UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
000-51429
(Commission file number)
CHINA HOUSING & LAND DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
Nevada | 20-1334845 |
(State or other jurisdiction of | (IRS Employer Identification |
incorporation or organization) | No.) |
6 Youyi Dong Lu, Han Yuan 4 Lou
Xi'an, Shaanxi Province
China 710054
(Address of principal executive offices)
86-029-8258-2632
(Issuer’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.¨
Large accelerated filer¨ | Accelerated filer¨ | Non-accelerated filer¨ | Smaller reporting companyx |
| | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ Nox
The number of shares of Common Stock outstanding on May 15, 2012 was 34,746,599 shares.
Except as otherwise indicated by the context, references in this Form 10-Q to:
“CHLN,” the “Company,” “we,” “our,” or “us” are references to China Housing & Land Development, Inc.
“U.S. Dollar,” “$” and “US$” mean the legal currency of the United States of America.
“RMB” means Renminbi, the legal currency of China.
“China” or the “PRC” are references to the People’s Republic of China.
“U.S.” is a reference to the United States of America.
“SEC” is a reference to the Securities & Exchange Commission of the United States of America.
“GFA” means gross floor area.
CHINA HOUSING & LAND DEVELOPMENT, INC.
Index
| | | | Page Number |
| | | | |
PART I | | FINANCIAL INFORMATION | | |
| | | | |
Item 1. | | Financial Statements | | 3 |
| | | | |
Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 21 |
| | | | |
Item 3. | | Quantitative and Qualitative Disclosures About Market Risk | | 38 |
| | | | |
Item 4. | | Controls and Procedures | | 38 |
| | | | |
PART II | | OTHER INFORMATION | | |
| | | | |
Item 1. | | Legal Proceedings | | 39 |
| | | | |
Item 1A. | | Risk Factors | | 39 |
| | | | |
Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds | | 39 |
| | | | |
Item 3. | | Defaults Upon Senior Securities | | 39 |
| | | | |
Item 4. | | Mining Safety Disclosure | | 39 |
| | | | |
Item 5. | | Other Information | | 39 |
| | | | |
Item 6. | | Exhibits | | 39 |
| | | | |
SIGNATURES | | | | 40 |
| | | | |
EX-31.1 | | (Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002) | | |
| | | | |
EX-31.2 | | (Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002) | | |
| | | | |
EX-32.1 | | (Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002) | | |
| | | | |
EX-32.2 | | (Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002) | | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Balance Sheets
As of March 31, 2012 (unaudited) and December 31, 2011
| | March 31, | | | December 31, | |
| | 2012 | | | 2011 | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 8,438,125 | | | $ | 22,014,953 | |
Cash – restricted | | | 88,253,258 | | | | 105,720,400 | |
Accounts receivable, net of allowance for doubtful accounts of $571,530 and $571,857, respectively | | | 21,275,060 | | | | 20,253,706 | |
Other receivables, prepaid expenses and other assets, net | | | 1,968,295 | | | | 1,483,758 | |
Real estate held for development or sale | | | 172,117,818 | | | | 163,482,316 | |
Property and equipment, net | | | 32,663,301 | | | | 33,018,990 | |
Advance to suppliers | | | 682,932 | | | | 889,965 | |
Deposits on land use rights | | | 90,690,658 | | | | 65,286,137 | |
Intangible assets, net | | | 54,063,286 | | | | 54,148,953 | |
Goodwill | | | 1,893,699 | | | | 1,894,782 | |
Deferred tax asset | | | - | | | | 308,248 | |
Deferred financing costs | | | 214,572 | | | | 253,569 | |
Total assets | | $ | 472,261,004 | | | $ | 468,755,777 | |
| | | | | | | | |
LIABILITIES | | | | | | | | |
Accounts payable | | $ | 35,389,393 | | | $ | 44,275,965 | |
Advances from customers | | | 54,156,966 | | | | 57,541,251 | |
Accrued expenses | | | 7,688,639 | | | | 8,380,041 | |
Income and other taxes payable | | | 16,350,514 | | | | 14,386,133 | |
Other payables | | | 7,871,437 | | | | 7,474,035 | |
Loans from employees | | | 14,878,920 | | | | 14,887,431 | |
Loans payable | | | 158,286,249 | | | | 148,402,690 | |
Deferred tax liability | | | 14,824,719 | | | | 14,861,462 | |
Warrants liability | | | 4,530 | | | | 4,162 | |
Fair value of embedded derivatives | | | 259,526 | | | | 330,629 | |
Convertible debt | | | 9,398,077 | | | | 9,165,591 | |
Mandatorily redeemable non-controlling interests in Subsidiaries | | | 21,803,665 | | | | 19,935,482 | |
Total liabilities | | | 340,912,635 | | | | 339,644,872 | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
Common stock: $.001 par value, authorized 100,000,000 shares issued 35,098,079 and 35,078,639, respectively | | | 35,098 | | | | 35,079 | |
Additional paid in capital | | | 49,084,245 | | | | 48,961,658 | |
Treasury stock at cost 351,480 and 337,800 shares, respectively | | | (434,240 | ) | | | (420,098 | ) |
Statutory reserves | | | 7,857,612 | | | | 7,857,612 | |
Retained earnings | | | 52,790,873 | | | | 50,555,460 | |
Accumulated other comprehensive income | | | 22,014,781 | | | | 22,121,194 | |
Total shareholders’ equity | | | 131,348,369 | | | | 129,110,905 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 472,261,004 | | | $ | 468,755,777 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Income
For The Three Months Ended March 31, 2012 and 2011
(Unaudited)
| | March 31, 2012 | | | March 31, 2011 | |
REVENUES | | | | | | | | |
Real estate sales | | $ | 20,434,343 | | | $ | 19,656,817 | |
Other revenue | | | 3,067,428 | | | | 2,900,879 | |
Total revenues | | | 23,501,771 | | | | 22,557,696 | |
| | | | | | | | |
COST OF REVENUES | | | | | | | | |
Cost of real estate sales | | | 14,232,864 | | | | 14,638,574 | |
Cost of other revenue | | | 2,239,870 | | | | 2,196,569 | |
Total cost of revenues | | | 16,472,734 | | | | 16,835,143 | |
| | | | | | | | |
Gross margin | | | 7,029,037 | | | | 5,722,553 | |
| | | | | | | | |
OPERATING EXPENSES | | | | | | | | |
Selling, general, and administrative expenses | | | 3,023,685 | | | | 3,432,716 | |
Stock based compensation | | | 122,606 | | | | - | |
Other expenses | | | 6,433 | | | | 41,577 | |
Financing expense | | | 230,272 | | | | 597,148 | |
Accretion expense on convertible debt | | | 232,486 | | | | 336,991 | |
Total operating expenses | | | 3,615,482 | | | | 4,408,432 | |
| | | | | | | | |
NET INCOME FROM BUSINESS OPERATIONS | | | 3,413,555 | | | | 1,314,121 | |
| | | | | | | | |
CHANGE IN FAIR VALUE OF DERIVATIVES | | | | | | | | |
Change in fair value of embedded derivatives | | | (71,103 | ) | | | (1,052,754 | ) |
Change in fair value of warrants | | | 368 | | | | (850,651 | ) |
Total change in fair value of derivatives | | | (70,735 | ) | | | (1,903,405 | ) |
| | | | | | | | |
Income before provision for income taxes | | | 3,484,290 | | | | 3,217,526 | |
| | | | | | | | |
Provision for income taxes | | | 969,485 | | | | 786,489 | |
Provision for (recovery of) deferred income taxes | | | 279,392 | | | | (38,046 | ) |
| | | | | | | | |
NET INCOME | | $ | 2,235,413 | | | $ | 2,469,083 | |
| | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING | | | | | | | | |
Basic | | | 34,730,261 | | | | 33,886,568 | |
| | | | | | | | |
Diluted | | | 34,730,261 | | | | 35,502,277 | |
| | | | | | | | |
NET INCOME PER SHARE | | | | | | | | |
Basic | | | 0.06 | | | | 0.07 | |
| | | | | | | | |
Diluted | | | 0.06 | | | | 0.05 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Comprehensive Income
For The Three Months Ended March 31, 2012 and 2011
(Unaudited)
| | March 31, | | | March 31, | |
| | 2012 | | | 2011 | |
| | | | | | |
NET INCOME | | $ | 2,235,413 | | | $ | 2,469,083 | |
| | | | | | | | |
OTHER COMPREHENSIVE (LOSS) INCOME | | | | | | | | |
(Loss) gain in foreign exchange | | | (106,413 | ) | | | 1,362,871 | |
| | | | | | | | |
COMPREHENSIVE INCOME | | $ | 2,129,000 | | | $ | 3,831,954 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 2012 and 2011
(Unaudited)
| | March 31, | | | March 31, | |
| | 2012 | | | 2011 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 2,235,413 | | | $ | 2,469,083 | |
Adjustments to reconcile net income to cash provided by (used in) operating activities: | | | | | | | | |
Bad debt recovery | | | - | | | | (39,010 | ) |
Depreciation | | | 541,120 | | | | 482,584 | |
Stock based compensation | | | 122,606 | | | | - | |
Gain on disposal of fixed assets | | | (8,201 | ) | | | (8,152 | ) |
Amortization of deferred financing costs | | | 38,909 | | | | 38,482 | |
Amortization of intangible assets | | | 54,606 | | | | 52,372 | |
Provision for (recovery of) future income taxes | | | 279,392 | | | | (38,046 | ) |
Change in fair value of embedded derivatives | | | (71,103 | ) | | | (1,052,754 | ) |
Change in fair value of warrants | | | 368 | | | | (850,651 | ) |
Accretion expense on convertible debt | | | 232,486 | | | | 336,991 | |
(Increase) decrease in assets: | | | | | | | | |
Accounts receivable | | | (1,030,918 | ) | | | 78,182 | |
Other receivable and prepaid expense | | | (190,732 | ) | | | 1,681,598 | |
Real estate held for development or sale | | | (8,851,173 | ) | | | (16,210,498 | ) |
Advances to suppliers | | | 206,175 | | | | (165,241 | ) |
(Deposit) refund on land use rights | | | (25,392,247 | ) | | | 6,846,002 | |
Increase (decrease) in liabilities: | | | | | | | | |
Accounts payable | | | (8,843,987 | ) | | | (363,064 | ) |
Advance from customers | | | (3,344,859 | ) | | | 13,070,852 | |
Accrued expense | | | 1,190,057 | | | | 3,235,978 | |
Other payables | | | 400,594 | | | | 1,519,947 | |
Income and other taxes payable | | | 1,675,161 | | | | 1,209,682 | |
Net cash (used in) provided by operating activities | | | (40,756,333 | ) | | | 12,294,337 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Change in restricted cash | | | 17,372,775 | | | | (4,590,301 | ) |
Purchase of property and equipment | | | (76,548 | ) | | | (660,593 | ) |
Proceeds from sale of property and equipment | | | 19,018 | | | | 18,240 | |
Net cash provided by (used in) investing activities | | | 17,315,245 | | | | (5,232,654 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Loans from banks | | | 30,111,889 | | | | 30,399,757 | |
Loans from external parties | | | 3,654,046 | | | | - | |
Payments of loans payable | | | (23,851,786 | ) | | | (1,063,991 | ) |
Repayment of loans from employees, net | | | - | | | | (60,800 | ) |
Repayments of payables for acquisition of businesses | | | - | | | | (2,279,982 | ) |
Purchase of treasury stock | | | (14,142 | ) | | | - | |
Net cash provided by financing activities | | | 9,900,007 | | | | 26,994,984 | |
| | | | | | | | |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (13,541,081 | ) | | | 34,056,667 | |
| | | | | | | | |
Effects of foreign currency exchange | | | (35,747 | ) | | | 681,400 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS, beginning of period | | | 22,014,953 | | | | 46,904,161 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS, end of period | | $ | 8,438,125 | | | $ | 81,642,228 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Shareholders' Equity
As of March 31, 2012 (unaudited) and December 31, 2011
| | | | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | Additional | | | | | | | | | Other | | | | |
| | Common Stock | | | Treasury | | | Paid in | | | Statutory | | | Retained | | | Comprehensive | | | | |
| | Shares | | | Par Value | | | Stock | | | Capital | | | Reserves | | | Earnings | | | Income | | | Totals | |
BALANCE, December 31, 2011 | | | 35,078,639 | | | $ | 35,079 | | | $ | (420,098 | ) | | $ | 48,961,658 | | | $ | 7,857,612 | | | $ | 50,555,460 | | | $ | 22,121,194 | | | $ | 129,110,905 | |
Options issued for stock-based compensation | | | - | | | | - | | | | - | | | | 95,390 | | | | - | | | | - | | | | - | | | | 95,390 | |
Common stock issued for directors’ compensations | | | 19,440 | | | | 19 | | | | - | | | | 27,197 | | | | - | | | | - | | | | - | | | | 27,216 | |
Treasury Stock | | | - | | | | - | | | | (14,142 | ) | | | - | | | | - | | | | - | | | | - | | | | (14,142 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,235,413 | | | | - | | | | 2,235,413 | |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (106,413 | ) | | | (106,413 | ) |
BALANCE, March 31, 2012 | | | 35,098,079 | | | $ | 35,098 | | | $ | (434,240 | ) | | $ | 49,084,245 | | | $ | 7,857,612 | | | $ | 52,790,873 | | | $ | 22,014,781 | | | $ | 131,348,369 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
Notes To Interim Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2012 and 2011
Note 1 – Organization and Basis of Presentation
China Housing & Land Development, Inc., (the “Company”) is a Nevada corporation, originally incorporated on July 6, 2004 under the name Pacific Northwest Productions Inc., (“Pacific”). On May 5, 2006, the Company changed its name to China Housing & Land Development, Inc. The Company, through its subsidiaries, is engaged in acquisition, development, management, and sale of commercial and residential real estate properties located primarily in Xi’an, Shaanxi Province, People’s Republic of China (PRC or China).
