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CHINA GRAND RESORTS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the U. S. Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934, as amended(the "Exchange Act"). Such statements relate to, among other things, our future plans of operations, business strategy, operating results and financial position and are often, though not always, indicated by words or phrases such as "anticipate," "estimate," "plan," "project," "outlook," "continuing," "ongoing," "expect," "believe," "intend," and similar words or phrases. These forward-looking statements include statements other than historical information or statements of current condition, but instead represent only our belief regarding future events, many of which by their nature are inherently uncertain and outside of our control. Important factors that could cause actual results to differ materially from forward-looking statements include, but are not limited to, those described in the section titled "Risk Factors" previously disclosed in our Annual Report on Form 10-K/A for the year ended September 30, 2010, as well as the following: • our ability to implement and execute our current business plan, including the ability to sell the apartment units of the Project; • the economic conditions in the Changde market, the location of the apartment units and elsewhere in the PRC for our consulting and marketing business, • Laws and regulations implemented by the PRC government designed to temper the real estate market in the PRC; • our ability to execute key strategies; • actions by our competitors; • our ability to raise additional funds, including loans from affiliates, to execute our new business plan ; • risks associated with assumptions we make in connection with our critical accounting estimates; • potential adverse accounting related developments; • other matters discussed in this Quarterly Report generally. Consequently, readers of this Quarterly Report should not rely upon these forward-looking statements as predictions of future events. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we access the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statement in this Quarterly Report to reflect any new events or any change in conditions or circumstances. All of the forward-looking statements in this Quarterly Report are expressly qualified by these cautionary statements. Overview We were organized under the laws of the State of Nevada on September 21, 1989. We engaged in a variety of business, described in part below, and effected various name changes prior to November 2009 when the name was changed to China Grand Resorts, Inc. Our subsidiary is Sun New Media Transaction Service Ltd. ("SNMTS"), a company incorporated in Hong Kong, which has a wholly owned subsidiary China Focus Channel Development Co., Ltd ("CFCD"), a company incorporated in People's Republic of China. In December 2009, the Company incorporated Key Prosper Holdings Limited, a company incorporated in the British Virgin Islands on December 8, 2009, with 100% shareholdings. During the three year period prior to December 2007, our principal business was providing marketing, brand management, advertising, media planning, public relations and direct marketing services to clients in the PRC. During December 2007 through January 2008, we re-directed our business towards providing mobile phone based services in the PRC. In January 2008, we divested ourselves of our advertising and marketing business. On December 31, 2007, we acquired a 70% equity interest in Jiangxi Hongcheng Tengyi Telecommunication Company, Ltd ("JXHC"), a local reseller of top-up mobile minutes in Jiangxi Province. Effective March 31, 2009, we acquired a Provincial Class One Full Service Operator license for the Jiangxi Province, PRC. The Class One license enabled us to sell mobile phone based products within the Jiangxi province. During this period, we also acquired other mobile phone based technologies to compliment our existing technology. We sought to market these technologies in the Jiangxi Province of China through JXHC utilizing our recently acquired Class One license. However, due to a lack of operating funds and other factors beyond our control, JXHC was unable to effectively develop its business. Consequently, effective on March 31, 2009, we sold our ownership in JXHC to an unaffiliated third party for $100. 13 On March 30, 2009, we acquired additional mobile internet software technology through our acquisition of GlobStream Technology Inc. ("Globstream") from its shareholders for $156,000. GlobStream was founded by Dr. Wenjun Luo, one of our former directors. In May of that same year, we terminated the operations related to GlobStream. Effective on August 1, 2009, we sold our ownership in GlobStream to Hua Hui. On August 1, 2009, as previously disclosed herein, we entered into a subscription agreement with Beijing Hua Hui Investment Ltd., an unaffiliated company organized under the laws of the PRC ("Hua Hui"). Hua Hui is part of The Beijing Hua Hui Corporation, a PRC real estate construction and development conglomerate that specializes in constructing and developing travel, resort, hotel, and apartment properties in popular tourist and other destinations within the PRC. Under the Agreement, we received from Hua Hui the commercial income rights (described herein) to 10,000 square