Indicate the number of shares outstanding of each issuer’s classes of common stock, as of the latest practicable date: 2,408,000 issued and outstanding as of November 15, 2007.
All statements contained in this Quarterly Report on Form 10-QSB (“Form 10-QSB”) for Sino-American Development Corporation, other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect” and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties that may cause actual results to differ materially.
Such risks include, among others, the following: international, national and local general economic and market conditions: our ability to sustain, manage or forecast our growth; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.
Consequently, all of the forward-looking statements made in this Form 10-QSB are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations. As used in this Form 10-QSB, unless the context requires otherwise, “we” or “us” or “Sino” or the “Company” means Sino-American Development Corporation and its subsidiaries.
The following management’s discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this item. In addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “may”, “will”, “could”, “expect”, “anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Quarterly Report on Form 10-QSB. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.
Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See “Exchange Rates” below for information concerning the exchanges rates at which Renminbi were translated into US Dollars at various pertinent dates and for pertinent periods.
Overview
Sino-American Development Corporation (the “Company”) was originally incorporated in Colorado in 1985 as Gemini Ventures, Inc. We changed our name in 1989 to Solomon Trading Company, Ltd., then in 1994 to the Voyageur First, Inc., then in 1995 to North American Resorts, Inc., and in 2000 to Immulabs Corp. Effective March 28, 2003, as filed with the State of Colorado, we changed our name to Xerion EcoSolutions Group Inc., and subsequently further changed our name to our current name.
We were a real estate development company until the closing of a spin-off on September 28, 2007 (“Spin-off”). We became a dormant company after the Spin-off.
Critical Accounting Policies
In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States, we make estimates and assumptions about the effect of matters that are inherently uncertain and may change in subsequent periods. The resulting accounting estimates will, by definition, may vary from the related actual results. We consider the following to be the most critical accounting policies:
INCOME RECOGNITION - Revenue from the sale of properties is recognized when the following four criteria are met: (1) a sale is consummated, (2) the buyer’s 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.
Results of Operations - Three months ended September 30, 2007 as compared to three months ended September 30, 2006
REVENUES. All of our revenue is derived from the sale of apartments from our completed development projects. During the three months ended September 30, 2007, we had revenues of $14,172 as compared to revenues of $6,524,081 during the three months ended September 30, 2006. The unfavorable variance in sales revenue was mainly attributable to lower sales activities.
SELLING EXPENSES. Selling expenses decreased to $462 for the quarter ended September 30, 2007, from $121,293 for the same quarter in 2006, primarily as a result of the significant decrease in advertising and promotional expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased to $91,206 for the three months ended September 30, 2007, compared to $537,225 for the same period in 2006, primarily as a result of the decrease in traveling expenses as we had no development activities in the United States during the first quarter of 2007 and the decrease in traveling expenses, salaries as well as increases in both our legal fees and audit fees.
Results of Operations - Nine months ended September 30, 2007 as compared to nine months ended September 30, 2006
REVENUES. All of our revenue is derived from the sale of apartments from our completed development projects. During the nine months ended September 30, 2007, we had revenues of $1,859,907 as compared to revenues of $11,409,809 during the nine months ended September 30, 2007. The unfavorable variance in sales revenue was mainly attributable to lower sales activities.
SELLING EXPENSES. Selling expenses decreased approximately 82% to $52,142 for the nine-month period ended September 30, 2007, from $294,882 for the same period in 2006, primarily as a result of our reduced sales activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased approximately 69% to $492,284 for the nine months ended September 30, 2007, compared to $1,605,506 for the same period in 2006, as we reduced our staffs in light of our reduced sales activities.
Liquidity and Capital Resources
As of September 30, 2007, we had accumulated deficits of $8,743,327. Our ability to continue as a going concern is dependent on our ability to raise capital through debt or equity financing and to obtain a profitable level of operations. These issues raise doubts about our ability to continue as a going concern.
Cash flows
OPERATING. Net cash flow used in operating activities amounted to $2,847,176 during the period ended September 30, 2007, as compared to $1,804,429 generated from operating activities for the same period in 2006. This increase is primarily attributable to cash outflow from operating activities.
