United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______________ to ________________
Commission File Number: 0-26760
-------
Xerion EcoSolutions Group Inc.
(Exact name of small business issuer as
specified in its charter)
Colorado 84-1286065
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1427 West ValleyBoulevard, Suite 101
Alhambra, CA 91803
-------------------------------------------------------------------------------
(Address of principal executive offices)
(626) 457-5958
--------------
(Issuer's telephone number)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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. |X| Yes |_|
No
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes |_| No|_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 227,321,840 shares as of May
12, 2006
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
XERION ECOSOLUTIONS GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of March 31, 2006............ 1
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2006, and 2005................................ 2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2006, and 2005................................ 3
Notes to the Condensed Consolidated Financial Statements............. 4
Item 2. Management's Discussion and Analysis or Plan of Operations...........14
Item 3. Controls and Procedures .............................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........19
Item 3. Defaults upon Senior Securities......................................19
Item 4. Submission of Matters to a Vote of Security Holders..................20
Item 5. Other Information....................................................20
Item 6. Exhibits and Reports on Form 8-K ....................................20
Signatures...................................................................22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XERION ECOSOLUTIONS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2006
(Unaudited)
ASSETS
Current Assets
Cash and equivalents $ 2,021,856
Accounts receivable, net of allowance of $445,321 246,492
Properties held for resale 4,433,759
------------
Total Current Assets 6,702,107
Land held for development 4,760,916
Property and equipment, net of accumulated depreciation 2,865,327
Construction in progress 5,492,601
------------
$ 19,820,951
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,992,209
Advances from buyers 3,736,442
Enterprise taxes payable 111,158
Other taxes payables 1,929,625
Short-term loans 5,008,302
------------
Total Current Liabilities 12,777,736
Minority Interest 334,371
------------
Stockholders" Equity
Common stock, 300,000,000 shares authorized, 227,321,840
shares issued and outstanding at
March 31, 2006 227,322
Additional paid in capital 5,747,681
Retained earnings 2,512,572
Accumulated other comprehensive income 266,523
------------
Total stockholders' equity before advances offset 8,754,098
Advances to directors (2,045,254)
------------
Total stockholders' equity, net of advances offset 6,708,844
------------
$ 19,820,951
============
See accompanying summary of accounting policies and
notes to condensed consolidated financial statements.
1
XERION ECOSOLUTIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ending
March 31,
------------------------------
2006 2005
------------- -------------
Sales Revenues $ 4,287,805 $ --
Cost of properties sold 3,279,050 --
------------- -------------
Gross Profit 1,008,755 --
------------- -------------
Selling, general and administrative expenses
Selling expenses 159,968 109,833
Depreciation expense 38,894 37,014
General and administrative epenses 557,953 278,346
Impairment Loss 956,855
------------- -------------
1,713,670 425,193
------------- -------------
Income (loss) from operations (704,915) (425,193)
Other income (expense)
Other revenues 2,111 4,511
Interest and finance costs (57,883) (49,957)
------------- -------------
(55,772) (45,446)
------------- -------------
Net income before income taxes and minority interest (760,687) (470,639)
(Provision for) Benefit from income taxes (212,246)
------------- -------------
Net income before minority interest (972,933) (470,639)
Minority interest in (earnings) loss 27,109 --
------------- -------------
Net income (loss) $ (945,824) $ (470,639)
------------- -------------
Other comprehensive income $ 3,814 $ --
------------- -------------
Total comprehensive income (loss) $ (942,010) $ (470,639)
============= =============
Basic and diluted earnings (loss) per share $ -- $ --
============= =============
Basic and diluted comprehensive income (loss) per share $ -- $ --
============= =============
Basic and diluted weighted average shares outstanding 227,321,840 227,321,840
============= =============
See accompanying summary of accounting policies and
notes to condensed consolidated financial statements.
2
XERION ECOSOLUTIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
--------------------------
2006 2005
----------- -----------
Cash Flows From Operating Activities
Net Income (Loss) $ (945,824) $ (470,639)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation 38,894 37,014
Minority interest (18,109) (11,959)
Changes in
Accounts receivable, net and other receivable 348,293 (1,781,768)
Properties held for resale 252,996
Advances to suppliers 196,637 (68,500)
Construction-in-progress 2,729,019 (1,308,077)
Accounts payable and other payables (567,548) (41,825)
Advances from buyers (1,716,776) 1,167,118
Income and other taxes payable 364,016 (138,362)
----------- -----------
Net Cash Flows From Operating Activities 681,598 (2,616,998)
Cash Flows From Investing Activities
Purchases/transfer of fixed assets (2,366) (1,179,099)
----------- -----------
Net Cash Provided (Used) by Investing Activities (2,366) (1,179,099)
Cash Flows from Financing Activities
Loan proceeds -- 1,554,364
Principal loans repayments (404,225) --
Capital distribution -- (23,902)
Advances to directors and affiliated companies (1,115,309) 360,637
----------- -----------
Net Cash Provided (Used) by Financing Activities (1,519,534) 1,891,099
----------- -----------
Foreign currency translation adjustment 3,814
----------- -----------
Increase (Decrease) in Cash (836,488) (1,904,998)
Cash at Beginning of Year 2,858,344 4,251,678
----------- -----------
Cash at End of Year $ 2,021,856 $ 2,346,680
=========== ===========
Supplemental disclosure of cash flow information
Interest Paid in Cash $ 57,883 $ 45,996
=========== ===========
Enterprise income taxes paid $ 332,251 --
=========== ===========
See accompanying summary of accounting policies and
notes to condensed consolidated financial statements.