The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries, Xi’an Tsining Housing Development Company Inc. (“Tsining”), Xi’an New Land Development Co. (“New Land”), Manstate Assets Management Limited (“Manstate”), Success Hill Investments Limited (“Success Hill”), Puhua (Xi’an) Real Estate Development Co., Ltd. (“Puhua”), Xi’an Xinxing Property Management Co., Ltd. (“Xinxing Property”), Suodi Co., Ltd. (“Suodi”), Shaanxi Xinxing Construction Co., Ltd. (“Xinxing Construction”), Xinxing FangZhou Housing Development Co., Ltd. (“Fangzhou”), Wayfast Holdings Limited (“Wayfast”), Clever Advance Limited (“Clever Advance”), Gracemind Holdings Limited (“Gracemind”), Treasure Asia Holdings Limited (“Treasure Asia”) and AnKang Jiyuan Real Estate Development Co., Ltd. (“Jiyuan”) (collectively, the “Subsidiaries”). Wayfast with its 100% subsidiary - Clever Advance and Gracemind with its 100% subsidiary - Treasure Asia were incorporated as holding companies in March 2009 and they were inactive during the first quarter of 2012. All inter-company balances and transactions have been eliminated on consolidation. The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair statement of the Company’s unaudited interim condensed consolidated balance sheet as at March 31, 2012 and the Company’s unaudited interim condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2012 and 2011 and the Company’s unaudited interim condensed consolidated statements of cash flows for the three months ended March 31, 2012 and 2011. These adjustments consist of normal recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year.
The unaudited interim condensed consolidated financial statements are based on accounting principles that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Annual Report”); except as disclosed below. They do not include certain footnote disclosures and financial information normally included in annual consolidated financial statements prepared in accordance with GAAP and, therefore, should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2011 Annual Report.
Accounting Principles Recently Adopted
In May 2011, the FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820)”. The purpose of these amendments are to achieve common fair value measurement and disclosure requirements in U.S GAAP and International Financial Reporting Standards (“IFRS”). The amendments in this Update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include the following: (1) Those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements, and (2) Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU No. 2011-04 is effective for the Company on January 1, 2012. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive income”. The FASB amended the existing guidance to require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statement. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. ASU No. 2011-05 is effective for the Company on January 1, 2012. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
Note 1 – Organization and Basis of Presentation (continued)
In September 2011, the FASB issued ASU 2011-08 “Intangibles-Goodwill and Other”. The objective of this update is to simplify how entities, both public and non-public, test goodwill for impairment. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described. ASU No. 2011-08 is effective for the Company on January 1, 2012 for the Company. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In December 2011, the FASB issued ASU 2011-12, “Comprehensive income”. The amendments are being made to allow FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. ASU No. 2011-12 is effective for the Company on January 1, 2012. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncement Not Yet Adopted
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet”. The amendments in this Update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. ASU No. 2011-11 is effective for the Company on January 1, 2013. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
Foreign exchange rates used:
| | March 31, 2012 | | | December 31, 2011 | | | March 31, 2011 | |
Period end RMB/U.S. Dollar exchange rate | | | 6.2975 | | | | 6.2939 | | | | 6.5483 | |
Average RMB/U.S. Dollar exchange rate | | | 6.3098 | | | | 6.4633 | | | | 6.5790 | |
Note 2 – Mandatorily Redeemable Preferred Stock and Non-controlling Interest
The Company recorded accretion cost on the mandatorily redeemable non-controlling interests using the effective interest method based on an effective interest rate of 45%. The related accretion cost incurred for the three months ended March 31, 2012 was $1,875,915 (March 31, 2011 - $3,279,369) and it was capitalized as real estate construction in progress.
| | Mandatory Redeemable Non-controlling Interests in Subsidiaries | |
Mandatorily redeemable non-controlling interests in subsidiaries at December 31, 2011 | | $ | 19,935,482 | |
Capitalized accretion cost on mandatorily redeemable non-controlling interests in subsidiaries | | | 1,875,915 | |
Difference in foreign exchange translation | | | (7,732 | ) |
Mandatorily redeemable non-controlling interests in subsidiaries at March 31, 2012 | | $ | 21,803,665 | |
The Company will make the final repayment of $28,616,642 on December 25, 2012.
Note 3 – Supplemental Disclosure of Cash Flow Information
Income taxes paid amounted to $346,504 and $172,215 for three months ended March 31, 2012 and 2011, respectively. Interest paid for the three months ended March 31, 2012 and 2011 amounted to $5,452,310 and $4,278,064, respectively.
Note 4 – Other Receivables, Prepaid Expenses and Deposits
Other receivables and prepaid expenses consisted of the following at March 31, 2012 and December 31, 2011:
| | March 31, 2012 | | | December 31, 2011 | |
| | | | | | |
Other receivable | | $ | 1,439,767 | | | $ | 920,837 | |
Allowance for bad debts | | | (144,193 | ) | | | (144,275 | ) |
Prepaid expenses | | | 380,291 | | | | 541,625 | |
Prepaid other tax expenses | | | 292,430 | | | | 165,571 | |
Other receivables and prepaid expenses | | $ | 1,968,295 | | | $ | 1,483,758 | |
Note 5 – Real Estate Held for Development or Sale
The following summarizes the components of real estate inventories as at March 31, 2012 and December 31, 2011:
| | March 31, 2012 | | | December 31, 2011 | |
Real estate projects completed and held for sale | | | | | | | | |
JunJing I project | | $ | 3,379,515 | | | $ | 3,381,448 | |
JunJing II project phase one | | | 204,635 | | | | 1,321,972 | |
Tsining 24G project | | | 44,884 | | | | 44,910 | |
Gangwan project | | | 33,150 | | | | 37,847 | |
Tsining Home IN project | | | 60,291 | | | | 60,325 | |
Real estate completed and held for sale | | | 3,722,475 | | | | 4,846,502 | |
| | | | | | | | |
Real estate projects held for development | | | | | | | | |
Puhua project | | | 122,808,227 | | | | 115,798,346 | |
Tangdu project | | | 4,708,049 | | | | 4,710,742 | |
JunJing III project | | | 3,463,761 | | | | 9,299,511 | |
Park plaza project | | | 12,394,004 | | | | 8,471,800 | |
Jiyuan Project | | | 13,171,671 | | | | 13,151,101 | |
Golden Bay project | | | 8,188,250 | | | | 5,657,731 | |
Other projects | | | 3,535,276 | | | | 1,356,331 | |
Construction materials | | | 126,105 | | | | 190,252 | |
Real estate held for development | | | 168,395,343 | | | | 158,635,814 | |
| | | | | | | | |
Total real estate held for development or sale | | $ | 172,117,818 | | | $ | 163,482,316 | |
The Company’s Tangdu project is essentially a land use right plus miscellaneous pre-construction costs. The Company still owns the legal title to this land use right however the government is negotiating with the Company regarding a potential transfer back to the government. If the land use right is transferred back to the government, the Company believes the government will refund all the costs incurred by the Company.
Note 6 – Property and Equipment
Property and equipment consisted of the following at March 31, 2012 and December 31, 2011:
| | March 31, 2012 | | | December 31, 2011 | |
Income producing properties and improvements | | $ | 29,607,861 | | | $ | 29,641,864 | |
Buildings and improvements | | | 4,437,975 | | | | 4,440,514 | |
Electronic equipment | | | 504,392 | | | | 498,260 | |
Vehicles | | | 726,815 | | | | 727,231 | |
Computer software | | | 313,223 | | | | 312,600 | |
Office furniture | | | 120,671 | | | | 120,062 | |
Office building under construction | | | 3,813,006 | | | | 3,608,643 | |
Total | | | 39,523,943 | | | | 39,349,174 | |
Accumulated depreciation | | | (6,860,642 | ) | | | (6,330,184 | ) |
Property and equipment, net | | $ | 32,663,301 | | | $ | 33,018,990 | |
Depreciation expense for the three months ended March 31, 2012 and 2011 amounted to $541,120 and $482,584, respectively. The depreciation expense was included in selling, general and administrative expenses and cost of other revenue.
Note 7 – Intangible Assets
The intangible assets consisted of the following at March 31, 2012 and December 31, 2011:
| | March 31, 2012 | | | December 31, 2011 | |
Development right acquired (a) | | $ | 51,280,435 | | | $ | 51,309,767 | |
Land use right acquired (b) | | | 8,535,188 | | | | 8,540,070 | |
Construction license acquired (c) | | | 1,195,422 | | | | 1,196,106 | |
| | | 61,011,045 | | | | 61,054,943 | |
Accumulated amortization | | | (6,947,759 | ) | | | (6,896,990 | ) |
Intangible assets, net | | $ | 54,063,286 | | | $ | 54,148,953 | |
| (a) | The development right for 487 acres of land in Baqiao Park obtained from the acquisition of New Land in fiscal 2007. The intangible asset has a finite life. In accordance with accounting standard, “Goodwill and Other Intangible Assets”, the intangible asset is subject to amortization over its estimated useful life. This method is intended to match the pattern of amortization with the income-generating capacity of the asset. The development right was originally set to expire on June 30, 2011. On November 25, 2010, the Company was able to extend the right to June 30, 2016. |
| | |
| (b) | The land use rights were acquired in the acquisition of Suodi. The land use rights certificate will expire in November of 2048. The Company amortizes the land use rights over 39 years. |
| | |
| (c) | The construction license was acquired through acquisition of Xinxing Construction. The construction license, which is subject to renewal every 5 years, is not amortized and has an indefinite estimated useful life because management believes the Company will be able to continuously renew the license in the future. The license was subject to renewal on March 10, 2011. The Company successfully renewed the license until December 31, 2015. |
For the three months ended March 31, 2012, the Company recorded $54,606 of amortization expense on the land use right (March 31, 2011 - $52,372). The amortization was included in selling, general and administrative expenses.
Note 8 – Accrued Expenses
| | March 31, 2012 | | | December 31, 2011 | |
Accrued expenses | | $ | 6,112,494 | | | $ | 8,000,003 | |
Accrued interest on loans | | | 1,576,145 | | | | 380,038 | |
Total | | $ | 7,688,639 | | | $ | 8,380,041 | |
Note 9 – Loans from Employees
The Company has borrowed money from certain employees to fund the Company’s construction projects. These unsecured loans bear interest at 20% per annum and are available to all employees.