INVESTING. Cash provided by investing activities increased to $2,762,110 for the period ended September 30 2007, as compared to $783,970 used in investing activities for the same quarter in fiscal 2006.
FINANCING. We had net loan repayments of $3,403,803 during the period ended September 30, 2007 compared to net loan repayments of $1,784,549 during the same period in 2006. This increase is primarily a result of the transfer of all our assets and liabilities to our Subsidiaries after the Spin-off. The repayment amount from directors and affiliated companies was $1,666,387 during the period ended September 30, 2007, as compared to $777,538 of cash advances to directors and affiliated companies for the same period in 2006.
Off-Balance Sheet Arrangements
As of September 30, 2007, we have not entered into any off-balance sheet arrangements with any individuals or entities.
RISK FACTORS
If any of the following risks actually materializes, our business, financial condition and results of operations would suffer. Please see the section entitled “Forward-Looking Statements” immediately following these risk factors for a discussion of what types of statements are forward-looking statements.
Change in political and economic conditions.
Since our main country of business operations is China, Town House's business operations and financial position are subject, to a significant degree, to the economic, political and legal developments in China.
China's government started implementing its economic reform policy in 1978, which has enabled the Chinese economy to gradually transform from a "planned economy" to a "socialist market economy." In 1993, the concept of the socialist market economy was introduced into the Constitution of China, and the country has since accelerated development of a market economy. A noteworthy phenomenon in the recent development of the Chinese economy is that non-state owned enterprises such as private enterprises play an increasingly important role in the Chinese economy and the degree of direct control by the Chinese government over the economy is gradually declining.
The Chinese government has been taking macro-economic austerity measures to suppress inflation and curb the pace of economic growth since July 1993. These measures include raising interest rates, tightening credit supply, delaying implementation of certain reform policies on pricing, enhancing financial supervision as well as tightening control on the granting of approval for property and infrastructure projects. However, since 1998, there has been deflation in the Chinese economy and the current economic policies of China mainly focus on stimulating consumption and expansion of domestic demand.
While the Chinese government has not stopped its economic reform policy since 1978, any significant adverse changes in the social, political and economic conditions of China may have fundamental changes in Chinese economic reform policies, and thus our operations and profits may be adversely affected.
Change in tax laws and regulations in China.
Various tax reform policies have been implemented in China in recent years. Interpretation of certain tax policies is still awaiting guidance from the Chinese government. Moreover, there can be no assurance that the existing tax laws and regulations will not be revised or amended in the future.
Changes in China's legal system.
China's legal system is based on statutory law. Unlike the common law system, statutory law is based on written statutes. Prior court decisions may be cited as persuasive authority but do not have binding effect. Since 1979, the Chinese government has been promulgating and amending the laws and regulations regarding economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, China's legal system is still not as fully developed as those western countries with a common law legal system.
Chinese real estate law.
Over the past five years, the majority of China's urban dwellers have changed their housing situation for apartments provided by their work units at a pittance to housing that they have had to buy and pay to maintain (through homeowner's associations that hire state supervised management companies). There are some estimates that 80% of urban Chinese now own their own home. But China has no legal concept of condominiums and no statute (yet) that defines the rights of these millions of homeowners.
In 1998, China created the basic building block of a market economy in real estate - a transferable ownership interest. This interest, called the "granted land use right" - is not 100% ownership as we know it in the West. The period of the interest is limited to a fixed term - varying from 40-70 years, depending upon the charter of the right - and the use to which the property must be put is specified as part of the grant. The granted land use right is transferable, mortgageable, leaseable, and usually can be subdivide. Further, it theoretically is renewable, but there will be a fee and since these land ownership rights are new there is no experience yet with renewals. Chinese anti-speculation rules provide that one cannot acquire or hold property just to "ride the market;" the property must be put to productive use within a set time of acquisition of the land use right - usually two years, or face penalties and ultimately forfeiture of the right.
