2005, LRY and a PRC third party established a subsidiary, Suzhou Gao Feng Hui Property Management Company Limited (“SZGFH”), in the PRC, with LRY holding 80% of the equity interest in SZGFH. On May 8, 2006, LRY acquired 20% of the equity interest in SZGFH from the third party. Following the acquisition, LRY effectively holds 100% of the equity interest in SZGFH. On September 11, 2007 SHSY and other third parties established a subsidiary, namely, Suzhou Bin Fen Nian Dai Administration Consultancy Company Limited (“SZBFND”) in the PRC, with SHSY holding a 19% equity interest in SZBFND. 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.

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.

 
6

 

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.
 
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and Principles of Consolidation

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America 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.

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.

 
7

 
 
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, 2011 and December 31, 2010 are US$1: RMB6.3549 and US$1: RMB6.7011, 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.

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.

 
8

 

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.

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.
 
 
9

 

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.

NOTE 3 - PROMISSORY DEPOSITS

The balance of $665,628 represents the deposits placed with several property developers in respect of a number of real estate projects where the Company is appointed as sales agent.

NOTE 4 - OTHER RECEIVABLES AND DEPOSITS

   
September 30,
   
December 31,
 
   
2011
   
2010
 
       
Advances to staff
    49,341       17,120  
Rental deposits
    84,129       87,368  
Property management
    46,438       11,377  
Other receivables
    367,762       262,885  
    $ 547,670     $ 378,751  
 
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT – NET

   
September 30,
   
December 31,
 
   
2011
   
2010
 
       
Furniture and fixtures
  $ 86,966     $ 83,449  
Computer and office equipment
    292,443       318,601  
Motor vehicles
    812,917       827,557  
Real Properties
    2,379,473       2,283,255  
Sub-total     3,571,799       3,512,862  
Less: Accumulated depreciation
    (1,100,969 )     (941,346 )
Total   $ 2,470,830     $ 2,571,516  
 
 
10

 


All above real properties as of September 30, 2011 and as of December 31, 2010 were pledged to secure a loan in note 7.

NOTE 6 – INVESTMENT PROPERTIES

   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Investment property
    9,743,792     $ 9,349,785  
Less: Accumulated depreciation
    (2,719,421 )     (2,141,251 )
    $ 7,024,371     $ 7,208,534  

The investment properties include 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 bank loan in note 7. The carrying amount of one floor as $1,543,274 was pledged to a promissory note payable in Note 8.

As of September 30, 2011, the four units of the investment properties were leased to SZBFND, a related party of the Company, and 100% of the total area of the one remaining floor was leased out.

NOTE 7- LONG-TERM INVESTMENT

A major portion of the long-term investment was for the Wuhan Yuan Yu Long in the amount of $4,111,788

We invested in a cooperation project in Wuhan where the initial investment amount is $1,509,958 (10 million RMB) in 2010. In the third quarter of 2011, we invested 16.13 million RMB, for a total 26.13 million RMB ($4,111,788) and as a result have a 49% stake in Yuan Yu Long.

NOTE 8 – PROMISSORY NOTES PAYABLE

There are two promissory notes, as listed below:
 
First, the balance includes a promissory note of $315,000 with an interest payable of $22,500. This promissory note of $315,000 bears interest at a rate of 15% per annum. This promissory note is unsecured and the term of repayment is not specifically defined.

Second, the balance includes a promissory note of $157,359. This promissory note of $154,358 bears interest at a rate of 15% per annum. This promissory note is unsecured and the term of repayment is not specifically defined.

NOTE 9 – AMOUNTS WITH RELATED PARTIES AND DIRECTORS

A related party is an entity that can control or significantly influence the management or operating policies of another entity to the extent one of the entities may be prevented from pursuing its own interests. A related party may also be any party the entity deals with that can exercise that control.

Amount due to directors

As of September 30, 2011, the balance includes one loan and advances obtained from Lin Chin-Jung.

The loan includes principal of $115,338 and accrued interest of $33,217 thereon. The principal is unsecured and bears interest at a rate of 9.6% per annum and the term of repayment is not specifically defined.

The advances and reimbursements of $17,702.87 represented the salary payable and rental reimbursement to Lin Chin-Jung outstanding as of September 30, 2011.

The advances and reimbursements of $17,702.87 represented the salary payable and rental reimbursement to Lin Chao Chun outstanding as of September 30, 2011.

Amount due to related party

The amount includes a rental deposit received from SZBFND. This amount is unsecured, interest free and repayable on demand.

 
11

 

NOTE 10 - OTHER PAYABLES AND ACCRUED EXPENSES

   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Accrued legal fee
    109,233       109,233  
Accrued staff commission & bonus
    530,029       607,929  
Rental deposits received
    606,468       699,786  
Property management
    131,115       125,813  
Accrual for onerous contracts
    37,597       5,613  
Dividends payables     59,010       0  
Other payables
    1442,170       1,544,191  
      2,915,622       3,092,565  

NOTE 11 – OTHER TAX PAYABLE

Other tax payable mainly represents the outstanding payables of business tax, urban real estate tax and land appreciation tax in the PRC.

NOTE 12- COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

During the nine months ended September 30, 2011 and 2010, the Company incurred lease expenses amounting to $205,605 and $260,240, respectively. As of September 30, 2011, the Company had commitments under operating leases, requiring annual minimum rentals as follows:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Within one year
  $ 100,242     $ 233,145  
Two to five years
    0       0  
Operating lease commitments
  $ 100,242     $ 233,145  

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, 22% of the buyers agreed to cancel the leasing agreements and 11% did not agree to the lowered rate. 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, 2011, 116 sub-leasing agreements have been signed, the area of these sub-leasing agreements represented 70% of total area with these lease commitments.

As of September 30, 2011, the lease commitments are as follows:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Within one year
  $ 1,020,976     $ 2,141,087  
Two to five years
    2,202,614       4,478,477  
Operating lease commitments arising from the promotional package
  $ 3,223,890     $ 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 $370,274 as of September 30, 2011 and $39,352 as of December 31, 2010.

According to the leasing agreements, the Company has an option to terminate any agreement by paying a predetermined compensation. As of September 30, 2011, the compensation to terminate all leasing agreements is $1,495,151. According to the sub-leasing agreements that have been signed through September 30, 2011, the rental income from these sub-leasing agreements will be $1,276,267 within one year and $643,399 within two to five years. However, no assurance can be given that we can collect all of the rental income.

 
12

 

NOTE 13 – LONG-TERM BANK LOANS
 
First, the balance includes a bank loan of $8,654,738 which bears interest at 110% of one year prime rate as announced by the People’s Bank of China (the rate for 2010 was 5.84%) and is secured by the properties as mentioned in Note 6 above. This loan is due on November 30, 2012. This loan ceiling is 55,000,000 RMB for a three-year revolving use, and each loan period is one year and can be extended upon the request.

Second, the remaining bank loan of $2,360,383 bears an interest at prime rate as announced by the People’s Bank of China (The rate for 2010 was 5.84%). This loan is due on August 22, 2012. This loan is secured by the properties as mentioned in Note 6 above. This loan ceiling is 15,000,000 RMB for a three-year revolving use, and each loan period is three months and can be extended upon the request.
 
NOTE 14 –DEPOSITS RECEIVED FROM UNDERWRTING SALES

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.

NOTE 15 – STATUTORY RESERVE

According to the relevant corporation laws in the PRC, a PRC company is required to transfer at least 10% of its profit after taxes, as determined under accounting principles generally accepted in the PRC, to the statutory reserve until the balance reaches 50% of its registered capital. The statutory reserve can be used to make good on losses or to increase the capital of the relevant company.

NOTE 16 – ACCUMULATED OTHER COMPREHENSIVE INCOME

As of September 30, 2011, the only component of accumulated other comprehensive income was translation reserve.

NOTE 17 – CONCENTRATION OF CUSTOMERS

During the three months and nine months ended September 30, 2011 and 2010, 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,
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
                                     
Customer A
    34 %     21 %     48 %     18 %     60 %     18 %
Customer B
    *       11 %     *       *       23 %     26 %
Customer C
    *       10 %     *       *       11 %     *  

* less than 10%

 
13

 
 
ITEM 2  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Sunrise Real Estate Group, Inc. (“SRRE”). The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including but not limited to our annual report on Form 10-K for the year ended December 31, 2011, which discusses our business in greater detail.
 
In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “seeks”, “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, current or potential investors, news organizations and others, and discussions with management and other of our representatives, customer and suppliers. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
 
Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.
 
In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, include those relating to our ability to raise money and grow our business, and potential difficulties in integrating new acquisitions with our current operations, especially as they pertain to foreign markets and market conditions.  Please also refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.

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”.

 
14

 

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.

On January 21, 2011, and January 22, 2011, we entered into a Share Purchase Agreement with Good Speed Services Limited (“Good Speed”) and Better Time International Limited (“Better Time”) respectively, to issue 2.5 million shares to each company for US $500 thousand. On June 24, 2011, we issued 2.5 million shares of common stock to Good Speed and received $500,000. On July 1, 2011, Sunrise and Better Time extended the closing date to on or before September 30, 2011. On September 30, 2011 Sunrise has received the $500,000 from Better Time and issued 2,500,000 shares of common stock to Better Time.
 
RECENT DEVELOPMENTS

Our major business was agency sales, whereby our Chinese subsidiaries contracted with property developers to market and sell their newly developed property units. For these services we earned a commission fee calculated as a percentage of the sales prices. We have focused our sales on the whole China market, especially in secondary cities. To expand our agency business, we have established subsidiaries in Shanghai, Suzhou, Beijing, Kunshan and Hainan, and branches in NanChang, YangZhou, NanJing, ChongQing and ShangQiu

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, 22% of the buyers agreed to cancel the leasing agreements and 11% did not agree to the lowered rate. 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, 2011, 116 sub-leasing agreements have been signed, the area of these sub-leasing agreements represented 70% of total area with these lease commitments.
 
RECENTLY ISSUED ACCOUNTING STANDARDS

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 proposed 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.

 
15

 

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 the above statements 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.

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.

 
16

 

RESULTS OF OPERATIONS

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, 2011, with comparisons to the historical three and nine months ended September 30, 2010.

Revenue

The following table shows the net revenue detail by line of business:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
% to
total
   
2010
   
% to
total
   
%
change
   
2011
   
% to
total
   
2010
   
% to
total
   
%
change
 
Agency sales
    764,447       42       2,026,092       65       (62 )     3,954,366       60       7,680,044       71       (49 )
Underwriting sales
    363,877       20       422,129       14       (14 )     625,533       10       1,138,736       11       (45 )
Property Management
    702,114       38       650,847       21       8       1,975,888       30       1,922,722       28       3  
Net revenue
    1,830,438       100       3,099,068       100       (41 )     6,555,786       100       10,741,502       100       (39 )

The net revenue in the third quarter of 2011 was $1,814,336, which decreased 41% from $3,099,068 in the third quarter of 2010. The total net revenue of the first three quarters of 2011 was $6,539,684, which decreased 39% from $10,741,502 of the first three quarters of 2010. In the third quarter of 2011, agency sales represented 56% of the total net revenue, underwriting sales represented 0% and property management represented 44%. In the first three quarters of 2011, agency sales represented 64% of the total net revenue, underwriting sales represented 4% and property management represented 32%. The drop in net revenue in the third quarter was mainly because of the decrease in agency, underwriting sales and property management.

Agency sales

In the third quarter and first three quarters of 2011, 56% and 64%, respectively, of our net revenue was due to agency sales. As compared with same period in 2011, net revenue of agency sales in the third quarter and first three quarters of 2010 decreased 49% and 45% respectively.
 
Because current macro economic policies on the real estate market has put a downward pressure on housing prices, real estate industry are being adversely affected including our company. We are continually seeking stable growth in our agency sales business in the rest of 2011. 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. Based on the new agreement, a portion of underwriting sales can be realized. In the third quarter of 2011, $1,132 of underwriting revenue was recognized.

 
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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 67% of the buyers agreed upon the lowered rate, 22% of the buyers agreed to cancel the leasing agreements and 11% did not agree to the lowered rate. 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, 2011, 116 sub-leasing agreements have been signed, the area of these sub-leasing agreements represented 70% of total area with these lease commitments.

We expect that the income from the sub-leasing business will be on a stable trend in 2011 and 2012 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,
 
   
2011
   
% to
total
   
2010
   
% to
total
   
%
change
   
2011
   
% to
total
   
2010
   
% to
total
   
%
change
 
Agency sales
    718,724       49       563,780       74       27       2,586,435       54       3,139,668       57       (18 )
Underwriting sales
    85,075       6       98,684       5       (14 )     146,251       3       266,238       5       (45 )
Property Management
    677,714       45       726,856       21       (7 )     2,033,649       43       2,106,484       38       (3 )
Cost of revenue
    1,481,513       100       1,389,320       100       7       4,766,335       100       5,512,388       100       (14 )
 
The cost of revenue of the third quarter of 2011 was $1,481,513, which increased 7% from $1,389,320 of the third quarter of 2010. The total cost of revenue of the first three quarters of 2011 was $4,766,335, which decreased 14% from $5,512,388 of the first three quarters of 2010. In the third quarter of 2011, agency sales represented 49% of the total cost of revenue, underwriting sales represented 6%, and property management represented 45%. In the first three quarters of 2011, agency sale represented 54% of the total cost of revenue, underwriting sales represented 3%, and property management represented 43%. The increase in cost of revenue in the third quarter of 2011 was because of the increase in consulting, marketing/planning cost. The decrease in cost of revenue in the first three quarters of 2011 was overall lower consulting and marketing/planning cost in the 9 month period..

Agency sales

As compared with the same period in 2010, cost of agency sales in the third quarter increased 27% and decreased 18% in the first three quarters. The main reason for the change was that although consulting and marketing/planning cost increased in the third quarter compared to the same period in 2010, the overall 9 months increase in 2011 was less than during the same period of 2010.

Underwriting sales

The cost of underwriting sales represents selling costs, such as staff costs and advertising expenses, associated with underwriting sales.

Property management

During the year of 2005 and 2006, SZGFH entered into leasing agreements with certain buyers of the Sovereign Building underwriting project to lease the properties for them. These leasing agreements on these properties are for 62% of the floor space that was sold to third party buyers. In accordance with the leasing agreements, the owners of the properties can have 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, 22% of the buyers agreed to cancel the leasing agreements and 11% did not agree to the lowered rate. 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, 2011, 116 sub-leasing agreements have been signed, the area of these sub-leasing agreements represented 70% of total area with these lease commitments.
  
We expect that these properties will remain close to 70% for the rest of 2011. However, no assurance can be given that this will be the case.
 
 
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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 $370,274 as of September 30, 2011 and $39,352 as of December 31, 2010.

Operating Expenses

The following table shows operating expenses detail by line of business:

    
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
% to total
   
2010
   
% to total
   
% change
   
2011
   
% to total
   
2010
   
% to total
   
% change
 
Agency Sales
    256,875       89       407,280       87       (37 )     848,994       89       1,000,809       92       (15 )
Property Management
    31,513       11       24,710       13       28       100,700       11       92,788       8       9  
Operating Expenses
    288,388       100       431,990       100       (33 )     949,694       100       1,093,597       100       (13 )

The operating expenses of the third quarter of 2011 were $288,388, which decreased 33% from $431,990 of the third quarter of 2010. The total operating expenses of the first three quarters of 2011 were $949,694, which decreased 13% from $1,093,597 of the first three quarters of 2010. In the third quarter of 2011, agency sales represented 89% of the total operating expenses and property management represented 11%. In the first three quarters of 2011, agency sale represented 89% of the total operating expenses and property management represented 11%. The decrease in the operating expenses in the third quarter and first three quarters of 2010 was due to the decrease in our agency sales operation.

Agency sales

When compared to 2010, the operating expenses for agency sales in the third quarter and first three quarters of 2011 decreased 37% and 15% respectively. The primary reason for the change was that in the third quarter of 2011, compared to the same period in 2010, our salary expense decreased by 57 in the third quarter of 2011. For the first three quarters of 2011, salary and consulting expense decreased 24% and 83% respectively.

Property management

When compared to 2010, the operating expenses for property management in the third quarter and first three quarters of 2011 increased 28% and 9% respectively. The primary reason for the change was that in the third quarter and first three quarters of 2011, our salary expenses increased 46% and 19% respectively, compared to the same period in 2010.


General and Administrative Expenses

When compared to 2010, the general and administrative expenses in the third quarter and first three quarters of 2011 decreased 11% and 3% respectively. The primary reason for the change was the decrease in our salary and leasing expenses. In the third quarter and first three quarters of 2010, our salary expense decreased 16% and 12%; leasing expenses decreased 24% and 34%, compared to the same period in 2010.

Interest Expenses
 
When compared to 2010, the interest expenses in the third quarter and first three quarters of 2011 increased 118% and 117% to $310,935 and $971,732 respectively. The interest expenses relate to bank loans and promissory notes payable.

LIQUIDITY AND CAPITAL RESOURCES

In the third quarter and first three quarters of 2011, 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 $1,567,198.

The Company’s operating activities used cash in the amount of $1,203,772, which was primarily attributable to other payable and accrued expense and deposit from underwriting sales.
 
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The Company’s investing activities used cash resources of $3,054,515, which was primarily attributable to long-term investment.
 
The Company’s financing activities provided cash resources of $2,741,288, which was primarily attributable to $1,000,000 received from capital increase and proceeds from promissory note.

The potential cash needs for the fourth quarter of 2011 will be the repayments of our bank loans and promissory notes, the rental guarantee payments and promissory deposits for various property projects.

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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this item.

ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as of September 30, 2011.

Under Rule 13a-15(e) and 15d-15(e), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2011 were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Controls over Financial Reporting.

During the most recent quarter ended September 30, 2011, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Under Rule 13a-15(e) and 15d-15(e), the term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
 
20

 
 
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings of a material nature.

ITEM 1A.  RISK FACTORS

A smaller reporting company is not required to provide the information required by this Item.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 30, 2011 we issued 2,500,000 shares of common stock to Better Time International Limited. The transaction was exempt under Regulation S of the Securities Act of 1933. The proceeds of the sale of the common stock are being used for general working capital.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

 
21

 

ITEM 6.  EXHIBITS
 
Exhibit
 
Description
Number
   
     
31.1
 
Section 302 Certification by the Corporation's Chief Executive Officer.
     
31.2
 
Section 302 Certification by the Corporation's Chief Financial Officer.
     
32.1and 32,2
 
Section 1350 Certification by the Corporation's Chief Executive Officer and Corporation's Chief Financial Officer.

XBRL Exhibit

101.INS† XBRL Instance Document.
101.SCH† XBRL Taxonomy Extension Schema Document.
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF† XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB† XBRL Taxonomy Extension Label Linkbase Document.
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document.

 
 

 

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, 2011
By: /s/ Lin, Chi-Jung
 
Lin, Chi-Jung, Chief Executive Officer
   
Date: November 18, 2011
By: /s/ Liu Zhen Yu
 
Liu Zhen Yu, Chief Financial Officer