Included in these loans are loans from the Company’s executives and an immediate family member:
| | March 31, 2012 | | | December 31, 2011 | |
Chairman | | $ | 889,242 | | | $ | 889,750 | |
Chief executive officer | | | 317,586 | | | | 317,768 | |
Chief financial officer | | | 238,190 | | | | 238,326 | |
Chief operating officer | | | 158,793 | | | | 158,884 | |
| | $ | 1,603,811 | | | $ | 1,604,728 | |
Note 10 – Loans Payable
| | March 31, 2012 | | | December 31, 2011 | |
Xi'an Rural Credit Union Zao Yuan Rd. Branch | | | | | | | | |
Originally due July 2, 2011, renewed on June 27, 2011 and extended to July 1, 2012, annual interest is at 8.856%, secured by the Company’s JunJing Yuan I building No. 12, Han Yuan and guaranteed by the Company’s President, President’s spouse, CEO, Tsining’s prior general manager and his spouse | | $ | 2,540,692 | | | $ | 2,542,143 | |
| | | | | | | | |
Xinhua Trust Investments Ltd. | | | | | | | | |
Due February 10, 2012, annual interest is at 10%, secured by the 24G project | | | - | | | | 23,832,600 | |
| | | | | | | | |
Bank of Xian | | | | | | | | |
Annual interest is fixed at 130% of People’s Bank of China prime rate at the time of borrowing (or 8.528%), secured by the Company’s JunJing building No.12. $714,569 was to be repaid in April 2012. $793,966 is payable before June 30, 2012 and $635,173 is payable on August 29, 2012 | | | 2,143,708 | | | | 2,224,376 | |
| | | | | | | | |
Bank of Beijing, Xi’an Branch | | | | | | | | |
Due December 10, 2012, annual interest is at the prime rate of People’s Bank of China (or 6.56%). The Company has restricted cash of $15,905,570 deposited with Bank of Beijing as collateral. The Company and Bank of Beijing are negotiating the potential extension of the balance | | | 15,879,317 4 | | | | 15,888,400 | |
Due November 30, 2014, annual interest is at the 130% of People’s Bank of China prime rate (or 8.53%). The loan is secured by Puhua project’s land use right and construction in progress. The repayment schedule is as follows: May 30, 2012 – $ 1,587,932 (RMB 10 million); November 30, 2012 – $1,587,932 (RMB 10 million); May 30, 2013 - $9,527,590 (RMB 60 million); November 30, 2013 - $9,527,590 (RMB 60 million); May 30, 2014 - $4,763,796 (RMB 30 million); and November 30, 2014 - $4,763,796 (RMB 30 million) | | | 31,758,634 | | | | 11,121,880 | |
| | | | | | | | |
Tianjin Cube Equity Investment Fund Partnership | | | | | | | | |
Originally due on January 27, 2012 and extended to July 27, 2012, annual interest is 9.6 %, secured by JunJing II Commercial Units, JunJing I Residential units and part of Company’s Park Plaza project | | | 31,758,634 | | | | 31,776,800 | |
| | | | | | | | |
JP Morgan | | | | | | | | |
Originally due on March 13, 2011 and extended to June 14, 2012, annual interest is at 1.97 %, secured by $35,569,671 of restricted cash. | | | 30,016,491 | | | | 30,016,491 | |
| | | | | | | | |
Bank of China, Macau Branch | | | | | | | | |
Due December 16, 2013, annual interest is based on 3-month London Interbank Offered Rate (“LIBOR”) rate plus 3.6%. The 3-month LIBOR rate at March 31, 2012 was 0.58%, secured by $31,758,634 of restricted cash. | | | 31,000,000 | | | | 31,000,000 | |
| | | | | | | | |
Construction Bank of China | | | | | | | | |
Three year loan and due on March 6, 2015. Annual interest is 101% of People’s Bank of China prime rate (or 7.65%). The loan is secured by JunJing III’s construction in progress and land use rights. | | | 9,527,590 | | | | - | |
| | | | | | | | |
Third party vendor | | | | | | | | |
Due August 8, 2012, non-interest bearing and unsecured | | | 2,073,251 | | | | - | |
| | | | | | | | |
Xi’an Xinxing Days Hotel & Suites Co., Ltd. (“Days Hotel”) | | | | | | | | |
Due August 8, 2012, annual interest is at 20 % (Note 18) | | | 1,587,932 | | | | - | |
Total | | $ | 158,286,249 | | | $ | 148,402,690 | |
Note 10 – Loans Payable (continued)
Except the loans from JP Morgan and Bank of China, Macau Branch, which were drawn to repay mandatorily redeemable non-controlling interests in Subsidiaries, all other loans were drawn to directly finance construction projects.
The majority of interest incurred was capitalized and allocated to various real estate construction projects.
The bank loans payable balances were secured by certain of the Company’s real estate held for development or sale with a carrying value of $71,694,747 at March 31, 2012 (December 31, 2011 - $55,777,318), certain buildings and income producing properties and improvements with a carrying value of $17,956,543 at March 31, 2012 (December 31, 2011 - $20,022,475) and certain land use rights with a carrying value of $3,369,886 (December 31, 2011 - $3,371,814). The weighted average interest rate on loans payable as at March 31, 2012 was 6.4% (December 31, 2011 – 6.7%).
The bank loans payable were also secured by certain real estate units sold to customers. The Company obtained consent from these customers that the Company does not have to remove the mortgage on such apartments or to register the transfer of the ownership of such apartments by the Company to the customers for the time being.
Note 11 – Fair Value of Financial Instruments
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of the measurement date, March 31, 2012, and the basis for that measurement, by level within the fair value hierarchy:
Fair Value Measurements Using | | Assets/Liabilities | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | At Fair Value | |
Warrants liability | | $ | - | | | $ | 4,530 | | | $ | - | | | $ | 4,530 | |
Fair value of embedded derivatives | | | - | | | | 259,526 | | | | - | | | | 259,526 | |
Total | | $ | - | | | $ | 264,056 | | | $ | - | | | $ | 264,056 | |
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of the measurement date, December 31, 2011, and the basis for that measurement, by level within the fair value hierarchy:
Fair Value Measurements Using | | Assets/Liabilities | |
| | Level 1 | | | Level 2 | | | Level 3 | | | At Fair Value | |
Warrants liability | | $ | - | | | $ | 4,162 | | | $ | - | | | $ | 4,162 | |
Fair value of embedded derivatives | | | - | | | | 330,629 | | | | - | | | | 330,629 | |
Total | | $ | - | | | $ | 334,791 | | | $ | - | | | $ | 334,791 | |
Note 12 – Convertible Debt
On January 28, 2008, the Company issued Senior Secured Convertible Debt due in 2013 (the “Convertible Debt”) and warrants to subscribe for common shares for an aggregate purchase price of $20 million. Both the warrant and embedded conversion option associated with the Convertible Debt meet the definition of a derivative instrument according to the standard “Accounting for Derivative Instruments and Hedging Activities”. Because the warrant and the convertible debt are denominated in U.S. dollars but the Company’s functional currency is the Chinese RMB, the exemption from derivative instrument accounting provided by the standard is not available and therefore the warrant and embedded conversion option are recorded as a derivative instrument liabilities and periodically marked-to-market.
On June 10, 2010, the Company and the Investors entered into an amendment (the “Amendment”), which grants investors the right to convert the $11 million non-convertible portion of the Convertible Debt. The right expires 5 business days after the effective date that a registration statement is filed by the Company registering the shares to be issued on the conversion. The warrants issued in 2008 were amended as well to permit the investors to exercise the warrants on a cashless basis and receive one common share for every two warrants held if the investor converts at least 55% of face amount of Convertible Debt held.
Note 12 – Convertible Debt (continued)
On January 25, 2011, certain investors requested and the Company’s Board approved allowing certain investors to convert $9,763,000 of convertible debt into 1,752,783 common shares with related warrants exercised on a two to one cashless basis. The conversion was effective on February 16, 2011. Since the Company’s registration statement became effective during the period, the rights to convert the $11 million non-convertible portion of the Convertible Debt and to exercise the warrants on a cashless basis and receive one common share for every two warrants expired.
The fair values of the warrants and embedded conversion option at March 31, 2012 were determined to be $4,530 and $259,526, respectively (December 31, 2011 - $3,102 and $330,629), using the Cox-Ross-Rubinstein Binomial Lattice Model (the “CRR Model”) with the following assumptions:
| | March 31, 2012 | | | December 31, 2011 | |
Expected life | | | 0.83 – 0.92 years | | | | 1.08 – 1.16 years | |
Expected volatility | | | 85% - 90 | % | | | 85 | % |
Risk-free interest rate | | | 0.18 | % | | | 0.13 – 0.14 | % |
Dividend yield | | | 0 | % | | | 0 | % |
For the three months ended March 31, 2012, the Company recorded an increase in fair value for the warrants of $1,428 and a decrease in fair value of the embedded derivatives of $71,103 respectively (March 31, 2011 – decrease of $242,537 and $1,052,754), in the interim condensed consolidated statements of income.
The carrying value of the Convertible Debt is accreted to its stated amount on maturity using the effective interest method. The effective interest rate was determined to be 15.42%. The carrying value of Convertible Debt on March 31, 2012 was $9,398,077 (December 31, 2011 - $9,165,591). Related interest and accretion costs for the three months ended March 31, 2012 were $129,384 and $232,486, respectively (March 31, 2011 - $190,338 and $336,991).
Note 13 – Shareholders’ Equity
Common stock
On March 21, 2012, the Company issued 19,440 shares of common stock valued at $27,216 based on the closing price of the shares on the same date to compensate the services provided by the independent directors.
Warrants
Pursuant to accounting guidance, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settle in a Company’s Own Stock”, the warrants issued contain a provision permitting the holder to demand payment based on a valuation in certain circumstances. Therefore, the Company recorded the warrants issued through private placements in 2007 as a liability at their fair value on the date of grant and then revalued them to $Nil at March 31, 2012 (December 31, 2011 - $1,060) using the CRR Model with the following assumptions:
| | March 31, 2012 | | | December 31, 2011 | |
Expected life | | | 0.11 years | | | | 0.36 years | |
Expected volatility | | | 55 | % | | | 85 | % |
Risk-free interest rate | | | 0.05 | % | | | 0.04 | % |
Dividend yield | | | 0 | % | | | 0 | % |
The gain from the change in fair value of warrants for the three months ended March 31, 2012 was $1,060 (March 31, 2011 – gain of $608,114).
Note 13 – Shareholders’ Equity (continued)
Warrants (continued)
Including the fair value of warrants associated with the convertible debt (note 12), the total warrant liability as at March 31, 2012 was $4,530 (December 31, 2011 - $4,162). The total loss from the change in fair value of warrants for the three month ended March 31, 2012 months was $368 (March 31, 2011 – gain of $850,651).
The following table provides information with respect to warrant transactions:
| | Number of Warrants Outstanding | | | Weighted Average Exercise Price | |
December 31, 2011 | | | 2,701,131 | | | $ | 4.59 | |
Exercised | | | - | | | | - | |
Expired | | | - | | | | - | |
March 31, 2012 | | | 2,701,131 | | | $ | 4.59 | |
The following summarizes the weighted-average information about the outstanding warrants as at March 31, 2012:
Outstanding Warrants |
Exercise Price | | | Number | | | | Average Remaining Contractual Life |
$ | 4.50 | | | | 2,539,416 | | | | 0.11 years |
$ | 6.07 | | | | 161,715 | | | | 0.92 years |
$ | 4.59 | | | | 2,701,131 | | | | 0.16 years |
Stock Options
On June 13, 2011, the Company granted options to acquire common stock of the Company to employees, officers and directors. The exercise price of the options was determined based on the fair value of the common stock at the grant date.
Options expire on the earlier of ten years from the issue date, subject to earlier termination resulting from an optionee’s death or departure from the Company or change of control. Unless otherwise determined by the Board of Directors, options granted vest as to 30%, 30% and 40% on each of the first, second and third anniversary dates of the option grants. The vesting is also subject to certain performance conditions on each vesting date.
The following table provides information with respect to stock option transactions:
| | Number of Stock Options Outstanding | | | Weighted Average Exercise Price | |
December 31, 2011 | | | 1,227,755 | | | $ | 1.39 | |
Granted | | | - | | | | - | |
Expired | | | - | | | | - | |
March 31, 2012 | | | 1,227,755 | | | $ | 1.39 | |
Note 13 – Shareholders’ Equity (continued)
Stock Options (continued)
The following summarizes the weighted-average information about the outstanding stock options as at March 31, 2012:
Outstanding Stock Options |
Exercise Price | | | Number | | | | Average Remaining Contractual Life |
$ | 1.39 | | | | 1,227,755 | | | | 9.21 years |
Stock-based compensation
The 1,227,755 stock options granted on June 13, 2011 have an estimated fair value of $1,316,911 for an average value of $1.04 to $1.10 per stock option using the CRR option pricing model with the following key assumptions:
| | June 13, 2011 | |
Expected life | | | 5.5 – 6.5 years | |
Expected volatility | | | 95 | % |
Risk-free interest rate | | | 1.74% - 2.10 | % |
Dividend yield | | | 0 | % |
The expected life of options represents the period of time the granted options are expected to be outstanding. As the Company had not previously granted options, no historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life was estimated as the average of the contractual term and the vesting period. The Company has not paid dividends in the past nor does it expect to pay dividends in the foreseeable future.