For the development of a new commercial real estate project, the developer must first obtain granted land use rights. Land use rights can be granted through bidding, auction and listings. The developer then enters into a land use right grant contract with the relevant government authority. The granted land use right can be transferred, leased, or mortgaged. The transferor and transferee must enter into a land use right transfer contract and file the executed contract with the appropriate government bureau, which will then issue a new land use certificate in the name of the transferee. In May 2002, the Ministry of Land and Resources issued a regulation regarding the land use right transfer. Whereas in the past, private parties were able to transfer land use rights by mutual agreement, this practice was prohibited by the new regulation. Under the new scheme, any procurement of land for business purposes can only be effected through bidding, auction and listing on an authorized exchange floor.
The long term value of Chinese land rights are still quite uncertain, and their rights not the kind of secure investment that would lead a lender, as might happen in American, to rely primarily on the land value and look beyond the individual ability of a borrower to repay the debt. Chinese banks, for example, rarely make construction loans because in theory they cannot lend more than the value of the land that is their security at the time of the loan. The Chinese deal with this problem by signing "pre-lease" or "pre-purchase" contracts whereby the end user pays all of the consideration before the building is commenced. Effectively, the users finance the seller's construction. Users borrow the money from the banks under arrangements which later will "morph" into mortgage loans when there is something to which the mortgage can attach. Usually the developer must deposit the purchase proceeds in the bank and the bank monitors the expenditures.
Before a presale method can be legally adopted, the developer of the project must have obtained (i) a land use right certificate, (ii) a planning permit for construction use of land, (iii) a planning permit for the construction project, (iv) a certificate of commencement of construction, and (v) a permit for presale of commercial housing.
Mortgages.
In 1993, the Central Government allowed state-owned banks to provide mortgage facilities to property buyers. In accordance with the banking regulations announced in 1998, loan repayment period was initially for a maximum of 20 years, and extent of the mortgage loan amount was for a maximum of 70 percent of the purchased property price. In 1999, banking regulations were amended to extend the loan repayment period to a maximum of 30 years and the extent of the mortgage loan amount was increased to a maximum of 80 percent of the purchased property price. As further incentives, state-owned banks were allowed to increase the mortgage loan facilities by an additional 15 percent of the approved banking facilities (maximum of 92 percent of the purchased property price). The provision of mortgage facilities to property buyers is considered to have created increasing demand for properties in the China.
In accordance with market practice in China, we are required to provide guarantees (during the development phase) to the banks in respect of mortgages offered to the property buyers until submission of the relevant real estate ownership certificates and certificates of other interests in the property unit by the relevant property buyers to the mortgagee bank. In our experience, such guarantee periods normally last for up to 6 months. If a property buyer defaults under the loan and we are required, during the guarantee period, to repay all debt owed by the defaulting property buyer to the mortgagee bank, the mortgagee bank will assign its rights under the loan and the mortgage to us and, subject to registration, we will have full recourse to the property. In line with industry practice, we do not conduct independent credit checks on the property buyers but relies instead on the credit checks conducted by the mortgagee banks. For financial reporting purposes, the sale of a property unit is not recognized until title has passed and we are released from our loan guarantee on the unit.
Wholly-owned foreign enterprises.
A wholly foreign-owned enterprise ("WFOE") is an entity 100 percent owned by a foreign investor or investors. An apparent advantage of a WFOE is that it can enjoy exclusive management control of its business activities and have autonomy in its operation without too much external interference.
The original WFOE regulations only permitted WFOEs in certain limited sectors and required that the foreign party either provided advanced technology or that at least 50% of the production could be exported. These conditions were relaxed over time as more WFOEs were permitted in increasingly broader sectors of the economy. In accordance with the Wholly Foreign-owned Enterprise Law as amended in 2001 and the Industrial Catalogue Guiding Foreign Investments (2004) (the "2004 Catalogue"), the export requirement is no longer permitted and WFOEs are now much more common, except in certain "restricted" or "prohibited" sectors as provided in the 2004 Catalogue.
With respect to China's real estate industry, the market has been gradually opened to WFOEs since China's entry into the World Trade Organization. Pursuant to the 2004 Catalogue, WFOEs are permitted to engage in the development, construction and management of ordinary residential houses while they, with limited exceptions, are restricted to participate in the development of high standard real estate projects.
One of the most important issues covered in the project documentation is the business scope of the WOFE. Business scope is narrowly defined for all businesses in China and the WOFE can only conduct business within its approved business scope, which ultimately appears on the business license. Any amendments to the business scope require further application and approval. Our business scope is defined to include general real estate development, sales, leasing and property management.