3
XERION ECOSOLUTIONS GROUP INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
ORGANIZATIONAL STRUCTURE
Xerion EcoSolutions Group Inc. (the "Company") was originally incorporated
in Colorado in 1985 as Gemini Ventures, Inc. The name was changed in 1989
to Solomon Trading Company, Ltd., in 1994 to the Voyageur First, Inc., in
1995 to North American Resorts, Inc., in 2000 to Immulabs Corp. Effective
March 28, 2003,as filed with the State of Colorado, the Company changed
its name to Xerion EcoSolutions Group Inc. and was engaged in the business
of developing gold extraction technology for the mining industry until it
became inactive in 2004.
In October of 2005, the Company entered into a stock exchange agreement
with Town House Land Limited (`Town House") whereby the Company issued
stock equal to 98.75% in its ownership in exchange for 100% of the
ownership interest in Town House.
This transaction was treated as a recapitalization of Town House for
financial reporting purposes.
Town House Land (formerly: Hong Kong Window of the World Apparel Co.,
Limited) was incorporated in Hong Kong, as a private limited liability
company on August 13, 2001 with an authorized capital of $64,103
(HK$500,000) divided into 500,000 ordinary shares of par value $0.12
(HK$1.00) each. Town House Land Limited ("Town House Land") changed to its
present name on August 13, 2003. On August 15, 2003, Town House Land
acquired 97% of the outstanding registered capital of Wuhan Town House
Land. Terms of the transaction call for Town House Land to pay $1,602,564
in cash plus the contribution of an additional $5,857,488 in share capital
in Town House Land as consideration for the acquisition of the 97%
interest in Wuhan Town House's registered capital. For financial reporting
purposes, Wuhan Town House was considered to be the acquiring entity and
the additional cash consideration paid was treated as a distribution to
members. Town House Land had no operations prior to this reverse
acquisition and there was substantially no change in ownership from that
of Wuhan Town House as a result of this transaction.
At March 31,2006 Town House Land held 97% of the registered capital of
Wuhan Town House, directly held 100% of the equity in Town House Land
(Miami) Corporation and indirectly 97% of the equity in Town House Land
(USA) Inc. Collectively hereinafter, Town House Land, Wuhan Town House,
Town House Land (Miami) Corporation and Town House Land (USA), Inc., are
referred to as "the Company".
Wuhan Town House Land Limited ("Wuhan Town House") (formerly: Wuhan
Pacific Real Estate Development Company Limited) was registered as a
formal third level property Company in Hubei Province, in the People's
Republic of China as a limited liability company (in which investors'
potential losses are limited to their capital contributions) on December
18, 1995 with a registered capital of $1,207,729 (Rmb. 10,000,000) and a
defined period of existence of 14 years to December 18, 2009. To meet the
qualifications of third level property company, the company must (1) have
registered capital of Rmb.10,000,000, (2) have engineering and staff of
not less that 12 people, (3) should have completed at lease 50,000 square
meters of accumulated development area, and (4) have a 100% passing rate
in construction quality and 10% ranked as excellent.
4
Subsequent recapitalizations during 2000 increased Wuhan Town House's
registered capital to $6,038,647 and changed is classification to a second
level property company. To meet the qualifications of a second level
property company, the company must (1) have registered capital of Rmb.
40,000,000, (2) have engineering and management staff of not less than 24
people, (3) should have completed 150,000 square meters of accumulated
areas completed within three years, (4) 100% pass rate in construction
quality with 10% ranked as excellent, and (5) at least three years
experience in property development. On August 15, 2003, Wuhan Town House
entered into a reverse merger agreement with Town House Land Limited
("Town House Land").
On October 10, 2003 Wuhan City Foreign Investment Bureau approved the
registration of Wuhan Town House Land as a Sino Foreign Joint Investment
Enterprise with a defined period of existence of 20 years to October 27,
2023.
Pursuant to the approval of Wuhan City Industrial and Commercial
Administrative Bureau on February 20, 2004 Wuhan Pacific Real Estate
Development Company Limited changed its name to Wuhan Town House Land
Limited.
Town House Land (USA) Inc. ("Town House USA") was incorporated in
California on March 4, 2004 and owns real estate which it is holding for
development. Town House Land is a wholly owned subsidiary of Wuhan Town
House.
Town House Land (Miami) Corporation ("Town House Miami") was incorporated
in Florida on November 18, 2004 and owns real estate which it is holding
for development. Town House Miami is a wholly owned subsidiary of Wuhan
Town House.