The Company does not believe any of the options will be forfeited because most of the stock options are granted to long-term employees and officers. In addition, since the performance condition will be set at a reasonably achievable level, the Company believes 100% of the performance conditions can be met.
Related to the above 1,227,755 stock options granted, compensation expense is recognized over the vesting period. During the three months ended March 31, 2012, compensation expense of $95,390 (March 31, 2011 - $Nil) was recognized in the interim condensed consolidated statements of income.
Treasury Stock
The Company approved the plan to repurchase up to $5 million shares of the Company’s common stock. The repurchase will be made from time to time at prevailing market prices, through open market purchases.There is no guarantee as to the exact number of shares that will be repurchased by the Company and the Company may discontinue purchases at any time when the Board of Directors determines additional repurchases are not warranted. The repurchase program is expected to continue until August 11, 2013.
During the first quarter of 2012, the Company repurchased 13,680 shares at average price of $1.03 and the total cost of $14,142 was recorded as treasury stock.
Note 14 – Other Revenue
| | For the three months ended | |
| | March 31, 2012 | | | March 31, 2011 | |
Interest income | | $ | 49,643 | | | $ | 38,826 | |
Rental income | | | 363,376 | | | | 587,276 | |
Income from property management services | | | 1,027,792 | | | | 831,201 | |
Construction contract income | | | 1,618,416 | | | | 1,435,424 | |
Gain on disposal of fixed assets and inventory | | | 8,201 | | | | 8,152 | |
Total | | $ | 3,067,428 | | | $ | 2,900,879 | |
Note 15 - Segment Reporting
The Company has two reportable segments: Real Estate Development and Sales segment and Real Estate Construction segment. The Real Estate Development and Sales segment includes operating subsidiaries, Tsining, Puhua, New Land, Suodi, Fangzhou and Jiyuan, while the Real Estate Construction segment represents Xinxing Construction. These two segments offer different products and services. The reportable segments are managed separately because they produce distinct products and provide different services. The Company and its other subsidiaries, Manstate, Success Hill, Way fast, Clever Advance, Grace mind, Treasure Asia and Property Management are aggregated as All Other segment. The All Other segment includes revenue from property management services from Property Management and all head office expenses and all expenses resulting from the change in fair value of warrants embedded derivatives. None of these companies has ever met any of the quantitative thresholds for determining reporting segments.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different skills and marketing strategies.
Financial information with respect to the reportable segments and reconciliation to the amounts reported in the Company’s interim condensed consolidated financial statements during the first three months of fiscal year 2012 and 2011 is as follows:
For the 3 months ended March 31, 2012:
| | Real Estate Development and Sales | | | Construction | | | All other | | | Adjustments and elimination | | | Consolidated | |
Revenues from external customers | | $ | 20,434,343 | | | $ | 1,618,416 | | | $ | 732,636 | | | $ | - | | | $ | 22,785,395 | |
Intersegment revenues | | | - | | | | 2,298,163 | | | | | | | | (2,298,163) | (1) | | | - | |
Rental from external customers | | | 226,385 | | | | 136,991 | | | | - | | | | - | | | | 363,376 | |
Other misc income (Interest & Gain from Property, Plant and Equipment ) | | | 128,559 | | | | - | | | | 224,441 | | | | - | | | | 353,000 | |
Interest expense | | | 174,954 | | | | 13,264 | | | | 42,054 | | | | - | | | | 230,272 | |
Segment profit before taxes | | | 3,335,850 | | | | 42,158 | | | | (36,946 | ) | | | 143,228 | (1) | | | 3,484,290 | |
Total assets | | | 497,940,032 | | | | 26,503,670 | | | | 187,025,964 | | | | (239,208,663) | (2) | | | 472,261,004 | |
Note 15 - Segment Reporting (continued)
For the 3 months ended March 31, 2011:
| | Real Estate Development and Sales | | | Construction | | | All other | | | Adjustments and elimination | | | Consolidated | |
Revenues from external customers | | $ | 19,656,817 | | | $ | 1,435,424 | | | $ | 940,229 | | | $ | - | | | $ | 22,032,470 | |
Intersegment revenues | | | - | | | | 2,249,599 | | | | - | | | | (2,249,599) | (1) | | | - | |
Rental from external customers | | | 212,307 | | | | 374,969 | | | | - | | | | - | | | | 587,276 | |
Other misc income (Interest & Gain from Property, Plant and Equipment ) | | | 62,083 | | | | | | | | (124,132 | ) | | | - | | | | (62,049 | ) |
Interest expense | | | 519,976 | | | | 34,664 | | | | 42,508 | | | | - | | | | 597,148 | |
Segment profit before taxes | | | 1,332,456 | | | | 250,052 | | | | 1,624,343 | | | | 10,675 | (1) | | | 3,217,526 | |
Total assets | | | 416,269,049 | | | | 16,178,515 | | | | 155,439,402 | | | | 175,410,629 | (2) | | | 412,476,336 | |
| (1) | These represent revenues earned from construction service performed by Xinxing Construction for Real Estate Development and Sales segment and its profits. They are eliminated upon consolidation. |
| (2) | The adjustment represents long-term investments in subsidiaries and inter-subsidiary balances elimination upon consolidation. |
Note 16 – Earnings (Loss) per Share
Earnings per share for the three months ended March 31, 2012, and 2011 were determined by dividing net income (loss) attributable to China Housing & Land Development, Inc. for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding.
| | March 31, | | | March 31, | |
| | 2012 | | | 2011 | |
Numerator | | | | | | | | |
Net income – basic | | $ | 2,235,413 | | | $ | 2,469,083 | |
Effect of dilutive securities | | | | | | | | |
Convertible Debt | | | - | | | | 828,048 | |
Net income – diluted | | $ | 2,235,413 | | | $ | 1,641,035 | |
Denominator | | | | | | | | |
Weighted average shares outstanding – basic | | | 34,730,261 | | | | 33,886,568 | |
Effect of dilutive securities | | | | | | | | |
Convertible Debt | | | - | | | | 1,615,709 | |
Weighted average shares outstanding – diluted | | | 34,730,261 | | | | 35,502,277 | |
Earnings per share | | | | | | | | |
Basic earnings per share | | $ | 0.06 | | | $ | 0.07 | |
Diluted earnings per share | | $ | 0.06 | | | $ | 0.05 | |
All outstanding options, warrants and convertible debt have anti-dilutive effects on the earnings per share and are therefore excluded from the determination of the first quarter of fiscal 2012 diluted earnings per share calculation.
Note 17 – Commitments and Contingencies
The Company leases part of its office and hotel space under various operating lease agreements that expire in 2019.
Additionally, the Company had various commitments related to land use right acquisition with unpaid balances of approximately $19.8 million. The balances are not due until the vendor removes the existing building from the land and changes the zoning status of the land use right certificate. Based on the current condition, the Company estimates that the balances will be paid in one year.
All future payments required under the various agreements are summarized below:
| | Payment due by period | |
Commitments and Contingencies | | Total | | | Less than 1 year | | | 1-2 years | | | 2-3 years | | | 3-4 years | | | 4-5 years | | | After 5 years | |
Operating leases | | $ | 659,308 | | | $ | 116,237 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 200,079 | |
Land use rights | | | 19,746,539 | | | | 19,746,539 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 20,405,847 | | | $ | 19,862,776 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 200,079 | |
Note 18 – Related Party Transactions
One of the Company’s executive officers’ spouse owned 37.83% of common stock ofDays Hotel. During the three months ended March 31, 2012, the Company incurred $26,598 (March 31, 2011 - $32,428) in fees to Days Hotel. As at March 31, 2012, the Company had $123,818 (December 31, 2011 - $106,440) payable to Days Hotel.
The Company did not sell any real estate units to Days Hotel during the three months ended March 31, 2012. However, the Company sold 14 apartments amounting to $695,439 to Days Hotel during the three months ended March 31, 2011.
The Company also borrowed a $1,587,932 in short-term loan from Days Hotel during the 3 months ended March 31, 2012 (Note 10).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Form 10-Q are not historical facts and are forward-looking statements, which can be identified by the use of terminology such as estimates, projects, plans, believes, expects, anticipates, intends, or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties, and other factors affecting our operations, market growth, services, products, and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events and conditions that may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation: our ability to attract and retain management to integrate and maintain technical information and management information systems; our ability to raise capital when needed and on acceptable terms and conditions; the intensity of competition; and general economic conditions.
All written and oral forward-looking statements made in connection with this Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Critical Accounting Policies and Estimates
We prepare our interim condensed consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates based on our own experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are inherently uncertain. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our interim condensed consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
The unaudited interim condensed consolidated financial statements are based on accounting principles that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Annual Report”). They do not include certain footnote disclosures and financial information normally included in annual consolidated financial statements prepared in accordance with GAAP and, therefore, should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2011 Annual Report.
Warrants and derivative liability
As of March 31, 2012, the Company has approximately $4,530 of warrants liability and $259,526 of fair value of embedded derivatives on the balance sheet each representing less than one percent of the total liabilities of the Company.
We utilize the Cox-Rubinstein-Ross (“CRR”) Binomial Lattice Model to estimate the fair values of warrants liability and embedded derivatives. The CRR model depends on the following assumptions: the Company’s common stock price underlying the warrants; strike price; conversion price; expected life; expected volatility; risk free interest rate; and dividend rate. We have used the CRR Binomial Lattice Model for the past three years. We do not expect any significant changes to the assumptions except for the common share price and the expected volatility.
We estimate the fair value of warrants liability and embedded derivatives every quarter and recognize the change in fair value as gain or loss on our current quarter consolidated statement of income. The fair values of warrant liabilities and embedded derivatives have changed during the past few years according to the valuation models and the fair values are positively related to the market share price movement and the volatility.
During the three months ended March 31, 2012, our common stock price experienced some degree of fluctuation with the price increasing from $1.00 on December 30, 2011 to $1.36 on March 31, 2012. As a result, we incurred approximately $368 as a change in fair value of warrants as a non-cash expense and recognized $71,103 as a change in fair value of embedded derivatives as a non-cash gain.
The following table summarizes the fair value of warrant liabilities and embedded derivative as of the periods indicated.
| | March 31, 2012 | | | December 31, 2011 | |
| | | | | | |
Fair value of warrants liability | | $ | 4,530 | | | $ | 4,162 | |
Fair value of embedded derivatives | | $ | 259,526 | | | $ | 330,629 | |
The following tables summarize all of the warrants and conversion options outstanding and the assumptions used for their valuations as of March 31, 2012 and December 31, 2011.