Changes in currency conversion policies in China.
Renminbi (Yuan) is not a freely exchangeable currency. Since 1998, the State Administration of Foreign Exchange of China has promulgated a series of circulars and rules in order to further enhance the verification of the truthfulness of foreign exchange payments under the current account items of a China enterprise and has imposed strict requirements in respect of borrowings and repayments of foreign exchange debts from and to foreign creditors under the capital account items and creation of foreign security in favor of foreign creditors.
This may cause complicated procedures in foreign exchange payments to foreign creditors under the current account items and thus will affect the restrictions on borrowing of international commercial loans, creation of foreign security and borrowing of Renminbi loans under guarantees in foreign currencies. (The majority of the income from the Town House entities is in Renminbi). Furthermore, the value of Renminbi (Yuan) may become subject to supply and demand, which could be largely affected by the international economic and political environment and any fluctuations in the exchange rate of Renminbi could have an adverse effect on the operational and financial condition of our subsidiaries in China.
Borrowing policies.
We borrow at competitive rates of interest. Borrowed funds will not be used for dividends to the shareholders.
The precise amount, if any, we borrow will depend in part upon the availability of financing, and prevailing interest rates and other loan costs. There is no assurance that such financing, if any, will be available to us in the amounts desired or on terms considered reasonable by the Board of Directors.
Loan agreements may require that we maintain certain reserves or compensating balances and may impose other obligations on us. Moreover, since a significant proportion of revenues may be reserved for repayment of debt, the use of financing may reduce the cash that might otherwise be available for dividends until the debt has been repaid and may reduce total cash flow for a significant period.
We may, under appropriate circumstances, attempt to cause Town House to borrow funds at fixed interest rates. However, we may borrow funds at rates that vary with a "prime" or "base" rate, particularly on an interim basis or when interest rates are believed to be trending downward. A rise in the indexed rate may increase borrowing costs and reduce the amount of our income and cash available for distribution. In past years, the prime rates charged by major banks have fluctuated significantly; as a result, the precise amount of interest that we might be charged cannot be predicted with any certainty.
Expansion risks.
We anticipate that our proposed expansion of our real estate development activities will include the construction of new building projects. Our cost estimates and projected completion dates for construction of new building projects may change significantly as the projects progress. In addition, our projects will entail significant construction risks, including shortages of materials or skilled labor, unforeseen environmental or engineering problems, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the projects and could delay their scheduled openings. A delay in scheduled openings will delay our receipt of increased sale revenues.
New projects.
Our projects to finance, develop, and expand our real estate processing facilities will be subject to the many risks inherent in the rapid expansion of a high growth business enterprise, including unanticipated design, construction, regulatory and operating problems, and the significant risks commonly associated with implementing a marketing strategy in changing and expanding markets. There can be no assurance that any of these projects will become operational within the estimated time frames and projected budgets at the time we enter into a particular agreement, or at all. In addition, we may develop projects as joint ventures in an effort to reduce our financial commitment to individual projects. There can be no assurance that the significant expenditures required to expand our real estate processing plants will ultimately result in the establishment of increased profitable operations.
When our future expansion projects become operational, we will be required to add and train personnel, expand our management information systems and control expenses. If we do not successfully address our increased management needs or we otherwise are unable to manage our growth effectively, our operating results could be materially and adversely affected.
Uncertainty of market acceptance.
We are currently selling our developed properties principally in the City of Wuhan. Achieving market acceptance for our properties, particularly in new markets, will require substantial marketing efforts and the expenditure of significant funds. There is substantial risk that any new markets may not accept or be as receptive to our properties. Market acceptance of our current and proposed properties will depend, in large part, upon our ability to inform potential customers that the distinctive characteristics of our properties make them superior to competitive properties and justify their pricing. There can be no assurance that our current and proposed properties will be accepted by consumers or that any of our current or proposed properties will be able to compete effectively against other properties. Lack of market acceptance of our properties would have a material adverse effect on us.
Changing consumer preferences.
As is the case with other companies new real estate developments, we are subject to changing consumer preferences and location-related concerns.
Sales force.