The Company's principal activity is the development and sale of commercial
and residential real estate. The Company's principal country of operations
through March 31, 2006 was The People's Republic of China ("PRC"),
however, the Company held substantial real estate holdings in the United
States as of that date which it plans to develop in the near future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
CONSOLIDATION POLICY - The consolidated financial statements include the
accounts of the Company, Town House, Wuhan Town House, Town House USA, and
Town House Miami. All significant inter-company transactions and balances
within the Company are eliminated on consolidation.
CASH AND EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be
cash equivalents. The carrying amounts reported in the accompanying
consolidated balance sheet for cash and cash equivalents approximate their
fair value. The Company has restricted cash in accordance with the loan
covenants.
5
ACCOUNTS RECEIVABLE - The Company provides an allowance for doubtful
accounts equal to the estimated uncollectible amounts. The Company's
estimate is based on historical collection experience and a review of the
current status of trade accounts receivable. Accounts receivable in the
balance sheet is stated net of such provision.
PROPERTIES HELD FOR SALE - Properties held for sale are comprised of
properties held for sale and repossessed properties held for resale and
are stated at the lower of cost or net realizable value. Cost includes
acquisition costs of land use rights, development expenditure, interests
and any overhead costs incurred in bringing the developed properties to
their present location and condition.
Net realizable value is determined by reference to management estimates
based on prevailing market conditions.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and
are being depreciated over the estimated useful lives of the related
assets. Depreciation is computed on the straight-line basis for both
financial and income tax reporting purposes over useful lives net of a 5%
salvage value as follows:
Building and land rights 40 years
Equipment 5 years
Motor vehicles 5-8 years
Office furniture and fixtures 5 years
Repairs and maintenance costs are normally charged to the statement of
operations in the year in which they are incurred. In situations where it
can be clearly demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the
use of the asset, the expenditure is capitalized as an additional cost of
the asset.
Property and equipment are evaluated annually for any impairment in value.
Where the recoverable amount of any property and equipment is determined
to have declined below its carrying amount, the carrying amount is reduced
to reflect the decline in value. There were no property and equipment
impairments recognized during the three months ended March 31, 2006 and
2005.
CONSTRUCTION-IN-PROGRESS - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including land rights costs, development
expenditures, and professional fees during the course of construction for
the purpose of financing the project. Upon completion and readiness for
use of the project, the cost of construction-in-progress is to be
transferred to properties held for sale.
RELATED COMPANIES - A related company is a company in which a director has
beneficial interests in and in which the Company has significant
influence.
INCOME RECOGNITION - Revenue from the sale of properties is recognized
when the following four criteria are met: (1) a sale is consummated, (2)
the buyers initial and continuing investments are adequate to demonstrate
a commitment to pay for the property, (3) the seller's receivable is not
subject to future subordination, and (4) the seller has transferred to the
buyer the usual risks and rewards of ownership in a transaction that is in
substance a sale and does not have a substantial continuing involvement
with the property.
6
Interest income is recognized when earned, taking into account the average
principal amounts outstanding and the interest rates applicable. COST OF
PROPERTIES SOLD - The cost of goods sold includes the carrying amount of
the properties being sold and the business taxes paid by the Company in
connection with the sales. Business taxes included in cost of sales were
$240,546 and $0 for the three months ended March 31, 2006 and 2005,
respectively.
ADVERTISING - Advertising costs are expensed as incurred. During the three
months ended March 31, 2006 and 2005, the Company incurred advertising
expenses of $9,318 and $725 respectively.
FOREIGN CURRENCIES - These financial statements have been prepared in U.S.
dollars. The functional currencies for Town House and Wuhan Pacific are
the "Hong Kong dollar" and "Renminbi" or "Yuan", respectively. Nonmonetary
assets and liabilities are translated at historical rates, monetary assets
and liabilities are translated at the exchange rates in effect at the end
of the year, and income statement accounts are translated at average
exchange rates.
TAXATION - Taxation on overseas profits has been calculated on the
estimated assessable profits for the year at the rates of taxation
prevailing in the countries in which the Company operates.
Provision for The People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable
profits less available tax relief for losses brought forward.
Enterprise income tax
Under the Provisional Regulations of The People's Republic of China
("PRC")Concerning Income Tax on Enterprises promulgated by the State
Council and which came into effect on January 1, 1994, income tax is
payable by enterprises at a rate of 33% of their taxable income.
Preferential tax treatment may, however, be granted pursuant to any law or
regulations from time to time promulgated by the State Council. For the
years ended December 31, 2005 and 2004, the Company has been granted the
privilege of computing the gross profit margins on real estate development
sales at 15% of sales and computed the enterprise income tax at 33% on
only 15% of sales. During 2005, the Company was able to settle its 2004
and prior years enterprise tax liabilities with the PRC taxing authorities
for substantially less than the prevailing statutory rate resulting in the
recognition of a net income tax benefit in 2005 of $1,484,799.
Enterprise income tax ("EIT") is provided on the basis of the statutory
profit for financial reporting purposes, adjusted for income and expense
items, which are not assessable or deductible for income tax purposes.
RETIREMENT BENEFIT COSTS - According to The People's Republic of China
regulations on pension, the Company contributes to a defined contribution
retirement plan organized by municipal government in the province in which
the Company was registered and all qualified employees are eligible to
participate in the plan. Contributions to the plan are calculated at 20%
or 26% of the employees' salaries above a fixed threshold amount and the
employees contribute 6% while the Company contributes the balance
contribution of 14% or 20%. The Company has no other material obligation
for the payment of retirement benefits beyond the annual contributions
under this plan.
7
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of certain
financial instruments, including cash, accounts receivable, commercial
notes receivable, other receivables, accounts payable, commercial notes
payable, accrued expenses, and other payables approximate their fair
values as of March 31, 2006 because of the relatively short-term maturity
of these instruments.
EARNINGS PER SHARE - Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed by dividing net income
by the weighted-average number of common shares and dilutive potential
common shares outstanding during the period. As of March 31, 2006 and
2005, there were no outstanding securities or other contracts to issue
common stock, such as options, warrants or conversion rights, which would
have a dilutive effect on earnings per share. For presentation purposes,
earning per share for 2005 and 2006 were computing assuming the
reorganization occurred on January 1, 2004.
USE OF ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles require 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 reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. The most significant estimates related to allowance for
uncollectible accounts receivable, depreciation, costs to complete
construction in progress, taxes, and contingencies. Estimates may be
adjusted as more current information becomes available, and any adjustment
could be significant.
RECENT ACCOUNTING PRONOUNCEMENTS - SFAS 123(R), SFAS 151, SFAS 152, SFAS
153 and SFAS 154 - SFAS 123 (R), Share Based Payment replaces SFAS 123,
Accounting for Stock-Based Compensation, SFAS No. 151, Inventory Costs -
an amendment of ARB No. 4 and SFAS No. 152, Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,
SFAS No. 153, Exchange of Non-monetary Assets - an amendment of APB
Opinion No. 29 and SFAS No. 154, Accounting Changes and Error Corrections
- a replacement of APB No. 20 and SFAS 3 were recently issued. SFAS No.
123(R), 151, 152, 153 and 154 have no current applicability to the Company
and have no effect on the consolidated financial statements.
RECLASSIFICATIONS - Certain amounts in the 2005 financial statements have
been reclassified to conform to the 2006 presentation.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
At March 31, 2006, the Company had $1,940,148 cash in banks located in The
People's Republic of China ("PRC") and these balances are not covered by
any type of protection similar to that provided by the Federal Deposit
Insurance Corporation on funds held in United States banks.
8
Substantially all of the Company's operations are in the PRC other than
three significant real estate holdings in the United States.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and clients and
maintains allowances for doubtful accounts based on factors surrounding
the credit risk of specific customers and clients, historical trends, and
other information. Accounts receivable totaling $246,492 and $738,124 as
of March 31, 2006 and 2005, respectively, were collateralized by real
estate.
4. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
Accounts receivable consist of the following as of March 31, 2006:
Accounts receivable $ 691,813
Less: Provision for doubtful debts (445,321)
-----------
Accounts receivable net of provision for doubtful debts $ 246,492
-----------
5. PROPERTIES HELD FOR RESALE
As of March 31, 2006, the Company had the following properties held for
resale:
General Garden $ 13,278
Garden of Eden --
Diamond Mansion Phase I Residential 28,289
Diamond Mansion Phase I Commercial 3,575,458
Diamond Mansion Phase 2 283,161
Gutian Apartments 219,546
Wuhan Town House Plaza 221,549
Other 92,478
===========
Total $ 4,433,759
===========
6. PROPERTIES AND EQUIPMENT
Properties and equipment as of March 31, 2006, stated at cost less
accumulated depreciation and amortization, consist of:
Land use rights and buildings $ 2,545,210
Plant and machineries 30,210
Motor vehicles 572,876
Office equipment 225,353
-----------
3,373,649
Less: Accumulated depreciation and amortization (508,322)
-----------
$ 2,865,327
===========
9
As of March 31, 2006, the Company owned three tracks of land located in
the United States which it was holding for development. The cost basis in
this land at March 31, 2006 was $4,760,916. At March 31, 2006,
substantially all of this land was pledged as collateral on various loans.
7. CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents three combined residential and
commercial projects. Construction-in-progress represents the cost of the
land use rights, capitalized interest expenses, related pre-approval
capital expenditures and government approval fees. A detail of these costs
by project as of March 31, 2006 is as follows:
Diamond Mansion Phase II $ 450,458
YiChang Town House Plaza 5,042,143
----------
$5,492,601
==========
YiChang Town House Plaza construction-in-progress is pledged as collateral
on certain short-term and long-term borrowings of Wu Han Town House.
During the three months ended March 31, 2006, the Company decided to
abandon the Jing Qi project which had been long delayed waiting for the
Provence to build access roads. This resulted in an impairment loss of
$956,855.
8. ADVANCES FROM BUYERS
Advances from buyers represented deposits from residential property buyers
and which procedures for the transfer of ownership of the property
purchased have not been completed as of the balance sheet date. The
deposits from such property buyers for residential properties to be
transferred in the subsequent years are carried forward as deferred
revenue.