Investor Warrants: | | March 31, 2012 | | | December 31, 2011 | |
Strike price | | | 6.07 | | | | 6.07 | |
Market price | | | 1.36 | | | | 1.00 | |
Valuation date | | | 3/31/2012 | | | | 12/31/2011 | |
Expiry date | | | 2/28/2013 | | | | 2/28/2013 | |
Volatility | | | 85.00 | % | | | 85.00 | % |
Risk free rate | | | 0.18 | % | | | 0.14 | % |
Option value | | | 0.02801 | | | | 0.01918 | |
| | | | | | | | |
Number of warrants | | | 161,715 | | | | 161,715 | |
| | | | | | | | |
Value | | | 4,530 | | | | 3,102 | |
Investor Warrants: 5-7-2007 | | March 31, 2012 | | | December 31, 2011 | |
Strike price | | | 4.50 | | | | 4.50 | |
Market price | | | 1.36 | | | | 1.00 | |
Valuation date | | | 3/31/2012 | | | | 12/31/2011 | |
Expiry date | | | 5/9/2012 | | | | 5/9/2012 | |
Volatility | | | 55.00 | % | | | 85.00 | % |
Risk free rate | | | 0.05 | % | | | 0.04 | % |
| | | | | | | | |
Option value | | | 0.00000 | | | | 0.00042 | |
| | | | | | | | |
# of warrants | | | 2,539,416 | | | | 2,539,416 | |
| | | | | | | | |
Value | | | 0 | | | | 1,060 | |
Conversion Option Valuation: | | March 31, 2012 | | | December 31, 2011 | |
Strike price | | | 5.57 | | | | 5.57 | |
Market price | | | 1.36 | | | | 1.00 | |
Valuation date | | | 3/31/2012 | | | | 12/31/2011 | |
Expiry date | | | 1/28/2013 | | | | 1/28/2013 | |
Volatility | | | 90.00 | % | | | 85.00 | % |
Risk free rate | | | 0.18 | % | | | 0.13 | % |
Option value | | | 0.03684 | | | | 0.01896 | |
| | | | | | | | |
Host Value – principal | | | 8,999,500 | | | | 8,999,500 | |
Host Value – interest | | | - | | | | - | |
| | | | | | | | |
Shares issuable on conversion (1) | | | 1,615,709 | | | | 1,615,709 | |
| | | | | | | | |
Option value – principal | | | 59,525 | | | | 30,628 | |
| | | | | | | | |
Derivative value | | | 259,525 | | | | 330,629 | |
Real estate held for development or sale, intangible assets and deposits on land use rights
We evaluate the recoverability of our real estate developments taking into account several factors including, but not limited to, our plans for future operations, prevailing market prices for similar properties and projected cash flows.
We review real estate projects whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the total of the expected undiscounted cash flow is less than the carrying amount of the assets, we recognize an impairment loss based on the fair value of the assets.
Our judgments and estimates related to impairment include our determination of whether an event has occurred to warrant an impairment test. If a test is required, we will have to make additional judgments and estimations such as our expectations of future cash flows and the calculation of the fair value of the impaired assets.
When real estate costs are determined to be impaired, they are written down to their estimated net realizable value. The Company evaluates the carrying value for impairment based on the undiscounted future cash flows of the assets. Write-downs of real estate costs deemed impaired are recorded as adjustments to the cost basis. There were no impairment on real estate inventories and no impairment losses were recorded for the three months ended March 31, 2012 and 2011.
The following summarizes the components of real estate inventories as of March 31, 2012 and December 31, 2011:
| | March 31, | | | December 31, | |
| | 2012 | | | 2011 | |
Real estate projects completed and held for sale | | | | | | | | |
JunJing I project | | $ | 3,379,515 | | | $ | 3,381,448 | |
JunJing II project phase one | | | 204,635 | | | | 1,321,972 | |
Tsining 24G project | | | 44,884 | | | | 44,910 | |
Gangwan project | | | 33,150 | | | | 37,847 | |
Tsining Home IN project | | | 60,291 | | | | 60,325 | |
Real estate completed and held for sale | | $ | 3,722,475 | | | $ | 4,846,502 | |
| | | | | | | | |
Real estate projects held for development | | | | | | | | |
Puhua project | | | 122,808,227 | | | | 115,798,346 | |
Tangdu project | | | 4,708,049 | | | | 4,710,742 | |
JunJing III project | | | 3,463,761 | | | | 9,299,511 | |
Park Plaza project | | | 12,394,004 | | | | 8,471,800 | |
Jiyuan Project | | | 13,171,671 | | | | 13,151,101 | |
Golden Bay project | | | 8,188,250 | | | | 5,657,731 | |
Other projects | | | 3,535,276 | | | | 1,356,331 | |
Construction materials | | | 126,105 | | | | 190,252 | |
Real estate held for development | | | 168,395,343 | | | | 158,635,814 | |
| | | | | | | | |
Total real estate held for development or sale | | $ | 172,117,818 | | | $ | 163,482,316 | |
The Company’s Tangdu project is essentially a land use right plus miscellaneous pre-construction costs. The Company still owns the legal title to this land use right but the government is negotiating with the Company regarding a potential transfer back to government. If the land use right is transferred back to the government, the Company believes the government will refund all the costs incurred by the Company.
Intangible asset
The intangible asset consisted of the following at March 31, 2012 and December 31, 2011:
| | March 31, 2012 | | | December 31, 2011 | |
Development right acquired (a) | | $ | 51,280,435 | | | $ | 51,309,767 | |
Land use right acquired (b) | | | 8,535,188 | | | | 8,540,070 | |
Construction license acquired (c) | | | 1,195,422 | | | | 1,196,106 | |
| | | 61,011,045 | | | | 61,054,943 | |
Accumulated amortization | | | (6,947,759 | ) | | | (6,896,990 | ) |
Intangible assets, net | | $ | 54,063,286 | | | $ | 54,148,953 | |
| (a) | The development right for 487 acres of land in Baqiao Park obtained from the acquisition of New Land in fiscal 2007. The intangible asset has a finite life. In accordance with accounting standard, “Goodwill and Other Intangible Assets”, the intangible asset is subject to amortization over its estimated useful life. This method is intended to match the pattern of amortization with the income-generating capacity of the asset. The development right was originally set to expire on June 30, 2011. On November 25, 2010, the Company extended the right to June 30, 2016. |
| (b) | The land use rights were acquired in the acquisition of Suodi. The land use rights certificate will expire in November of 2048. The Company amortizes the land use rights over 39 years. |
| (c) | The construction license was acquired through acquisition of Xinxing Construction. The construction license, which is subject to renewal every five years, is not amortized and has an indefinite estimated useful life because management believes the Company will be able to continuously renew the license in the future. The license was subject to renewal on March 10, 2011. T During the second quarter of 2011, the Company successfully renewed the license until December 31, 2015. |
The Company evaluates its intangible asset for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Based on the discounted estimated future cash flows, the Company will record a write-down for impairments if the discounted cashflows are over the carrying value of the intangible asset. No impairment write-down was recognized for the period ended March 31, 2012 and 2011.
For the three months ended March 31, 2012, the Company recorded $54,606 of amortization expenses on land use right (2011 - $52,372). The amortization was included in selling, general and administrative expenses.
Deposits on land use rights
| | March 31, | | | December 31, | |
| | 2012 | | | 2011 | |
Deposits on land use rights | | | 90,690,658 | | | | 65,286,137 | |
The increase in deposits on land use rights was due to a land acquisition payment of RMB 160 million on Park Plaza during the first quarter of 2012.
The Company conducts regular reviews of the deposits on land use rights. After review and assessment, the Company concluded that there was no significant decrease in the market price and therefore no impairment write-down was required. According to E-House (China) Real Estate Research Institute the average residential sale price in Xi’an city was stable in the fiscal quarter ended March 31, 2012. The average sale price decreased to 7,703 RMB per square meter (approximately US$1,223 per square meter) from 7,903 RMB (approximately US$1,254 per square meter) in the fourth quarter 2011, representing a decrease of 2.5% quarter-over-quarters.
Material trends and uncertainties that may impact continuing operations
Changes in national and regional economic conditions, as well as in areas where we conduct our operations and where prospective purchasers of our homes live, may result in more caution on the part of homebuyers resulting in fewer home purchases. According to data from the Xi’an Bureau of Statistics, Xi’an city’s real estate transaction volume (in terms of sq. meter signed) decreased about 37.9% in the first quarter of 2012 compared to the same period of 2011. Most of our projects are currently in Xi’an city. However, during the first quarter of 2012, our revenue from sale of properties increased approximately 21.8% over same period of 2011, which was mainly due to additional sales from JunJing III project, which was started in the fourth quarter of 2011.
Virtually all purchasers of our homes finance their acquisitions through lenders providing mortgage financing. A substantial increase in mortgage interest rates or unavailability of mortgage financing would adversely affect the ability of prospective homebuyers to obtain the financing they need in order to purchase our homes, as well as the ability of prospective move-up homebuyers to sell their current homes. For example, if mortgage financing became less available, demand for our homes could decline. A reduction in demand could also have an adverse effect on the pricing of our homes because we (and our competitors) may reduce prices in an effort to compete for home buyers. A reduction in pricing could result in a decline in revenues and margins. Additionally, policies were implemented by the local government in February 2011 to curb speculation in the real estate market. These new policies included capping year-over-year housing unit average selling price (“ASP”) increases to 15%, restricting third-time home purchases for local residents and second-time home purchases for non-local residents. These new policies could result in buying delays amongst potential new customers, which could impact our revenues.
The real estate development industry is capital intensive, requiring significant up-front expenditures to acquire land and begin development. Accordingly, we incur substantial indebtedness to finance our homebuilding and land development activities. Although we believe that internally generated funds and our current borrowing capacity will be sufficient to fund our capital and other expenditures (including land acquisition, development and construction activities), the amounts available from such sources may not be adequate to meet our needs. If such sources are not sufficient, we would seek additional capital in the form of debt or equity financing from a variety of potential sources, including bank financings and/or securities offerings. The availability of borrowed funds, to be utilized for land acquisition, development and construction, may be greatly reduced, and the lending community may require larger amounts of equity to be invested by borrowers in a project in connection with new loans. Failure to obtain sufficient capital to fund planned capital and other expenditures could have a material adverse effect on our business.
In addition, regulatory requirements could force us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to statutes and rules regulating, among other things, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations such as building permit allocation ordinances and impact and other fees and taxes, which may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from government agencies to grant the necessary licenses, permits and approvals could have an adverse effect on our operations.
As of March 31, 2012, we had $8,438,125 of cash and cash equivalents, compared to $22,014,953 as of December 31, 2011, a decrease of $13,576,828. As of March 31, 2012, we had loans payable of $158,286,249 most of which will be due within 2012. As of December 31, 2011, our loans payable amounted to $148,402,690.
The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements for the year 2012. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of land for the development of future projects, through cash provided by operations and additional funds raised by future financings. Upon acquiring land for future development, we intend to raise funds to develop our projects by obtaining mortgage financing mainly from local banking institutions with which we have done business in the past. We believe that our relationships with these banks are in good standing and that our real estate will secure the loans needed. We believe that adequate cash will be available to fund our operations.
BUSINESS
Our Company
We are a leading residential developer with a focus on fast growing Tier II and Tier III cities in western China. We are dedicated to providing quality and affordable housing to middle class families. The majority of our customers are first time home buyers and first time up-graders, who, we believe, will benefit from China’s rapid gross domestic product (“GDP”) growth and the middle classes’ corresponding increase in purchasing power.
We commenced our operations in Xi’an in 1999 and have been considered one of the industry leaders and one of the largest private residential developers in the region. We have experienced significant growth in the past 13 years and have developed over 1.5 million square meters of residential projects. Through the utilization of modern design and technology, as well as a strict cost control system, we are able to offer our customers high quality, cost-effective products. Most of our projects are designed by world-class architecture firms from the United States, Canada and Europe that have introduced advanced “eco” and “green” technologies into our projects.
As we are focusing primarily on the demand from first time home buyers and first time up-graders in western China, the majority of our apartments have sizes in the range of 70 square meters to 120 square meters; with such sizes considered to be a stable market section of the residential real estate market in western China. Our typical residential project is approximately 100,000 square meters in size and consists of multiple high-rise, middle-rise and low-rise buildings as well as a community center, commercial units, educational facilities such as kindergartens and other auxiliary facilities. In addition, we provide property management services to our developments and have exclusive membership systems for our customers. We typically generate a large portion of our sales through referrals from our existing customers.
We acquire our land reserves and development sites through primary land development with the local government, open-market auctions, acquisitions of old factories from the government and acquisitions of distressed assets from commercial banks. We do not depend on a single land acquisition method and this facilitates our acquisition of the land at a reasonable cost and also in our receiving higher returns on our investments from our developments. We intend to continue our expansion into other strategically selected cities in western China by leveraging our brand name and scalable business model.
Our Strategies
We are primarily focused on the development, construction, management and sale of residential real estate properties to capitalize on the rising demand for real estate from China’s emerging middle class. We seek to become the market leader in western China and plan to implement the following specific strategies to achieve our goal:
Consolidate through Acquisition and Partnership. Currently, the residential real estate market in western China is fragmented with many small players. We believe that this market fragmentation will provide us with opportunities for acquisitions or partnerships. We believe acquisitions will provide us better leverage in negotiations and better economies of scale.
Expand into Other Tier II and Tier III Cities. We believe our proven business model and expertise can be replicated in other Tier II and Tier III cities, especially in western China. We stepped into Ankang city in July 2011 for a residential project. Furthermore, we have identified certain cities that possess attractive replication dynamics.