We intend to hire additional sales personnel during 2007. There is no assurance that hiring these additional sales people will result in increased sales. We anticipate using independent sales agents to sell and distribute our real estate development projects. We cannot predict whether we will be able to obtain and maintain satisfactory sales arrangements and the failure to do so could have a material adverse effect on our business, operations and finances.
Geographic concentration; fluctuations in regional economic conditions.
Nearly all of our sales are concentrated in the central area of China. Accordingly, we are susceptible to fluctuations in our business caused by adverse economic conditions in this region. Difficult economic conditions in other geographic areas into which we may expand may also adversely affect our business, operations and finances.
Dependence on executives.
We are highly dependent on the services of Mr. Fang Zhong, and the loss of his services would have a material adverse impact on our operations. He has been primarily responsible for our development the and the development and marketing of our real estate projects. We have not applied for key-man life insurance on the lives of our executives, but may do so in the future.
Competition.
The real estate business is highly competitive and, therefore, we face substantial competition in connection with the marketing and sale of our projects. In general, real estate properties are price sensitive and affected by many factors beyond our control, including changes in consumer tastes, fluctuation commodity prices and changes in supply due to weather, production, and natural disaster. Our real estate properties face competition from other developers in our marketing areas. Most of our competitors are well established, have greater financial, marketing, personnel and other resources, have been in business for longer periods of time than us, and have projects that have gained wide customer acceptance in the marketplace. Our largest competitors are state-owned companies owned by the government of China. Large foreign real estate companies have also entered the real estate industry in China. The greater financial resource of such competitors will permit them to procure properties and to implement extensive marketing and promotional programs, both generally and indirect response to advertising claims by the Company.
Lack of property and general liability insurance.
We and our subsidiaries are self-insured, and do not carry any property insurance, general liability insurance, or any other insurance that covers the risks of our business operations. As a result, any material loss or damage to our properties or other assets, or personal injuries arising from our business operations would have a material adverse affect on our financial condition and operations.
Government regulation.
We are subject to extensive regulation by China and by other province, county and local authorities in jurisdiction in which our properties are sold. We believe that we are currently in substantial compliance with all material governmental laws and regulations and maintain all material permits and licenses relating to our operations. Nevertheless, there can be no assurance that we will continue to be in substantial compliance with current laws and regulations, or whether we will be able to comply with any future laws and regulations. To the extent that new regulations are adopted, we will be required to conform our activities in order to comply with such regulations. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, operations and finances.
Doing business in China.
Doing business in China involves various risks including internal and international political risks, evolving national economic policies as well as financial accounting standards, expropriation and the potential for a reversal in economic conditions. Since the late 1970s, the government of China has been reforming China's economic system. These reforms have resulted in significant economic growth and social progress. Although we believe that economic reform and the macroeconomic policies and measures adopted by the current China government will continue to have a positive effect on economic development in China and that we will continue to benefit from such policies and measures. These policies and measure may from time to time be modified or revised. Adverse changes in economic policies of the China government or in the laws and regulations, if any, could have a material adverse effect on the overall economic growth of China, and could adversely affect our business operations.
China currency, "Renminbi", is not a freely convertible currency, which could limit our ability to obtain sufficient foreign currency to support our business operations in the future.
We rely on China government's foreign currency conversion policies, which may change at any time, in regard to our currency exchange needs. We receive substantially all of our revenues in Renminbi, which is not freely convertible into other foreign currencies. In China, the government has control over Renminbi reserves through, among other things, direct regulation of the conversion or Renminbi into other foreign currencies and restrictions on foreign imports. Although foreign currencies which are required for "current account" transactions can be bought freely at authorized China banks, the proper procedural requirements prescribed by China law must be met. At the same time, China companies are also required to sell their foreign exchange earnings to authorize China banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the China government. This type of heavy regulation by the China government of foreign currency exchange restricts certain of our business operations and a change in any of these government policies, or any other, could further negatively impact our operations.
Fluctuations in the exchange rate between the China currency and the United States dollar could adversely affect our operating results.
The functional currency of our operations in China is "Renminbi". Results of our operations are translated at average exchange rates into United States dollars for purposes of reporting results. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. Although we may use hedging techniques in the future (which we currently do not use), we may not be able to eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock prices.
Fluctuations in exchange rates of the Renminbi could adversely affect the value of stock ownership in the Company.
For over 10 years the official exchange rate for the conversion of Renminbi to US dollars was unofficially pegged at US$1 to RMB8.28. In July 2005, the People's Bank of China (PBOC), the country's central bank, began a new policy of calculating the Renminbi's value against the US dollar using a weighted average of the prices given by major banks. The highest and lowest offers are excluded from the calculation. As a result of this change the RBM has appreciated against the US dollar so that the exchange rate was US$1 to RMB8.11 at December 31, 2005, and is now approximately US$1 to RMB8.04. It should be expected that currency exchange fluctuations will occur in the future as a result of circumstances beyond our control, such as the level of trade deficit or equalization between the US and the China, global economic conditions, global currency markets, and other factors. All of our revenue is generated in the China in Renminbi, so that during periods that the US dollar is worth less in relation to the value of the Renminbi, the total revenue and results of operations reported in US dollars in the financial statements we publish in the US will be less. Consequently, fluctuations in exchange rates could adversely affect the US dollar value of our results of operations and our perceived value in the public market.
Uncertainty relating to the existing law and regulations in the China may restrict the level of legal protections to foreign investors.
The China currently adopts civil law system which relies heavily on written statutes, and decisions made by the courts are not binding precedents, but for guidance only. The legal system in the China cannot provide the investors with the same level of protection as in the US. We are governed by the law and regulations generally applicable to local enterprises. These laws and regulations were recently introduced and remain experimental in nature and subject to changes and refinements. Interpretation, implementation and enforcement of the existing law and regulations can be uncertain and unpredictable and therefore have restrictions on legal protections on both Hong Kong and foreign investors.
We have traditionally been dependent on bank debt to finance our projects and is therefore subject to availability of such financing and fluctuations in interest rates.
The development of high quality housing requires substantial funds. We had internally funded our development projects from presale revenue and externally from bank loans. We cannot guarantee that sufficient capital can be generated to develop every one of our projects by way of only presale revenue. In addition, we cannot guarantee our ability to continue to obtain bank loans and credit facilities and renewals of existing borrowings from financial institutions on maturity under favorable terms and conditions. Changes in interest rates on our borrowings will also affect our financing costs and consequently our results of operations.
Reliance on independent contractors in providing various services creates risks, and we are exposed to various risks in relation to contractors’ performance.
We engage independent third party contractors, through open tenders, to provide various services including construction, piling and foundation, building and fitting-out works, interior decoration and installation of elevators. Although it is our strategy and policy to select reputable independent third party contractors with positive track records in most cases and supervises the construction progress, there is no assurance that the services rendered by any of these independent third party contractors will always be satisfactory or match the targeted quality level required by us. Additionally, we are exposed to the risk that a contractor may require additional capital in excess of the cost they tendered to complete a contractual property development, and we may have to provide such additional capital. Furthermore, there is risk that contractors may experience financial or other difficulties which may affect their ability to carry out construction works, thus delaying the completion of our property developments or resulting in additional costs for us. Any of these factors could adversely affect our revenues and reputation.
In order for our Chinese subsidiaries to pay dividends in the United States, a conversion of Renminbi into US dollar is required.
Under current China law, the conversion of Renminbi into foreign currency generally required government consent. Government authorities may impose restrictions that could have a negative impact in the future on the conversion process and upon our ability to meet our cash needs, and to pay dividends to our shareholders. However, our subsidiaries are presently classified as a wholly foreign owned enterprise ("WFOE") in China that have verifiable foreign investment in China, funding having been made through an official China banking channel. Because our subsidiaries qualify for treatment as a WFOE, the subsidiaries can declare dividends and their funds can be repatriated to us in the United States under current laws and regulations in China.
Mortgage interest rates may increase, cooling demand for our properties.
Bank mortgages are becoming increasingly popular as a means of financing property purchases in China. Any increase in bank mortgage interest rates may significantly increase the cost of mortgage financing to property buyers, thus reducing the attractiveness of mortgages as a source of financing property purchases and, accordingly, adversely affecting the affordability of residential properties. The Chinese government may also increase the level down payment requirement or impose certain other conditions which would make mortgage financing unavailable or unattractive to the potential property buyers.
The practice of pre-selling developments may expose us to substantial liabilities.
The existing common practices by property developers to pre-sale properties (while still under construction) in China involves certain risks. For example, we may fail to complete a property development which may have been fully or partially pre-sold. In such circumstances, we could find ourselves liable to purchasers of pre-sold units for our losses. There can be no assurance that these losses would not exceed the purchase price paid in respect of the pre-sold units. In addition, if a pre-sold property development is not completed on time, the purchasers of pre-sold units may be entitled to compensation for late delivery. If the delay extends beyond a certain period, the purchasers may even be entitled to terminate the pre-sale agreement and claim for damages.
Our shares may have limited liquidity, and the spun-off shares of Town House Land Limited, a Hong Kong company, have no market for resale.
A substantial portion of our shares of common stock are subject to registration, and are closely held by certain institutional and insider investors. Consequently, the public float for the shares may be highly limited. As a result, should an investor wish to sell his shares into the open market he may encounter difficulty selling large blocks of the shares or obtaining a suitable price at which to sell the shares.
In addition, concerning holders of our stock immediately prior to the December 11, 2006 stock purchase and change of control, the shares of Town House Land Limited (“Town House”) that were spun-off in the Spin-off have no market for resale, and there can be no assurance that such a market will ever be developed. Town House is a private company organized and existing under the laws of Hong Kong. Any future transfer of shares of Town House will be subject to applicable restrictions under Hong Kong law.
If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price to decrease substantially.
We will need to continue to improve our financial and managerial controls, reporting systems and procedures, and documentation thereof. If our financial and managerial controls, reporting systems or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially.
Our common shares are thinly traded and, an investor may be unable to sell at or near ask prices or at all if he needs to sell shares to raise money or otherwise desire to liquidate such shares.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common shares have historically been sporadically or “thinly-traded” on the “Over-The-Counter Bulletin Board,” meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that SOAD is a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give an investor any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
The market price for our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” and lack of current revenues that could lead to wide fluctuations in our share price. An investor may be unable to sell your common stock at or above his purchase price if at all, which may result in substantial losses to the investor.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on our share price. Secondly, an investment in our stock is a speculative or “risky” investment due to our lack of revenues or profits to date and uncertainty of future market acceptance for current and potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
We do not anticipate paying any cash dividends.
We presently do not anticipate that we will pay any dividends on any of our capital stock in the foreseeable future. The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business plan; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.
Fluctuations in exchange rates of the Renminbi could adversely affect the value of stock ownership in the Company.
For over 10 years the official exchange rate for the conversion of Renminbi to US dollars was unofficially pegged at US$1 to RMB8.28. In July 2005, the People's Bank of China (PBOC), the country's central bank, began a new policy of calculating the Renminbi's value against the US dollar using a weighted average of the prices given by major banks. The highest and lowest offers are excluded from the calculation. As a result of this change the RBM has appreciated against the US dollar so that the exchange rate was US$1 to RMB8.11 at December 31, 2005, and is now approximately US$1 to RMB7.67. It should be expected that currency exchange fluctuations will occur in the future as a result of circumstances beyond our control, such as the level of trade deficit or equalization between the US and the China, global economic conditions, global currency markets, and other factors. All of our revenue is generated in the China in Renminbi, so that during periods that the US dollar is worth less in relation to the value of the Renminbi, the total revenue and results of operations reported in US dollars in the financial statements we publish in the US will be less. Consequently, fluctuations in exchange rates could adversely affect the US dollar value of our results of operations and the perceived value of the Company in the public market.
The Application of the "Penny Stock" Rules Could Adversely Affect the Market Price of Our Common Stock and Increase Your Transaction Costs to Sell Those Shares.
As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the "penny stock" rules. The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.
We may be unable to achieve some or all of the benefits that we expect to achieve through the Spin-Off.
The full strategic and financial benefits expected to result from the Spin-Off may be delayed or may never occur at all. For instance, there can be no assurance that investors will regard the new corporate structure as more clear and simple than the current corporate structure.
None.
None.
None.
None.
None.
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.
