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[December 31, 2012]
CHINA GRAND RESORTS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties, and which speak only as of the date of this annual report.No one should place strong or undue reliance on any forward looking statements. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in Item 1A and elsewhere in this annual report. This Item should be read in conjunction with the financial statements and related notes and with the understanding that our actual future results may be materially different from what is currently expected or projected by us.
Overview We were organized under the laws of the State of Nevada on September21, 1989. We went 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.
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 and January 2008, we re-directed our business towards providing mobile phone based services. In January 2008, we divested ourselves of our advertising and marketing business.
On December 31, 2007, we acquired a 70% equity interest in Jiangxi HongchengTengyi 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.
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, 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 mentioned throughout this Form 10-K, 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 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 concerning Building of 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 Changde Hua Hui. The parties have valued the commercial income rights 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 $2.40per 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.
As a result of the transaction with Hua Hui, the Company's new business goal is to become a leading specialty real estate sales company in China for tourism area developments.
Results of Operations As a result of our transaction with Hua Hui, the results of operations discussed below may not be meaningful in potentially assessing future operations of the Company.
Unless otherwise indicated, all amounts are in U.S. Dollars.
16 -------------------------------------------------------------------------------- Fiscal Year ended September 30, 2012 Compared to Fiscal Year ended September 30, 2011 Consulting Revenues and Gross Margin Commencing in 2009, we were developing our new business strategy discussed above. As a result, we had no revenues from operations or gross margin for the year ended September 30, 2012 and the comparable period in 2011 due to the general slowdown in economic activity in the PRC during such period.
Loss from Operations During the year ended September 30, 2012, we incurred general and administrative expenses of $214,061compared with $221,182 for the year ended September 30, 2011. The decrease 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, due to our reduced operations. We also had $9,029 in depreciation and amortization for the year ended September 30, 2012 compared with $8,728 for the comparable year ended September 30, 2011, the difference is due to the change of foreign currency exchange rate. Our loss from operations for the year ended September 30, 2012 was $223,090 compared to $229,910 for the year ended September 30, 2011. The difference between the periods is due to higher depreciation and amortization expenses and the reduction of general and administrative expenses discussed above.
Other (Expense) Income Other expense for the year ended September 30, 2012 is $42,160, of which $42,219 is the interest expense related to the loans from Hua Hui. For the corresponding period in year 2011, other income is $28,278, of which $28,127 is the interest expenses related to the loans from Hua Hui.
Loss Before Income Taxes Our loss from continuing operations was $265,250 for the year ended September 30, 2012 compared to a loss of $258,188 for the year ended September 30, 2011.
The difference is due to the reasons discussed above.
Net Loss As a result of the foregoing, our net loss was $265,250 for the year end September 30, 2012 compared with a loss of $258,188 for the year ended September 30, 2011.
Total Comprehensive Loss For the year ended September 30, 2012, we had a foreign currency translation loss of $861 compared with a loss of $28,652 for the year ended September 30, 2011. The difference is due to the fluctuations of value of the US dollar in comparison to the RMB. As a result, we had a total comprehensive loss of $266,111 for the year ended September 30, 2012 compared with a total comprehensive loss of $286,840 for year ended September 30, 2011.
Liquidity and Capital Resources Recently, we have financed our operations primarily through cash generated from a mixture of short and long-term loans from affiliates.
The following table summarizes our cash flows for the fiscal years ended September 30, 2012 and September 30, 2011: Fiscal Year Ended September 30, September 30, 2012 2011 USD USD Net cash used in operating activities (217,105) (220,921) Net cash (used in) provided by investing activities Net cash provided by financing activities 212,589 150,101 Effect of exchange rate fluctuations on cash (940) (1,186) Net increase (decrease) in cash and cash equivalents (5,456) (72,006) Cash and cash equivalents (closing balance) 911 6,367 The net cash used in operating activities for year ended September 30, 2012 was $(217,105), compared with net cash used in operating activities of $(220,921) for year ended September 30, 2011. The $3,816 difference is due to the reduction of general and administrative expenses discussed above during the year ended September 30, 2011.
17 -------------------------------------------------------------------------------- The net cash used in the investing activities for the year ended September 30, 2012 was $Nil, compared with net cash provided by investing activities of $Nil, for year ended September 30, 2011.
The net cash provided by financing activities for the year ended September 30, 2012 was $212,589 compared with net cash provided by financing activities of $150,101 for year ended September 30, 2011. There was a difference of $62,488 which is primarily due to the increased shareholder loans during the year ended September 30, 2012.
The effect of the exchange rate on cash was $(940) for the year ended September 30, 2012, compared with $(1,186) for the year ended September 30, 2011. The difference is due to the fluctuation in foreign currency exchange rate.
The difference in the closing balance of cash and cash equivalent (closing balance) for the year ended September 30, 2012 and 2011 is due to the reasons mentioned above.
Capital Requirements For The Next 12 Months We continue to experience significant losses from operations. As discussed below, we anticipate that we will generate sales from the Project commencing at the second quarter of calendar year 2013. However, we nonetheless 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, or Redrock Capital Venture Limited, a shareholder. Commencing in June 2009, we began receiving loans from Redrock Capital Venture Limited. As of September 30, 2012, the amount due to Redrock is $100,281, in which the amount is due on demand and bears no interest. In addition, commencing in October 2009, we received loans from Hua Hui, our majority shareholder, in various increments totaling approximately $958,271 as the date of this report. These loans are due on demand and bear interest at the prevailing rate charged by the PRC Central Bank on the payment date.
However, we do not have any agreements, arrangements or commitments with or guarantees from any party, including our largest shareholder or Redrock, 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: $127,752 for our executive offices expenditures, which includes $61,000 in salaries and related costs of personnel, $46,752 in professional fees, and $20,000 in miscellaneous office expenditures.
We expect to generate revenues from the sale of the apartment units at the second quarter of calendar year 2013. 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.
Contractual Obligations In December 2009, we relocated our office to a new space in Beijing. The initial term of this office lease was from December 11, 2009 to December 10, 2011 with a monthly lease payment of $5,333 with two months period of free rent. In August 2011, we renewed this lease agreement from December 11, 2011 to December 12, 2012 with new monthly payment of $6,253. This lease has been expired on December 12, 2012. Currently, Hua Hui, our majority shareholder, provides an office to us for free. However, Hua Hui may charge us in the future. We have not reach an agreement as of the date of this filing. The lease expenses for the year ended September 30, 2012 amounted to $75,418 and, as of September 30, 2012, the total lease commitment for the year ended September 30, 2013 $14,856.
18 -------------------------------------------------------------------------------- CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in Note 2 to our consolidated financial statements included in this Annual Report. 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.
NEW ACCOUNTING PRONOUNCEMENTS In July 2012, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update No. 2012-02 ("ASU 2011-12"), Testing Indefinite-Lived Intangible Assets for Impairment. Under this standard, entities testing long-lived intangible assets for impairment now have an option of performing a qualitative assessment to determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. This ASU is effective beginning January 1, 2013, with early adoption permitted under certain conditions. The adoption of this standard is not expected to have a material impact on the Company's financial position, results of operations, and cash flows.
In December 2011, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update No. 2011-12 ("ASU 2011-12"), Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The provisions of ASU 2011-12 became effective in fiscal years beginning after December 15, 2011. The adoption of ASU 2011-12 did not materially impact on the Company's financial position, results of operations, and cash flows.
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," as described in Note 11 to our audited consolidated financial statements included in this Annual Report. 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 2011due to net loss occurred.
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