Continue to Focus on the Middle Market. Since the middle class has growing purchasing power and, as a result of prevailing Chinese culture and values, a strong desire to own homes, we believe the demands for residential real estate from the emerging middle class will offer attractive opportunities for the growth of our Company. Thus, we plan to leverage our brand name, experience and design capabilities to meet these demands from the middle class.
Our Competitive Strengths
We believe we have the following competitive strengths which will enable us to compete effectively and to capitalize on the growth opportunities in our market:
Leading position in our market and industry
We are one of the largest private residential real estate developers in western China. We believe that we have strong design and sales capabilities as well as a well-regarded brand name in the region. Due to strong local project experience and long term relationships with the central and local governments, we have been able to acquire significant land assets at reasonable costs, thereby providing a strong pipeline of potential future business and revenue over the next three to five years.
Attractive market opportunity
The real estate market in western China has grown slower than that of eastern China. We believe the region is well positioned to grow at faster rates for the next few years due to social, and economic factors. Our business model has proven to be efficient and we plan to expand into other Tier II and Tier III cities in western China. Our growth strategy is focused on western China, and we believe we will significantly benefit from the Chinese government’s “Go West” policy, which encourages economic development and population movement to western China.
Unique and proven business model
Due to strong local project experience and long term working relationships with the central and local governments, we generally have been able to acquire land assets at costs more reasonable than those obtained by our competitors. We are primarily focused on capitalizing on rising demand for properties from China’s emerging middle class, which has significant purchasing power and a strong demand for residential housing. In order to leverage our brand to appeal to the middle class, we use various advertising media to market our property developments and to reach our target demographic, including newspapers, magazines, television, radio, e-marketing and outdoor billboards. We believe that our brand is widely recognized in our market and is known for high quality products at cost-effective prices.
Experienced management team
We have an experienced management team with a proven track record of developing and expanding our operations. Our four primary managers have a total of more than 66 years of experience in developing residential properties. As a result, we have developed extensive core competencies, supplemented by in-house training and development programs. We believe that our management’s core competencies, extensive industry experience and long-term vision and strategy will enable us to effectively realize growth opportunities.
Greater access to financing through multiple channels
We enjoy multiple long term relationships with a number of high quality Chinese banks and these relationships ensure timely access to capital. Our loan facilities are mainly used for development projects and day to day running of our business. Besides traditional banks, we also work with other financial institutions, such as trust companies and real estate funds to diversify our funding channels and risks.
Our Property Projects
We provide three fundamental types of real estate developments:
| · | High-rise apartment buildings, typically 19 to 33 stories, usually constructed of steel-reinforced concrete, that are completed within approximately 24 months of securing all required permits. |
| · | Mid-rise apartment buildings, typically 7 to 18 stories, usually constructed of steel-reinforced concrete, that are completed within approximately 12 to 18 months of securing all required permits. |
| · | Low-rise apartment buildings and villas, typically 2 to 6 stories, often constructed of steel-reinforced concrete, that are completed within approximately 12 months of securing all required permits. |
Our projects can be classified into one of four stages of development:
| · | Projects in planning, which include projects for which we have purchased the development and or land use rights for parcels of land as part of our project development pipeline. The completion of projects on these sites is subject to adequate financing, approval of permits, receipt of licenses and certain market conditions; |
| · | Projects in process, which include developments where we have typically secured the development and land use rights, and where the site planning, architecture, engineering and infrastructure work is in progress; |
| · | Projects under construction, where the building construction has started but has not yet been completed; and |
| · | Completed projects with units available for sale, where the construction has been finished and most of the units in the buildings have been sold or leased. |
Projects Under Construction
| | | | | Actual or | | | Actual or | | | | | | Total | | | Sold GFA | |
| | | | | Estimated | | | Estimated Pre-sale | | | Total Site | | | Gross | | | by March | |
Project | | Type of | | | Construction | | | Commencement | | | Area | | | Floor Area | | | 31, 2012 | |
Name | | Projects | | | Period | | | Date | | | (m2) | | | (m2) | | | (m2) | |
Puhua Phase One | | | Multi-Family residential & Commercial | | | | Q4/2009 - Q4/2012 | | | | Q4/2009 | | | | 47,600 | | | | 136,927 | | | | 118,036 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Puhua Phase Two | | | Multi-Family residential & Commercial | | | | Q2/2010 - Q4/2013 | | | | Q2/2010 | | | | 47,300 | | | | 260,810 | | | | 80,655 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
JunJing III | | | Multi-Family residential & Commercial | | | | Q4/ 2010 - Q4/2012 | | | | Q4/2011 | | | | 8,094 | | | | 52,245 | | | | 44,835 | |
| | | | | Number of | | | | | | Contracted | | | Recognized | |
| | Total | | | Units sold by | | | Estimated | | | Revenue by | | | Revenue by | |
Project | | Number of | | | March 31, | | | Revenue | | | March 31, 2012 | | | March 31, 2012 | |
name | | Units | | | 2012 | | | ($million) | | | ($million) | | | ($million) | |
Puhua Phase One | | | 858 | | | | 756 | | | | 124.6 | | | | 92.1 | | | | 85.4 | |
| | | | | | | | | | | | | | | | | | | | |
Puhua Phase Two | | | 1,587 | | | | 623 | | | | 245.6 | | | | 67.1 | | | | 41.1 | |
| | | | | | | | | | | | | | | | | | | | |
JunJing III | | | 517 | | | | 487 | | | | 52.0 | | | | 46.2 | | | | 35.0 | |
Puhua: The Puhua project, the Company’s 79 acre project located in the Baqiao New Development Zone, has a total land area of 192,582 square meters and an expected GFA of approximately 640,000 square meters.
The construction of the Puhua project began in June 2009. The whole project, which consists of four phases, is expected to be completed in the third quarter of 2014, with estimated revenue of $700 million. The Company began accepting pre-sale contracts for units in the Puhua Phase One project on October 24th, 2009. As of March 31, 2012, the contract revenue for Puhua project was $159.2 million.
JunJing III: JunJing III is located near our JunJing II project and the city expressway. It has an expected total GFA of about 52,245 square meters. The project will consist of three high rise buildings, each 28 to 30 stories high. The project is targeting middle to high income customers who require a high quality living environment and convenient transportation to the city center. We started construction during the fourth quarter of 2010 and pre-sales began during the fourth quarter of 2011. The total estimated revenue from this project is about $52.0 million. As of March 31, 2012, we have recognized $35.0 million revenue out of $46.2million contract sales.
Projects under planning and in process
| | | | Estimated | | | Estimated | | | Total Site | | | | | | Total | |
Project | | Type of | | Construction | | | Pre-sale | | | Area | | | Total GFA | | | Number of | |
Name | | Projects | | Period | | | Commencement | | | (m2) | | | (m2) | | | Units | |
Baqiao New Development Zone | | Land Development | | | 2009- 2020 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Puhua Phase Three | | Multi-Family residential & Commercial | | | Q2/2012 - Q2/2014 | | | | Q3/2012 | | | | N/A | | | | 177,193 | | | | N/A | |
Puhua Phase Four | | Multi-Family residential & Commercial | | | Q2/2013 - Q4/2014 | | | | Q3/2013 | | | | N/A | | | | 216,611 | | | | N/A | |
Park Plaza | | Multi-Family residential & Commercial | | | Q1/2012 - Q4/2014 | | | | Q3/2012 | | | | 44,250 | | | | 141,822 | | | | 2,000 | |
Golden Bay | | Multi-Family residential & Commercial | | | Q2/2012 - Q4/2014 | | | | Q3/2012 | | | | 146,099 | | | | 252,540 | | | | N/A | |
Textile City | | Multi-Family residential & Commercial | | | Q3/2013 -Q3/2018 | | | | Q3/2013 | | | | 433,014 | | | | 630,000 | | | | N/A | |
Ankang Project | | Multi-Family residential & Commercial | | | Q2/2012 -Q3/2015 | | | | Q3/2012 | | | | 74,820 | | | | 243,152 | | | | 2,200 | |
Baqiao New Development Zone: On March 9, 2007, we entered into a Share Transfer Agreement with the shareholders of Xi’an New Land Development Co., Ltd. (“New Land”), under which the Company acquired 32,000,000 shares of New Land, constituting 100% equity ownership of New Land. This acquisition gave the Company the exclusive right to develop and sell 487 acres of land in a newly designated satellite city of Xi’an (the “Baqiao Project”).
Xi’an has designated the Baqiao District as a major resettlement zone where the city expects 900,000 middle to upper income inhabitants to settle. The Xi’an local government intends to create a thriving commercial and residential zone similar to Pudong, Shanghai, which has provided many new economic opportunities and significant amounts of housing for Shanghai’s growing population.
The Xi’an municipal government plans investments of RMB 50 billion (over $7.6 billion) in infrastructure in the Baqiao New Development Zone. The construction of a large-scale public wetland park is well underway. It will embellish the natural environment adjacent to China Housing’s Baqiao Project.
Through our New Land subsidiary, we sold 18.4 acres to another developer in 2007 and generated about $24.41 million in revenue.
In 2008, we established a joint venture with Prax Capital Real Estate Holdings Limited (“Prax Capital”) to develop 79 acres within the Baqiao Project, which will be the first phase of the Baqiao Project’s development. Prax Capital invested $29.3 million in the joint venture. The joint venture is further described in the Puhua section below.
In December 2010, we signed a preliminary contract with the government with the intention to acquire a 107 acre tract of land for development of a new real estate housing project. The new project, with an estimated total GFA of 630,000 square meters, is expected to begin in the third quarter of 2013.
After selling 18.4 acres, placing 79 acres in the Puhua project and approximately 42 acres in the Golden Bay Project and setting aside 107 acres for the textile city project, approximately 241 acres remain available for the Company to develop in the Baqiao Project.
Puhua Phase Three:Puhua Phase Three is located within the Baqiao project, with a total GFA of 177,193 square meters. The project will consist residential buildings and commercial space. We expect to start presale of Puhua Phase Three in the third quarter of 2012.
Puhua Phase Four: Puhua Phase Four is located within the Baqiao project, with a total GFA of 216,611 square meters. The project will consist residential buildings and commercial space. We expect to start presale of Puhua Phase Three in the third quarter of 2013.
Park Plaza: In July 2009, the Company entered into a Letter of Intent to acquire 44,250 square meters of land in the center of Xi’an for the Park Plaza project. In April 2012, the Company officially acquired the land use right for Park Plaza. The Company intends to develop a large mid-upper income residential and commercial development project on this site, with a GFA of 141,822 square meters. The four-year construction of Park Plaza began in the first quarter 2012. We anticipate accepting pre-sale purchase agreements in the third quarter of 2012, and revenues from pre-sale agreements will begin to be recognized when all revenue recognition criteria have been met. The total revenue from Park Plaza is estimated to be $154 million.
Golden Bay: The Golden Bay project is located within the Baqiao project, with a total GFA of 252,540 square meters. The Golden Bay project will consist of residential buildings as well as a commercial area. Construction was anticipated to begin in the second quarter of 2012, and we expect to begin accepting pre-sale purchase agreements in the third quarter of 2012.
Textile City: The Textile City project is located within the Baqiao New Development Zone. The project consists of residential buildings and a commercial area. Construction is expected to start in the third quarter of 2013, and the entire project will take five years.
Ankang Project: The Ankang project is located in Ankang city, which is approximately 200 kilometers south of Xi’an in China’s Shanxi Province, The project consists of residential buildings and a commercial area. Construction is expected to start in the second quarter of 2012, and presales are expected to start in the following quarter. Total GFA is expected to reach 243,152 square meters. Total projected revenue is estimated to be $171.9 million.
Completed Projects with Units Available for Sale
Project name | | Type of Projects | | Completion Date | | Total Site Area (m2) | | | Total GFA (m2) | | | Total Number of Units | | | Number of Units sold by March 31, 2012 | |
JunJing II Phase Two | | Multi-Family residential & Commercial | | Q2/2011 | | | 29,800 | | | | 121,888 | | | | 1,015 | | | | 1,015 | |
JunJing II Phase One | | Multi-Family residential & Commercial | | Q4/2009 | | | 39,524 | | | | 142,214 | | | | 1,213 | | | | 1,211 | |
JunJing I | | Multi-Family residential & Commercial | | Q3/2006 | | | 55,588 | | | | 167,931 | | | | 1,671 | | | | 1,667 | |
JunJing II: JunJing II is located at 38 East Hujiamiao, Xi’an, with total GFA of approximately 264,102 square meters. It is our first “Canadian” style residential community and has “green and energy-saving” characteristics. The project is divided into two phases, namely JunJing II phase one and JunJing II phase two. We started the construction of JunJing II phase one in the third quarter of 2007 and started the pre-sale campaign in the second quarter of 2007.