meters of apartment space in the Huadun Changde International Hotel's Apartment Complex located in the city of Changde in China's Hunan Province ("Project"). The Project is currently under development by Hua Hui. The commercial income rights were valued by an independent appraiser at $8,777,000. As consideration, we agreed to pay a total of $7,317,000, to be satisfied by issuing Hua Hui subject to certain conditions, a total of 2,774,392 shares of our common stock which is valued at $2.40 per share (the closing price of our common stock on the transaction date (August 1, 2009) after giving effect of 20 for 1 reverse split) for a total stock value of $6,658,536. As additional consideration, Hua Hui received from us all of the shares of the GlobStream Technology Inc., our wholly owned subsidiary, certain assets of Sun New Media Transaction Services Limited and China Focus Channel Development Co., Ltd, and certain other miscellaneous assets of us which were valued at $658,241. Our Current Business Strategy General Hua Hui and its affiliates, including The Beijing Hua Hui Corporation, are a PRC real estate construction and development group that specializes in constructing and developing travel, resort, hotel, and apartment properties in popular tourist and other destinations within the PRC. As a result of the transaction with Hua Hui, our initial business goal was to become a leading specialty real estate consulting and marketing company for tourism projects in the PRC. As part of that goal, we intend to market the commercial rights to the Project that we received from Hua Hui. We planned on expanding our business by using existing resources and knowhow of our affiliates and other parties to engage in providing consulting and marketing services for real estate developers. However, beginning in late 2009 and continuing through 2011, the PRC State Council adopted a number of governmental initiatives designed to cool a perceived overheated real estate market. As a result, the Company has suspended its plans to engage in consulting and marketing services for real estate developers. Presently, apart from the Project (discussed below), we are evaluating other markets and business opportunities, including subject to market conditions, its previously proposed real estate consulting business, however, as of the date of the report, it has not committed to any specific market or business opportunity. With respect to the Project, Hua Hui will responsible for project marketing and perform the actual unit sales. We expect to pay Hua Hui a sales commission of not less than 0.5% and not more than 8% of the unit sales price and we will receive the remainder of the unit sales price. As of the date of this report, we do not have any formal agreements or arrangements with any developer or Hua Hui for fees that we will earn, or fees that we will pay Hua Hui. The Project As mentioned above, the Project consists of 10,000 square meters of apartment space in the concerning Building of the Huadun Changde International Hotel's Apartment Complex, a 17 story building, located in the city of Changde, Hunan Province ("Project"). The Project is currently under construction by Hua Hui. Changde is a popular tourist destination located in China's central Hunan province. Upon completion, the Complex will consist of a total of 215,000 square meters located on an approximately 3.6 acre piece of land that has access roads on the North, East, and West. The city is accessible by rail and air and is in close proximity to several tourist, scenic, and commercial areas. The Project is in close proximity to several tourist, scenic, and commercial areas. Construction began on June 1, 2009 and initially was expected to be completed on December 31, 2010. However, due to certain structural and style changes implemented by Hua Hui, Hua Hui has informed us that the Project is expected to be completed at the end of calendar year 2011. All permits concerning the Project have been acquired from governmental authorities, and the construction of the Project is approximately 85% completed as the date hereof. We also have acquired the pre-sale permits for the sale of the apartments from the local real estate authority. 14 The Project when completed will be comprised of a total 128 apartments. The units are expected to range in size from 120 square meters to 210 square meters. Under current market conditions, we expect prices of the apartment units to range from RMB5,500 ($850) per square meter to RMB 6,500 ($1,004) per square meter. The units when sold will be unfurnished. Hua Hui began pre-completion marketing efforts in the mid-calendar 2010. In this regard, it initiated advertisements in the Changde airport and has an outdoor billboard on the main road of Changde City. In addition, it also has printed sales brochures; visited with potential buyers and commenced website design for the Project. A sales center and several model units with respect to the Project were completed by Hua Hui in late November 2010. Potential buyers can tour then these models to gain appreciation of the design, structure and appearance of the units. We have actively collaborated with Hua Hui with regard to the content of information contained in the outdoor billboard and print media, as well as the design of the sales center. In addition, we have commenced independent marketing efforts for the Project on a limited