9.TRANSACTIONS WITH RELATED PARTIES
Amounts due from/(to) directors and officers at March 31, 2006 are as
follows:
Fang Zhong (Director) $ 2,111,258
Hu Min (Director) 5,970
Luo Yun Fang (Director) (586)
Fang Wei Jun (Director) (440)
Fang Hui (Deceased) (440)
Fang Wei Feng (Director) (70,508)
-----------
$ 2,045,254
===========
The amounts due are unsecured, interest free and have no fixed repayment
terms. For financial reporting purposes, the net balance due from
directors has been reflected as an offset against stockholders equity.
During the three months ended March 31, 2006 Fang Zhong received
$1,115,309 in advances from the Company. Of these advances, $546,271 went
to Wuhan Pacific Shopping Mall Limited pursuant to a guarantee of Fang
Zhong
10
10. OTHER TAXES PAYABLE
Other tax payables at March 31, 2006 consist of the following:
Business tax $ 1,426,703
Other taxes 502,922
-----------
$ 1,929,625
===========
11. SHORT-TERM LOANS
The Company had the following short-term loans at March 31, 2006:
Wu Han Town House short-term bank loan,
secured by residential units of Town House
Plaza, interest at 120% of the national rate,
paid periodically, due on February 7, 2006. $ 276,588
Town House Land (Miami) short-term bank loan,
secured by real estate property in the United
States, interest at 1% over prime (8.250% at
December 31, 2005), principle due on
December 31, 2006. 800,000
Wuhan Town House short-term bank loan,
secured by corporate guarantee, interest
at 6.696% paid periodically, principle due on
December 31, 2007. 692,176
Wuhan Town House short-term bank loan,
secured by YiChang Project construction-
in-progress, interest at 115% of the national
rate, principle due based upon a percentage
of sales through December 20, 2006. 1,726,264
Town House Land (USA) short-term bank loan,
secured by real estate property in the United
States, interest at Far East Bank Prime Rate
Plus 1% (7.0% at September 30, 2005) paid
periodically, principle due on
May 1, 2006. 760,000
Wu Han Town House short-term loan from a
financial institution, secured by real property,
interest at Far East Bank Prime Rate plus 1%
(7.0% at September 30, 2005) paid periodically,
principle due on May 1, 2006. 100,000
11
Town House Land short-term loan from a
financial institution, secured by 433,000 shares
of Town House Land stock issued to a director,
interest at 20% paid periodically, principle due on
October 25, 2005. 95,000
Wuhan Town House short-term bank loan,
Secured by YiChang Project construction-
in-progress, interest at 120% of national
rate paid periodically, principle due based
upon a percentage of sales through
February 28, 2007. 246,609
Hire purchase 9,692
Indirect financing 301,973
-----------
$ 5,008,302
===========
12. INCOME TAX
Provision for The People's Republic of China enterprise income tax ("EIT")
is calculated at the prevailing rate based on the estimated assessable
profits less available tax relief for losses carried forward.
For the three months ended March 31, 2006 and 2005, the Company has been
granted the privilege of computing the gross profit margins on real estate
development sales at 15% of sales and computed the enterprise income tax
at 33% on only 15% of sales.
EIT is provided on the basis of the statutory profit for financial
reporting purposes, adjusted for income and expense items, which are not
assessable or deductible for income tax purposes.
A reconciliation of EIT tax at the statutory rate to the Company's
effective rate is as follows:
2006 2005
--------- ---------
Computed tax at Federal statutory rate of 34% $(254,608) $(160,017)
Difference primarily attributable to EIT tax
assessed on gross real estate sales and
adjustments to prior years tax liabilities
based on assessments from the PRC taxing
authorities 42,362 160,017
--------- ---------
Provision for (benefit from) income taxes $(212,246) $ --
========= =========
12
13. COMMITMENTS
As of March 31, 2006, the Company had contractual commitments on
construction projects totaling $18,383,935; commitments for lease
expenditures of $32,389; and an advertising commitment of $22,389.
During January of 2005, the Company and Fang Johnson entered into a three
year commitment to advance up to Rmb. 30,000,000 ($3,699,137) to Wuhan
Pacific Shopping Mall Limited. Fang Johnson has personally guaranteed the
repayment of these advances. As of March 31, 2006, the Company had
advanced a total of $3,278,774 to Wuhan Pacific Shopping Mall Limited, all
of which was treated as a repayment/advance of funds to Fang Johnson.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This Form 10-QSB contains forward-looking statements that involve
substantial risks of uncertainties. You can identify these statements by
forward-looking words such as "may", "will", "expect", "plans", "intends",
"anticipate", "believe", "estimate" and "continue" or similar words and are
intended to identify 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. You should read statements that contain these words carefully because
they discuss its future expectations, contain projections of its future results
of operations or of its financial condition or state other "forward-looking"
information. The Company believes that it is important to communicate its future
expectations to its investors. However, there may be events in the future that
the Company is not able to accurately predict or control. The factors listed
above in the section captioned "Risk Factors", as well as any differ materially
from the expectations the Company describe in its forward-looking statements.
Results of Operations
Comparison of operations for the three months ended March 31, 2006 with the
three months ended March 31, 2005:
Revenues
Sales revenues increased by $4,287,805 or 100%, in 2006 from $0.00 in
2005. The favorable variance in sales revenue was mainly attributable to sale of
units that became available for sale in 2006 that where under construction in
2005.
o Sales of residential properties were $3,712,110 for the three months
ended March 31, 2006. The percentage of residential sales to total
sales was 86.5% for 2005.
o Sales of commercial properties were $575,695 for the three months
ended March 31, 2006. The percentage of commercial sales to total
sales was 13.5% 2005.
Cost of Goods Sold
Cost of properties sold increased to $3,279,050 for the three months ended
March 31, 2006. The costs of properties sold are for the 6 commercial units and
170 residential units sold during the quarter. Cost of properties sold also
include $240,546 of construction and sales taxes associated with the units sold
during the three months ended March 31, 2006
Operating and other expenses
Selling expenses increased by $50,135, or 45%, to $159,968 in 2006 from
$109,833 in 2005, primarily as a result of the following:
o Advertising expenses increased by $8,593, or 1,185%, due to
advertising to stimulate pre-sales of the soon to be completed of
Town House Plaza.
o Promotional expenses increased by $48,788, or 229%, due to more
promotional activities in new and existing markets.
14
Administrative expenses increased by $279,577, or 50%, to $557,923 in 2006
from $278,346 in 2005, primarily as a result of the following:
o Salaries of administrative staff increased by $149,023, or 176%, due
to an increase in bonuses and average monthly salaries
o Legal and professional fees increased by $29,633, or 590%, as a
result of increases legal services during 2006.
o Other tax expenses increased by $44,500, or 9,251% as a result of
increases in stamp duty, property duty and licenses duty paid.
o Rental expense increased $18,986, or 453%, as a result of new
offices established in Miami and additional sales office in Yichang.
Depreciation expense increased by $1,880, or 5%, to $38,894 in 2006 from
$37,014 in 2005. This increase is primarily attributable to the purchase of
additional assets during 2005.
Impairment loss of $956,855 due to the termination of the Jing Qi project.
The Jing Qi project has been suspended for many years waiting for the
construction of a public road near the project. Because the status of the road
construction could not be determined with any degree of certainty the Company
has canceled the project.
Interest and finance costs increased by $7,926, or 16%, to $57,833 in 2006
from $49,957 in 2005. This increase is primarily a result of an increase
interest expense related to short term loans coupled with bank handling charges.
Liquidity and Capital Resources
As of March 31, 2006, the Company had a working capital deficit of
$6,075,629
Cash flows
Operating. Net cash flow provided by operating activities increased by
$3,298,626, or 1,260%, to $681,628 in 2006 from $(2,616,998) in 2005. This
increase is primarily attributable to the increase in sales during 2006 as
compared to 2005 discussed above.
Investing. Cash used in investing activities decreased $1,176,733 to $2,366 in
2006 from $1,179,099 in 2005. This decrease is primarily attributable to the
Acquisition of properties in 2005.
Financing. The Company has repaid $404,225 of borrowings in 2006 compared to
$1,554,364 in loan proceeds in 2005. This change is primarily a result of
completing projects and paying down financing. The Company paid cash advances to
directors and affiliated companies of $1,115,309 in 2006.
15
Critical Accounting Policies
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and the following
is a summary of significant accounting policies:
Consolidation policy - The consolidated financial statements include the
accounts of the Company, Town House, Wuhan Town House, Town House USA, and Town
House Miami. All significant inter-company transactions and balances within the
Company are eliminated on consolidation.
Cash and equivalents - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be cash
equivalents. The carrying amounts reported in the accompanying consolidated
balance sheet for cash and cash equivalents approximate their fair value. The
Company has restricted cash in accordance with the loan covenants.
At March 31, 2006, the Company had $1,940,148 cash in banks located in the
People's Republic of China ("PRC") and these balances are not covered by any
type of protection similar to that provided by the FDIC on funds held in United
States banks.
Accounts receivable - The Company provides an allowance for doubtful
accounts equal to the estimated uncollectible amounts. The Company's estimate is
based on historical collection experience and a review of the current status of
trade accounts receivable. Accounts receivable in the balance sheet is stated
net of such provision.
Related companies - A related company is a company in which a director has
beneficial interests in and in which the Company has significant influence.
Properties held for sale - Properties held for sale are comprised of
properties held for sale and repossessed properties held for resale and are
stated at the lower of cost or net realizable value. Cost includes acquisition
costs of land use rights, development expenditure, interests and any overhead
costs incurred in bringing the developed properties to their present location
and condition.
Net realizable value is determined by reference to management estimates
based on prevailing market conditions.
Construction-in-progress - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is recorded
at acquisition cost, including land rights costs, development expenditures,
professional fees and during the course of construction for the purpose of
financing the project. Upon completion and readiness for use of the project, the
cost of construction-in-progress is to be transferred to properties held for
sale.
Income Recognition - Revenue from the sale of properties is recognized
when the following four criteria are met: (1) a sale is consummated, (2) the
buyers initial and continuing investments are adequate to demonstrate a
commitment to pay for the property, (3) the seller's receivable is not subject
to future subordination, and (4) the seller has transferred to the buyer the
usual risks and rewards of ownership in a transaction that is in substance a
sale and does not have a substantial continuing involvement with the property.
16
Interest income is recognized when earned, taking into account the average
principal amounts outstanding and the interest rates applicable.
Cost of properties sold - The cost of goods sold includes the carrying
amount of the properties being sold and the business taxes paid by the Company
in connection with the sales. Business taxes included in cost of sales were
$240,546 and $0.00 for the three months ended March 31, 2006 and 2005,
respectively.
Advertising - Advertising costs are expensed as incurred. During the three
months ended March 31, 2006 and 2005, the Company incurred advertising expenses
of $9,318 and $725 respectively.
Foreign currencies - These financial statements have been prepared in U.S.
dollars. The functional currencies for Town House and Wuhan Pacific are the
"Hong Kong dollar" and "Renminbi" or "Yuan", respectively. Nonmonetary assets
and liabilities are translated at historical rates, monetary assets and
liabilities are translated at the exchange rates in effect at the end of the
year, and income statement accounts are translated at average exchange rates.
Taxation - Taxation on overseas profits has been calculated on the
estimated assessable profits for the year at the rates of taxation prevailing in
the countries in which the Company operates.
Provision for The People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable profits less
available tax relief for losses brought forward.
Enterprise income tax
Under the Provisional Regulations of The People's Republic of China
("PRC")Concerning Income Tax on Enterprises promulgated by the State Council and
which came into effect on January 1, 1994, income tax is payable by enterprises
at a rate of 33% of their taxable income. Preferential tax treatment may,
however, be granted pursuant to any law or regulations from time to time
promulgated by the State Council. For the three months ended March 31, 2006 and
2005, the Company has been granted the privilege of computing the gross profit
margins on real estate development sales at 15% of sales and computed the
enterprise income tax at 33% on only 15% of sales. During 2005, the Company was
able to settle its 2004 and prior years enterprise tax liabilities with the PRC
taxing authorities for substantially less than the prevailing statutory rate
resulting in the recognition of a net income tax benefit in 2005 of $1,484,799.
Enterprise income tax ("EIT") is provided on the basis of the statutory
profit for financial reporting purposes, adjusted for income and expense items,
which are not assessable or deductible for income tax purposes.
Fair value of financial instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, commercial notes
receivable, other receivables, accounts payable, commercial notes payable,
accrued expenses, and other payables approximate their fair values as of March
31, 2006 because of the relatively short-term maturity of these instruments.
17
Use of estimates - The preparation of financial statements in accordance
with generally accepted accounting principles require 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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The most significant
estimates related to allowance for uncollectible accounts receivable,
depreciation, costs to complete construction in progress, taxes, and
contingencies. Estimates may be adjusted as more current information becomes
available, and any adjustment could be significant.
Earnings Per Share - Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing net income by the
weighted-average number of common shares and dilutive potential common shares
outstanding during the period. As of March 31, 2006 and 2005, there were no
outstanding securities or other contracts to issue common stock, such as
options, warrants or conversion rights, which would have a dilutive effect on
earnings per share. For presentation purposes, earning per share for 2006 and
2005 were computing assuming the reorganization occurred on January 1, 2004.
(1) Caution Regarding Forward-Looking Information
When used in this report, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," and similar expressions are
intended to identify 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 regarding events, conditions, and financial trends that may affect the
Company's future plans of operations, business strategy, operating results, and
financial position. Persons reviewing this report are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. These risks and uncertainties, many of which are beyond our control,
include (i) the sufficiency of existing capital resources and the Company's
ability to raise additional capital to fund cash requirements for future
operations; (ii) volatility of the stock market; and (iii) general economic
conditions. Although the Company believes the expectations reflected in these
forward-looking statements are reasonable, such expectations may prove to be
incorrect.
18
(5) Contractual Obligations
The following table is a summary of the Company's contractual obligations
as of March 31, 2006:
Less Than
Total One Year 1-3 Years Thereafter
------------ ------------ ------------ ------------
Advances from Buyers $ 3,736,442 $ 3,736,442 -- --
Notes Payable 5,008,302 5,008,302 ~ ~
Operation Leases 54,682 54,682 ~ ~
Construction Commitments 18,383,935 18,383,935 ~ ~
------------ ------------ ------------ ------------
$ 27,183,361 $ 27,183,361 $ -- $ --
============ ============ ============ ============
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer/President and its Chief Financial
Officer/principal accounting officer (collectively, the "Certifying Officers")
are responsible for establishing and maintaining disclosure controls and
procedures for the Company. Such officers have concluded (based upon their
evaluation of these controls and procedures as of a date within 90 days of the
filing of this report) that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
this report is accumulated and communicated to the Company's management,
including its principal executive officers as appropriate, to allow timely
decisions regarding required disclosure. The Certifying Officers also have
indicated that there were no significant changes in the Company's internal
controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation, and that there were no corrective
actions necessary with regard to any significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company recently filed a Schedule 14C Information Statement with the
U.S. Securities and Exchange Commission regarding a special meeting of the
stockholders of the Company to be held on May 31, 2006, at 3:00 p.m. local time,
at 55 South Lake Avenue, Pasadena, CA 91101, for the purpose of approving the
following proposals:
(1) To approve the reincorporation of the Company from the State of
Colorado to the State of Nevada, including the change of our
corporate name to "SINO-American Development Corporation" ("SADC")
and a change in the par value of preferred stock to $0.001 par value
per share from no par value and our authorized shares from
300,000,000 to 150,000,000;
(2) To approve a one-for-eight (1-for-8) reverse split of the currently
issued and outstanding Common Stock of the Company;
(3) To elect members to the Board of Directors of the Company consisting
of five persons: Mr. Fang Zhong, Mr. Yang Jeongho, Mr. Fang Wei
Feng, Mr. Fang Wei Jun, and Mr. Dick R. Lee;
(4) To approve the 2006 Stock Option, SAR and Stock Bonus Plan;
(5) To approve the appointment of Murrell, Hall, McIntosh & Co., PLLP as
the registered public accounting firm of the Company for its fiscal
year ending December 31, 2006; and
(6) To consider and act upon such other business as may properly come
before the meeting or any adjournment thereof.
ITEMS 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3(i) Articles of Incorporation and Amendments
3.1 Articles of Incorporation of Gemini Ventures, Inc. filed on
November 11, 1985 with the Secretary of State of the State of
Colorado is incorporated herein by reference to exhibit 3.1 to
the Form 10-KSB annual report filed by the Company for the
year ended December 31, 2005.
3.2 Articles of Amendment to the Articles of Incorporation filed
July 3, 1989 is incorporated herein by reference to exhibit
3.2 to the Form 10-KSB annual report filed by the Company for
the year ended December 31, 2005.
3.3 Certificate of Correction filed on December 9, 1994, to
correct the name of the Company to The Voyageur First, Inc. is
incorporated herein by reference to exhibit 3.3 to the Form
10-KSB annual report filed by the Company for the year ended
December 31, 2005.
3.4 Articles of Amendment to the Articles of Incorporation filed
November 29, 1995, changing the name of the Company to North
American Resorts, Inc., and additional changes is incorporated
herein by reference to exhibit 3.4 to the Form 10-KSB annual
report filed by the Company for the year ended December 31,
2005.
3.5 Amendments to Articles of Incorporation filed April 21, 1998,
increasing the authorized number of shares of common stock to
150,000,000 shares, par value $.001, is incorporated herein by
reference to exhibit 3.5 to the Form 10-KSB annual report
filed by the Company for the year ended December 31, 2005.
20
3.6 Amendment to Articles of Incorporation filed October 5, 1998,
naming the members of the Board of Directors is incorporated
herein by reference to exhibit 3.6 to the Form 10-KSB annual
report filed by the Company for the year ended December 31,
2005.
3.7 Amendment to Articles of Incorporation filed April 14, 2000,
to change directors and amend Bylaws is incorporated herein by
reference to exhibit 3.7 to the Form 10-KSB annual report
filed by the Company for the year ended December 31, 2005.
3.8 Amendment to Articles of Incorporation filed on June 30, 2000,
to change the name of the Company to Immulabs Corporation is
incorporated herein by reference to exhibit 3.8 to the Form
10-KSB annual report filed by the Company for the year ended
December 31, 2005.
3.9 Amendment to Articles of Incorporation filed on March 28,
2005, changing the name of the Company to Xerion EcoSolutions
Group Inc. is incorporated herein by reference to exhibit 3.9
to the Form 10-KSB annual report filed by the Company for the
year ended December 31, 2005.
3(ii) Bylaws of the Company is incorporated herein by reference to
exhibit 3(ii) of Form 10-QSB filed by the Company for its
fiscal year ended December 31, 2005.
21. List of the subsidiaries of the Company is incorporated herein
by reference to Exhibit 21 to the Form 10-KSB annual report of
the Company for the year ended December 31, 2006.
99.1 Charter of the Compensation Committee of the Board of
Directors is incorporated herein by reference to exhibit 99.1
to the Form 10-KSB annual report filed by the Company for its
fiscal year ended December 31, 2005.
99.2 Charter of the Audit Committee of the Board of Directors is
incorporated herein by reference to exhibit 99.2 to the Form
10-KSB annual report filed by the Company for its fiscal year
ended December 31, 2005.
31.1 Certification of Fang Zhong
31.2 Certification of Lou Yun Fang
32 Certification of Zhong Fang and Lou Yun Fang
(b) Reports on Form 8-K
None
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Xerion EcoSolutions Group Inc.
Date: May 14, 2006 By:
---------------------------------------------
Fang Zhong
Chief Executive Officer and President
22