JunJing II Phase Two:The construction of phase two commenced in the second quarter of 2009 and pre-sales started in the same quarter. As of December 31, 2011, the contract revenue for phase two was $100 million and we have recognized all the contract revenue as the percentage of completion reached 100%.
JunJing II Phase One:We started the construction of JunJing II phase one in the third quarter of 2007 and started the pre-sale campaign in the second quarter of 2007. The project was completed in December 2009 and generated total revenue of $95 million.
JunJing I: 369 North Jinhua Road, Xi’an. That is the first “German” style residential & commercial community in Xi’an, designed by the world-famous WSP architectural firm. Its target customers were local middle income families. The project has 15 residential apartment buildings consisting of 1,671 one to five bedroom apartments. The project features secured parking, cable TV, hot water, heating systems, and access to natural gas. Total GFA is 167,931 square meters. JunJing Garden I is also a commercial venture that houses small businesses serving the needs of JunJing Garden I residents and surrounding residential communities. The project was completed in September 2006.
CONSOLIDATED OPERATING RESULTS
Three Months Ended March 31, 2012 Compared With Three Months Ended March 31, 2011
Revenues
Our revenues are mainly derived from the sale of residential and commercial units and buildings, infrastructure work we perform for the local government and land development projects in the Baqiao area. In the first quarter of 2012, most of our revenues came from the JunJing III project.
Effective January 1, 2008, the Company adopted the percentage of completion method of accounting for revenue recognition for all building construction projects in progress, including the JunJing II and Puhua Projects. Before that time, the full accrual method was used for all of our residential, commercial and infrastructure projects. Infrastructure projects continue to be accounted for using the full accrual method of accounting.
| | Three months | | | Three months | |
| | ended | | | ended | |
Revenues by project: | | Mar 31, 2012 | | | Mar 31, 2011 | |
US$ | | | | | | | | |
Project Under Construction | | | | | | | | |
JunJing III | | | 10,629,103 | | | | - | |
Puhua Phase One | | | 4,778,151 | | | | 5,219,729 | |
Puhua Phase Two | | | 1,770,796 | | | | 8,428,480 | |
JunJing II Phase Two (Completed on June 30, 2011) | | | 4,174,516 | | | | | |
Projects Completed | | | | | | | | |
JunJing II Phase One | | | 3,256,293 | | | | 1,080,635 | |
JunJing II Phase Two (Under construction on March 31, 2011) | | | $ | | | | $ | |
JunJing I | | | - | | | | | |
Tsining-24G | | | - | | | | 695,439 | |
Tsining Gang Wan | | | - | | | | 58,018 | |
Revenues from the sale of properties | | $ | 20,434,343 | | | $ | 19,656,817 | |
The following table summarizes details of our most significant projects:
Revenues by project: | | Three months ended Mar 31, 2012 | | | Three months ended Mar 31, 2011 | |
US$ | | | | | | | | |
Puhua Phase One contract sales | | | 1,245,345 | | | | 5,150,567 | |
Revenue | | | 4,778,151 | | | | 5,219,729 | |
Total gross floor area (GFA) available for sale | | | 136,927 | | | | 136,927 | |
GFA sold during the period | | | 1,394 | | | | 3,665 | |
Remaining GFA available for sale | | | 18,891 | | | | 27,219 | |
Percentage of completion | | | 91.0 | % | | | 59.2 | % |
Percentage GFA sold during the period | | | 1.0 | % | | | 2.6 | % |
Percentage GFA sold to date | | | 86.2 | % | | | 80.1 | % |
Average sales price per GFA | | | 893 | | | | 1,405 | |
| | | | | | | | |
Puhua Phase Two contract sales | | | 2,348,212 | | | | 18,767,261 | |
Revenue | | | 1,770,796 | | | | 8,428,480 | |
Total gross floor area (GFA) available for sale | | | 260,810 | | | | 260,810 | |
GFA sold during the period | | | 2,678 | | | | 21,984 | |
Remaining GFA available for sale | | | 180,155 | | | | 213,393 | |
Percentage of completion | | | 53.2 | % | | | 33.9 | % |
Percentage GFA sold during the period | | | 1.0 | % | | | 8.4 | % |
Percentage GFA sold to date | | | 30.9 | % | | | 18.8 | % |
Average sales price per GFA | | | 877 | | | | 854 | |
| | | | | | | | |
JunJing III contract sales | | | 13,242,856 | | | | - | |
Revenue | | | 10,629,103 | | | | - | |
Total gross floor area (GFA) available for sale | | | 52,245 | | | | 52,245 | |
GFA sold during the period | | | 1,131 | | | | - | |
Remaining GFA available for sale | | | 17,201 | | | | 52,245 | |
Percentage of completion | | | 77.5 | % | | | - | |
Percentage GFA sold during the period | | | 2.2 | % | | | - | |
Percentage GFA sold to date | | | 67.1 | % | | | - | |
Average sales price per GFA | | | 11,708 | | | | - | |
Revenues from projects under construction
Puhua Phase One
Puhua Phase One consists of 7 garden houses, 2 mid-rise and 4 high-rise buildings with total expected revenues of approximately $124 million. During the first quarter of 2012, we were able to secure $1.2 million in contract sales. We also recognized approximately $4.8 million in revenues based on the percentage of completion method.
Puhua Phase Two
Puhua Phase two has expected revenues of approximately $245.4 million. During the first quarter of 2012, we were able to secure $2.3 million in contract sales. We also recognized approximately $1.8 million in revenues based on the percentage of completion method.
JunJing III
JunJing III is located near our JunJing II project and the city expressway. It has an expected total GFA of about 52,245 square meters. The project will consist of three high rise buildings, each 28 to 30 stories high. The project is targeting middle to high income customers who require a high quality living environment and convenient transportation to the city center. We started construction during the fourth quarter of 2010 and pre-sales began during the fourth quarter of 2011. The total estimated revenue from this project is about $52.0 million. We have recognized $35.0million out of $52.0 million contract sales.
Please note that the method of percentage of completion was utilized to recognize revenue from January 1, 2008.
Revenues from projects completed
The revenue from completed projects totaled $3,256,293 for the three months ended March 31, 2012, compared to $1,834,092 during the same period of 2011. During the first quarter of 2012, revenues from projects completed mainly resulted from the sale of JunJing II Phase One commercial units.
Other income
Other income includes property management fees, rental income, revenues from the disposal of fixed assets as well as government’s allowance for the equivalent cost of interest on the Company’s investments required to support infrastructure construction, continued river management and suburban planning for the entire Baqiao high-technology industrial park. We recognized $3,067,428 in other income for the three months ended March 31, 2012 compared with $2,900,879 in the same period of 2011. The increase can be explained by the following table, which summarizes the breakdown of the other income and the changes during the three months ended March 31, 2012 and 2011:
| | For the three months ended | |
| | March 31, 2012 | | | March 31, 2011 | |
Interest income | | $ | 49,643 | | | $ | 38,826 | |
Rental income, net | | | 363,376 | | | | 587,276 | |
Income from property management services | | | 1,027,792 | | | | 831,201 | |
Miscellaneous construction contracts | | | 1,618,416 | | | | 1,435,424 | |
Gain on disposal of fixed assets and inventory | | | 8,201 | | | | 8,152 | |
Total | | $ | 3,067,428 | | | $ | 2,900,879 | |
Cost of real estate sales
The cost of real estate sales in the three months ended March 31, 2012 decreased 2.8% to $14,232,864 compared with $14,638,574 in the same period of 2011. The primary selling projects were Puhua Phase One, Phase Two and JunJing III during the first quarter of 2012.
Gross profit and profit margin
Gross profit for the three months ended March 31, 2012 was $7,029,037, representing a 22.8% increase from $5,722,553 in the same period of 2011. The gross profit margin for the three months ended March 31, 2012 was 30.0% compared with 25.4% in the same period of 2011. The increased gross profit resulted from increased sales from JunJing III project. The increase in gross profit margin was mainly due to increased average selling price from JunJing III project. In general, the Company’s real estate sales should have an approximately 25% margin (after business taxes).
Selling, general and administrative expenses
Selling, general and administrative expenses (SG&A) for the three months ended March 31, 2012 decreased 11.9% to $3,023,686 from $3,432,716 in the same period of 2011. SG&A accounted for 12.9% of total revenue in the first quarter of 2012 compared to 15.2% for the same period in 2011. The decrease in SG&A is mainly due to decreased selling and administrative expenses associated with Tsining and Puhua. The decrease in percentage of SG&A to total revenue is primarily due to the increase of revenue, and cost control in SG&A expenses.
Stock-based compensation
The 1,227,755 stock options granted on June 13, 2011 have an estimated fair value of $1,316,911 for an average value of $1.04 to $1.10 per stock option using the CRR option pricing model with the following key assumptions:
| | June 13, 2011 | |
Expected life | | | 5.5 – 6.5 years | |
Expected volatility | | | 95 | % |
Risk-free interest rate | | | 1.74% - 2.10 | % |
Dividend yield | | | 0 | % |
The expected life of options represents the period of time the granted options are expected to be outstanding. As the Company had not previously granted options, no historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life was estimated as the average of the contractual term and the vesting period. The Company has not paid dividends in the past nor does it expect to pay dividends in the foreseeable future.
The Company does not believe any of the options will be forfeited because most of the stock options are granted to long-term employees and officers. In addition, since the performance condition will be set at a reasonably achievable level, the Company believes 100% of the performance conditions can be met.
Compensation expense for stock options is recognized over the vesting period. During the three months ended March 31, 2012, compensation expense of $122,606 (March 31, 2011 - $Nil) was recognized in the interim condensed consolidated statements of income.
Other expenses
Other expenses mainly consist of late delivery settlements and maintenance costs. Other expenses in the three months ended March 31, 2012 were $6,432 compared with $41,577 in the same period of 2011.
Operating profit and operating profit margin
Operating profit is defined as gross profit minus operating expenses but before change in fair value of derivatives and income taxes. Operating profit in the three months ended March 31, 2012 was $3,413,555 compared with $1,314,121 in the same period of 2011. The operating profit margin increased to 14.5% for the first quarter of 2012 compared with 5.8% for the same period of 2011. Increase in revenues and gross profit margin, as well as the reduction of SG&A were the primary contributing factors to the improvements in operating profit and operating profit margin.
Financing expense
Financing expense in the three months ended March 31, 2012 decreased 61.4% to $230,272 from $597,148 in the same period of 2011. The decrease was mainly due to the capitalization of loan interest.
Change in fair value of embedded derivative
The embedded derivative is related to the Company’s $20 million convertible debt offering completed in January 2008. The change in the fair value of embedded derivatives is a periodic adjustment to the estimated cost to the Company, which was provided by the Cox-Ross-Rubinstein Binomial Lattice valuation model (CRR model).
The CRR model depends on the following assumptions: the Company’s common stock price underlying the warrants; strike price; conversion price; expected life; expected volatility; risk free interest rate; and dividend rate. During the first quarter of 2012, our common stock price experienced fluctuations with the price increasing from $1.03 on January 3, 2012 to $1.36 on March 30, 2012. The change in stock price and expected volatility caused an increase in fair value for warrants and the change of fair value was booked as a non-cash expense.
The Company recorded a loss of $71,103 in the change in fair value of embedded derivatives in the three months ended March 31, 2012 compared with a loss of $1,052,754 in the same period of 2011.
Change in fair value of warrants
In 2006, 2007 and 2008, the Company issued warrants in conjunction with the issuance of common shares or convertible debt. The warrants permit the investors to buy additional common shares at the prices specified in the warrant agreements.
An investor typically only exercises a warrant to buy common shares when the stock price is higher than the warrant exercise price. The investor pays the exercise price and the Company covers the difference between the warrant exercise price and the share price at the time of conversion.
In addition, the Company was required to estimate the fair value of its remaining warrants outstanding and adjust the value as appropriate, and it chose to use the Cox-Ross-Rubinstein Binomial Lattice valuation model to estimate their fair value.