basis. We expect to play an active role in Hua Hui's future marketing plans. In any pre-completion sale, the amount of the down payment that we will be able to obtain from a buyer is subject to the housing policy of governing real estate authorities. The current policy allows for a down payment ranging from 30% to 50% of the sales price dependent on the property size. As mentioned, Hui Hua will act as the sales agent and is expected to receive a sales commission of not less than 0.5% and not more than 8% of the unit sales price. Hua Hui has informed us that in course of selling the units, it will act in good faith in selling the units and will not act preferentially toward selling its units over the units of the Company. However, at the present time, the Company does not have a formal agreement with Hua Hui regarding sales commission or the manner of sale with respect to the units. As of the date of this filing, we have not sold any of the units. Our working capital budget for the next 12 months is approximately $494,000 which relate principally to costs of our executive offices. This amount is comprised of $185,000 in professional fees, $140,000 in salaries and related personnel costs, $56,000 for executive office rent, and $113,000 in miscellaneous expenses. We will not incur any costs of marketing the Project. We expect to generate revenues from the sale of the apartment units at the end of calendar year 2011. Thereafter, subject to the foregoing, we believe that revenues from the Project will be sufficient to fund our ongoing working capital needs. Our business strategies are subject to certain risks and uncertainties, including our ability to raise additional funds in the future. We cannot predict whether we will be successful with any of business strategies. We do not anticipate seasonal fluctuations in our business. Results of Operations Unless otherwise indicated, all amounts are in U.S. Dollars. Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010 Total Revenues and Gross Margin For the three month period ended June 30, 2011, we were waiting on the completion of the Project, and as a result, we had no revenues from operations or gross margin. During the comparable period in 2010, we had no revenues and related expenses from our consulting business due to the general slowdown in economic activity in the PRC during such period. Loss from Operations During the three months ended June 30, 2011, we incurred general and administrative expenses of $46,789 compared with $64,113 for the three months ended June 30, 2010. The reduction in general and administrative expenses is primarily due to reduced overhead at the corporate level. Commencing in 2009, we made an effort to reduce our ongoing overhead expenditures, which includes personnel reductions and office expense, due to our reduced operations. We also had $2,191 in depreciation and amortization for the three months ended June 30, 2011 compared with $1,643 for the comparable three months ended June 30, 2010, the difference is due to the financial adjustments during the three months ended June 30, 2010. Our loss from operations for the three months ended June 30, 2011 was $48,980 compared to $65,756 for the three months ended June 30, 2010. The difference between the periods is due to the reduction of general and administrative expenses discussed above. Other Income (Expense) Other expense for the three months ended June 30, 2011 is $7,355, which mainly is the interest expense for the period. For the corresponding period in year 2010, other expense is $3,506 which mainly is the interest expense. The increase in interest expense is a result of higher principal loan amounts from Hua Hui during the current period. Net loss Our net loss $56,335 for the three months ended June 30, 2011 compared to a net loss of $69,262 for the three months ended June 30, 2010. The difference is due to the reasons discussed above. Comprehensive Loss During three months ended June 30, 2011, we had a foreign currency translation loss of $7,359 compared with a loss of $1,482 for the three months ended June 30, 2010. The difference is due to fluctuation of value of US dollar against RMB. As a result of all of the issues mentioned above, we had a total comprehensive loss of $63,694 for the three months ended June 30, 2011 compared with a total comprehensive loss of $70,744 for the comparable three months ended June 30, 2010. 15 Nine Months Ended June 30, 2011 Compared to Nine Months Ended June 30, 2010 Total Revenues and Gross Margin For the nine month period ended June 30, 2011, we were waiting on the completion of the Project, and as a result, we had no revenues from operations or gross margin. During the comparable period in 2010, we had no revenues and related expenses from our consulting business due to the general slowdown in economic activity in the PRC during such period. Loss from Operations During the nine months ended June 30, 2011, we incurred general and administrative expenses of $154,104 compared with $209,610 for the nine months ended June 30, 2010. The reduction in general and administrative expenses is primarily due to reduced overhead at the corporate level. Commencing in 2009, we made an effort to reduce our ongoing overhead expenditures, which includes personnel reductions and office expense, due to our reduced operations. We also had $6,487 in depreciation and amortization for the six months ended June 30, 2011 compared with $4500 for the comparable nine months ended June 30, 2010, the difference is due to the reduction of fixed assets during the nine months ended June 30, 2011. Our loss from operations for the nine months ended June 30, 2011 was $160,591 compared to $214,110 for the nine months ended June 30, 2010. The difference between the periods is due to the reduction of general and administrative expenses discussed above. Other Income (Expense) Other expense for the nine months ended June 30, 2011 is $19,956, which mainly is the interest expense for the period. For the corresponding period in year 2010, other expense is $6,764 which is also the interest expense. The increase in interest expense is a result of higher principal loan amounts from Hua Hui during the current period. Net Loss Our net loss $180,547 for the nine months ended June 30, 2011 compared to a net loss of $220,874 for the nine months ended June 30, 2010. The difference is due to the reasons discussed above. Comprehensive Loss During nine months ended June 30, 2011, we had a foreign currency translation gain of $13,573 compared with a loss of $1,591 for the nine months ended June 30, 2010. The difference is due to fluctuation of value of US dollar against RMB. As a result of all of the issues mentioned above, we had a total comprehensive loss of $166,974 for the nine months ended June 30, 2011 compared with a total comprehensive loss of $222,465 for the comparable nine months ended June 30, 2010. 16 Liquidity and Capital Resources We finance our operations primarily through cash generated from operating activities, a mixture of short and long-term loans (including loans from affiliates) and issuance of common stock. The following table summarizes our cash flows for the nine months ended June 30, 2011 and 2010: Six Months Ended June 30, 2011 2010 Net cash used in operating activities $ (191,945) $ (314,590) Net cash provided by (used in) investing activities - (31,155) Net cash provided by financing activities $ 164,581 $ 468,661 Effect of exchange rate fluctuations on cash and cash equivalents $ (18,554) $ ( 1,765) Net (decrease)/ increase in cash and cash equivalents $ (45,918) $ 121,152 Cash and cash equivalents (closing balance) $ 32,455 $ 147,576 The net cash used in operating activities for the nine months ended June 30, 2011 was negative $191,945, compared with net cash used in operating activities of negative $314,590 for the nine months ended June 30, 2010. The difference of $122,645 is primarily due to the reduction of general and administrative expenses discussed above during the nine months ended June 30, 2011. The net cash used in investing activities for the nine month ended June 30, 2011 was $0, compared with net cash provided by investing activities of negative $31,155 for the nine month ended June 30, 2010. The cash difference of $31,155 is primarily caused by the purchase of plant and equipment in the 2010 period. The net cash provided by financing activities for the nine month ended June 30, 2011 was $164,581, compared with net cash provided by financing activities of $468,661 for the nine month ended June 30, 2010. The difference of $304,080 is mainly due to the reduction of loan from shareholders during the nine months ended June 30, 2011. The effect of the exchange rate on cash was a loss of $18,554 for the nine months ended June 30, 2011, compared with a loss of $1,765 for the nine months ended June 30, 2010. The difference is due to fluctuation of value of US dollar against RMB. The difference between the closing balance of cash and cash equivalents for the nine months ended June 30, 2011 and 2010 is due to the reasons mentioned above. Capital Requirements for the Next 12 Months We continue to experience significant losses from operations. We are uncertain as to when we will achieve profitable operations. We have an immediate need for capital to conduct our new business endeavors as well as our ongoing working capital needs. We anticipate raising capital through additional private placements of our equity securities, and, if available on satisfactory terms, debt financing. It is conceivable that funding of all or part of the budget required above may come from Hua Hui, our largest shareholder. However, we do not have any agreements, arrangements or commitments with or guarantees from any party, including our largest shareholder, to provide funding to us. We cannot guarantee that we will be successful in our efforts to enhance our liquidity. If we are unable to raise sufficient funds to meet our cash requirements as described above, we may be required to curtail, suspend, or discontinue our current and/or proposed operations. Our inability to raise additional funds as described above may force us to restructure, file for bankruptcy, sell assets or cease operations, any of which could adversely impact our business and business strategy, and the value of our capital stock. Due to the current price of our common stock, any common stock based financing, including transactions with affiliates which may include equity conversions of outstanding loans, will likely create significant dilution to the then existing shareholders. In addition, in order to conserve capital and to provide incentives for our employees and service providers, it is conceivable that we may issue stock for services in the future which also may create significant dilution to existing shareholders. Our capital budget for the next 12 months is as follows: $494,000 for our executive offices expenditures, which includes $140,000 in salaries and related costs of personnel, $185,000 in professional fees, $56,000 in executive office rent, and $113,000 in miscellaneous office expenditures. We expect to generate revenues from the sale of the apartment units at the end of calendar year 2011. Thereafter, the Company believes that revenues from the Project will be sufficient to support our ongoing capital working needs for the ensuing six to twelve month period. However, our projections are subject to certain risks and uncertainties, including our ability to raise additional funds in the near future. We cannot predict whether we will successful with any of business strategies. 17 Contractual Obligations In December 2009, we relocated our office to a new space in Beijing. The term of the old lease was from September 1, 2009 to July 31, 2011; however, we terminated the old lease on December 11, 2009 as mutually agreed with the landlord with no penalty to us. The new office lease is from December 11, 2009 to December 10, 2011 and provides for monthly lease payment of $5,333 with two months period of free rent. The leased premise consists of 192.7 square feet. Moreover, we also have entered into another building lease for the office located in Beijing. The Beijing facilities lease is from July 3, 2010 to July 2, 2011 and provides for monthly lease payment of $26. The leased premise for the second Beijing lease consists of 10 square feet. The lease expenses for the three months ended June 30, 2011 amounted to $17,239 and the total lease commitment as of June 30, 2011 is $28,138 CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in Note 2 to our consolidated financial statements included in the annual report for the year ended September 30, 2010. We prepare our financial statements in conformity with U.S. GAAP, which requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on our management's judgment. Recently issued Accounting Pronouncements FASB Establishes Accounting Standards Codification Effective January 1, 2010, the Company adopted the provisions in ASU 2010-06, "Fair Value Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements, which requires new disclosures related to transfers in and out of levels 1 and 2 and activity in level 3 fair value measurements, as well as amends existing disclosure requirements on level of disaggregation and inputs and valuation techniques. The adoption of the provisions in ASU 2010-06 did not have an impact on the Company's consolidated financial statements. In February 2010, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that amends the disclosure requirements related to subsequent events. This guidance includes the definition of a Securities and Exchange Commission filer, removes the definition of a public entity, redefines the reissuance disclosure requirements and allows public companies to omit the disclosure of the date through which subsequent events have been evaluated. This guidance is effective for financial statements issued for interim and annual periods ending after February 2010. This guidance did not materially impact the Company's results of operations or financial position, but did require changes to the Company's disclosures in its financial statements. In April 2010, the FASB issued ASU No. 2010-13 - Compensation - Stock Compensation (Topic 718), which addresses the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. This Update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company expects that the adoption of the amendments in this Update will not have any significant impact on its financial position and results of operations. In April 2010, the EITF issued "Revenue Recognition - Milestone Method." This issue provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. This issue is effective on a prospective basis for milestones achieved in fiscal years beginning after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the potential impact of this issue. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company's consolidated financial statements upon adoption. 18 OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder's equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. Revenue Recognition We rely on SEC Staff Accounting Bulletin: No. 104 "Revenue Recognition in Financial Statements" ("SAB 104") (ASC No.605) to recognize our revenue. SAB 104 in establishing our accounting policy states that revenue generally is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to the buyer is fixed or determinable, and (4) collectability is reasonably assured. Income Taxes We account for income taxes under ASC No 740, "Income Taxes". We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of their recorded amount, an adjustment to our deferred tax assets would increase our income in the period such determination was made. Likewise, if we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to our income in the period such determination is made. We record income tax expense on our taxable income using the balance sheet liability method at the effective rate applicable in China in our consolidated statements of operations and comprehensive loss. There is no income tax expenses in 2009 and 2010 due to net loss occurred. |