The change in fair value of warrants was a loss of $368 in the three months ended March 31, 2012, compared to a gain of $850,651 during the same period of 2011, which consisted of the periodic adjustment to the estimated cost to the Company to provide the common shares, assuming that all of the warrants will be exercised sometime in the future. The basis for estimating the cost to provide the common shares was provided by the valuation model. The CRR model depends on the following assumptions: the Company’s common stock price underlying the warrants; strike price; expected life; expected volatility; risk free interest rate; and dividend rate. During the first quarter of 2012, our common stock price experienced large fluctuations with the price increasing from $1.03 on January 3, 2012 to $1.36 on March 30, 2012. The increase in stock price and expected volatility caused an increase in fair value for warrants and the change of fair value was booked as a non-cash expense.
Provision for income taxes
The $969,485 provision for current income taxes for the three months ended March 31, 2012 increased from $786,489 for the three months ended March 31, 2011 due to increase in net income from business operations.
Net income
Net income for the three months ended March 31, 2012 decreased 9.5% to $2,235,412 compared to $2,469,083 in the same period of 2011. The decrease in net income compared with the same period in 2011 was mainly due to the absence of non-cash gain associated with changes in fair value of derivatives.
Basic and diluted earnings per share
Basic earnings per share was $0.06 in the three months ended March 31, 2012, compared to $0.07 in the same period of 2011. Diluted earnings per share was $0.06 in the three months ended March 31, 2012, compared to $0.05 in the same period of 2011. The number of shares outstanding did not change significantly from year to year.
Common shares used to calculate basic and diluted EPS
The weighted average shares outstanding used to calculate basic earnings per share was 34,730,261 shares in the three months ended March 31, 2012 and 34,730,261 shares in the same period of 2011. The weighted average shares outstanding used to calculate the diluted earnings per share was 34,730,261 shares in the three months ended March 31, 2012 and 35,502,277 shares in the same period of 2011.
Foreign exchange
The Company operates in China and the functional currency is Chinese Renminbi (RMB) but the reporting currency is the U.S. dollar, based on the exchange rate of the two currencies. The fluctuation of exchange rates during the three months ended March 31, 2012 and the same period of 2011, when translating the operating results and financial positions at different exchange rates created the accrued gain (loss) on foreign exchange. The loss on foreign exchange in the three months ended March 31, 2012 was $106,413, compared with a gain of $1,362,871 in the same period of 2011.
Cash flow discussion
There is a net cash outflow of $13,541,081 during the three months ended March 31, 2012 compared to $34,056,667 cash inflow during the same period of 2011.
Operating activity cash outflow was $40,756,333 in the three months ended March 31, 2012, compared to operating cash inflow of $12,294,337 in the same period of 2011. The cash outflows were primarily from the land acquisition and real estate development.
There was a cash inflow of $17,315,245 for investing activities for the three months ended March 31, 2012, compared to investing cash outflow of $5,232,654 for the same period of 2011. The cash inflows during the three months ended March 31, 2012 were primarily from the change in restricted cash.
There was a cash inflow of $9,900,007 for financing activities for the three months ended March 31, 2012 compared with $26,994,984 of financing cash inflow in the same period of 2011 due to the additional bank loans drawn.
Debt leverage
Total debt consists of payables for acquisition of businesses, loans from employees, loans payable, convertible debt and mandatorily redeemable non-controlling interests in Subsidiaries.
Total debt outstanding as of March 31, 2012 was $204.3 million compared with $192.4 million on December 31, 2011. Net debt outstanding (total debt less cash) as of March 31, 2012 was $107.7 million compared with $64.0 million on December 31, 2011. The Company’s net debt as a percentage of total capital (net debt plus shareholders’ equity) was 45.0% on March 31, 2012 and 33.0 % on December 31, 2011, which mainly resulted from additional bank and employee loans.
Liquidity and capital resources
Our principal liquidity demands are based on the development of new properties, property acquisitions, and general corporate purposes. As of March 31, 2012, we had $8,438,125 of cash and cash equivalents, compared to $22,014,953 as of December 31, 2011, a decrease of $13,576,828. Along with progress in projects, we can use the internally generated cash flow to fund daily operations.
The Company leases part of its office and hotel space under various operating lease agreements that expire in 2019.
Additionally, the Company had various commitments related to land use right acquisition with unpaid balances of approximately $19.7 million. The balances are not due until the vendor removes the existing building from the land and changes the zoning status of the land use right certificate. Based on the current condition, the Company estimates that the balances will be paid in one year.
All future payments required under the various agreements are summarized below:
| | Payment due by period | |
Commitments and Contingencies | | Total | | | Less than 1 year | | | 1-2 years | | | 2-3 years | | | 3-4 years | | | 4-5 years | | | After 5 years | |
Operating leases | | $ | 659,308 | | | $ | 116,237 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 200,079 | |
Land use rights | | | 19,746,539 | | | | 19,746,539 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 20,405,847 | | | $ | 19,862,776 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 85,748 | | | $ | 200,079 | |
Financial obligations
As of March 31, 2012, we had total bank loans of $158,286,249 with a weighted average interest rate of 6.4%, compared with bank loans of $148,402,690 as of December 31, 2011.
Our mortgage debt (total bank loans) is secured by the assets of the Company.
Loans payable
Bank loans represent amounts due to various banks. These loans generally can be renewed with the banks when they expire. Bank loans as of March 31, 2012 and December 31, 2011 consisted of the following:
| | March 31, 2012 | | | December 31, 2011 | |
Xi’an Rural Credit Union Zao Yuan Rd. Branch | | | | | | | | |
Originally due July 2, 2011, renewed on June 27, 2011 and extended to July 1, 2012, annual interest is at 8.856%, secured by the Company’s Jun Jing Yuan I building No. 12, Han Yuan and guaranteed by the Company’s President, President`s spouse, CEO, Tsining’s general manager and his spouse | | $ | 2,540,692 | | | $ | 2,542,143 | |
| | | | | | | | |
Xinhua Trust Investments Ltd. | | | | | | | | |
Due February 10, 2012, annual interest is at 10%, secured by the 24G project | | | - | | | | 23,832,600 | |
| | | | | | | | |
Bank of Xian | | | | | | | | |
Annual interest is fixed at 130% of People’s Bank of China prime rate at the time of borrowing (or 8.528%), secured by the Company's JunJing building No.12. $714,569 is repaid in April 2012. $793,966 is payable before June 30, 2012 and $635,173 is payable on August 29, 2012 | | | 2,143,708 | | | | 2,224,376 | |
| | | | | | | | |
Bank of Beijing, Xi’an Branch | | | | | | | | |
Due December 10, 2012, annual interest is at the prime rate of People’s Bank of China (or 6.56%). The Company has restricted cash of $15,905,570 deposited with Bank of Beijing as collateral. The Company and Bank of Beijing are negotiating the potential extension of the balance | | | 15,879,317 4 | | | | 15,888,400 | |
Due November 30, 2014, annual interest is at the 130% of People’s Bank of China prime rate (or 8.53%). The loan is secured by Puhua project’s land use right and construction in progress. The repayment schedule is as follows: May 30, 2012 – $ 1,587,932 (RMB 10 million); November 30, 2012 – $1,587,932 (RMB 10 million); May 30, 2013 - $9,527,590 (RMB 60 million); November 30, 2013 - $9,527,590 (RMB 60 million); May 30, 2014 - $4,763,796 (RMB 30 million); November 30, 2014 - $4,763,796 (RMB 30 million) | | | 31,758,634 | | | | 11,121,880 | |
| | | | | | | | |
Tianjin Cube Equity Investment Fund Partnership | | | | | | | | |
Originally due on January 27, 2012 and extended to July 27, 2012, annual interest is 9.6 %, secured by JunJing II Commercial Units, JunJing I Residential units and part of Company’s Park Plaza project | | | 31,758,634 | | | | 31,776,800 | |
| | | | | | | | |
JP Morgan | | | | | | | | |
Originally due on March 13, 2011 and extended to June 14, 2012, annual interest is at 1.97 %, secured by $35,569,671 of restricted cash. | | | 30,016,491 | | | | 30,016,491 | |
| | | | | | | | |
Bank of China, Macau Branch | | | | | | | | |
Due December 16, 2013, annual interest is based on 3-month London Interbank Offered Rate (“LIBOR”) rate plus 3.6%. The 3-month LIBOR rate at March 31, 2012 was 0.58%, secured by $31,758,634 of restricted cash. | | | 31,000,000 | | | | 31,000,000 | |
| | | | | | | | |
Construction Bank of China | | | | | | | | |
Three years loan and due on March 6, 2015. Annual interest is 101% of People’s Bank of China prime rate (or 7.65%). The loan is secured by JunJing III’s construction in progress and land use rights. | | | 9,527,590 | | | | - | |
| | | | | | | | |
Third party vendor | | | | | | | | |
Due August 8, 2012, non-interest bearing | | | 2,073,251 | | | | - | |
| | | | | | | | |
Xi’an Xinxing Days Hotel & Suites Co., Ltd. (“Days Hotel”) Due August 8, 2012, annual interest is at 20% | | | 1,587,932 | | | | - | |
Total | | $ | 158,286,249 | | | $ | 148,402,690 | |
Except the loans from JP Morgan and Bank of China, Macau Branch, which were drawn to repay mandatorily redeemable non-controlling interests in Subsidiaries, all other loans were drawn to directly finance construction projects.
The majority of interest incurred was capitalized and allocated to various real estate construction projects.
The bank loans payable balances were secured by certain of the Company’s real estate held for development or sale with a carrying value of $71,694,747 at March 31, 2012 (December 31, 2011 - $55,777,318), certain buildings and income producing properties and improvements with a carrying value of $17,956,543 at March 31, 2012 (December 31, 2011 - $20,022,475) and certain land use rights with a carrying value of $3,369,886 (December 31, 2011 - $3,371,814). The weighted average interest rate on loans payable as at March 31, 2012 was 6.4% (December 31, 2011 – 6.7%).
The bank loans payable were also secured by certain real estate units sold to customers. The Company obtained consent from these customers that the Company does not have to remove the mortgage on such apartments or to register the transfer of the ownership of such apartments by the Company to the customers for the time being.
Liquidity expectation
The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements for the year 2012.
We intend to meet our liquidity requirements, including capital expenditures related to the purchase of land for the development of our future projects, through cash flow provided by operations and additional funds raised by future financings. Upon acquiring land for future developments, we intend to raise funds to develop our projects by obtaining mortgage financing mainly from local banking institutions with which we have done business in the past. We believe that our relationships with these banks are in good standing and that our real estate will secure the loans needed. We believe that adequate cash flow will be available to fund our operations.
The majority of the Company’s revenues and expenses were denominated primarily in Renminbi (RMB), the currency of the People’s Republic of China. There is no assurance that exchange rates between the RMB and the U.S. dollar will remain stable. The Company does not engage in currency hedging. Inflation has not had a material impact on the Company’s business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to the following market risks, including but not limited to:
General Real Estate Risk
There is a risk that the Company’s property values could go down due to general economic conditions, a weak market for real estate generally, or changing supply and demand. The Company’s property held for sale value, approximately $169.7 million at the end of March 31, 2012, may change due to market fluctuations. Currently, it is valued at our cost, which is significantly below the market value.
Risk Relating to Property Sales
The Company may not be able to sell a property at a particular time for its full value, particularly in a poor market.
Foreign Currency Exchange Rate Risk
The Company conducts all of its business in the People’s Republic of China. All revenue and profit are denominated in RMB. When the RMB depreciates, it may adversely affect the Company’s financial performance.
Item 4. Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures. |
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective.
| (b) | Changes in Internal Control over Financial Reporting. |
During the quarter ended March 31, 2012, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors.
We have no material changes to the risk factors previously disclosed in our Form 10-K, as amended, for the year ended December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mining Safety Disclosure
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
Exhibit | | |
Number | | Description of Exhibit |
31.1* | | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended |
31.2* | | Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended |
32.1* | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) |
32.2* | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) |
101.INS† | | XBRL Instance Document |
101.SCH† | | XBRL Taxonomy Extension Schema Document |
101.CAL† | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF† | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB† | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE† | | XBRL Taxonomy Extension Presentation Linkbase Document |
*Filed herewith.
†Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| China Housing & Land Development, Inc. |
| | |
May 15, 2012 | By: | /s/ Xiaohong Feng |
| | Xiaohong Feng |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
May 15, 2012 | By: | /s/ Cangsang Huang |
| | Cangsang Huang |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |