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, 2008
|_| 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 small business issuer as specified in its charter)
Nevada 20-1334845
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6 Youyi Dong Lu, Han Yuan 4 Lou
Xi'An, Shaanxi Province
China 710054
(Address of principal executive offices)
86-029-82582632
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 31, 2008 30,143,757
shares of common stock
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
CHINA HOUSING & LAND DEVELOPMENT, INC.
Index
Page
Number
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2008 (unaudited)
and December 31, 2007 2
Consolidated Statements of Income and Other Comprehensive
Income for the three and nine months ended March 31, 2008
and 2007 (unaudited) 3
Consolidated Statements of Cash Flows for nine months ended
March 31, 2008 and 2007 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis or Plan of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4T. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 23
SIGNATURES 23
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
China Housing & Land Development Inc. and Subsidiary
Consolidated Balance Sheets
As of March 31, 2008 and December 31, 2007
March 31, December 31,
2008 2007
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
Assets USD
Cash $ 14,933,102 $ 2,351,015
Cash - restricted 105,627 101,351
Accounts receivable, net of allowance for doubtful
accounts of $98,323 and $94,514, respectively 12,740,498 12,107,882
Other receivables, prepaid expenses and other assets 660,134 567,308
Notes receivable, net 3,828,787 947,918
Real estate
Finished projects 14,697,711 16,130,130
Construction in progress 28,625,865 24,856,801
------------ ------------
Total real estate held for development or sale 43,323,576 40,986,931
------------ ------------
Property and equipment, net 6,160,749 5,707,012
Assets held for sale 13,430,748 12,910,428
Advance to suppliers 2,459,543 2,071,549
Deposits on land use rights 32,062,120 29,694,103
Deferred financing cost 742,265 55,451
Intangible assets, net 50,148,499 48,205,697
------------ ------------
Total assets $180,595,648 $155,706,645
============ ============
Liabilities
Accounts payable $ 9,173,114 $ 9,311,995
Advances from customers 5,923,646 5,258,351
Accrued expenses 2,033,774 1,903,451
Payable to original shareholders 8,849,820 11,413,229
Income and other taxes payable 24,096,765 22,711,981
Other payables 4,282,280 3,881,137
Loans from employees 2,162,420 2,388,862
Loans payable 14,689,104 14,120,034
Deferred tax 16,549,005 15,907,880
Warrants liability 6,035,306 2,631,991
Fair value of embedded derivatives 4,211,886
Convertible debt 12,824,655
------------ ------------
Total liabilities 110,831,775 89,528,911
------------ ------------
Shareholders' equity
Common stock: $.001 par value, authorized 100,000,000 shares 30,144 30,142
issued and outstanding 30,143,757 and 30,141,887, respectively
Additional paid in capital 28,391,500 28,381,534
Statutory reserves 2,885,279 2,885,279
Retained earnings 30,412,841 30,365,156
Accumulated other comprehensive income 8,044,109 4,515,623
------------ ------------
Total shareholders' equity 69,763,873 66,177,734
------------ ------------
Total liabilities and shareholders' equity $180,595,648 $155,706,645
============ ============
2
China Housing & Land Development Inc. and subsidiary
Consolidated Statements of Income and other comprehensive income
As of March 31, 2008 and 2007
31/Mar 31/Mar
------------ ------------
2008(USD) 2007
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
Revenue
Sale of properties $ 4,523,945 $ 8,045,576
Other income 222,692 150,621
------------ ------------
Total revenue 4,746,637 8,196,197
------------ ------------
Costs and expenses
Cost of properties s and land 2,367,112 6,251,458
Selling, general and administrative expenses 1,148,601 498,079
Other expense 15,910 32,619
Interest expense 439,673 207,876
Accretion expense on convertible debt 171,683
Change in fair value of embedded derivatives 284,511
Change in fair value of warrants (9,489)
------------ ------------
Total costs and expense 4,418,001 6,990,032
------------ ------------
Income before provision for income taxes 328,636 1,206,165
Provision for income taxes 280,951 413,663
------------ ------------
Net income 47,685 792,502
Gain (loss) on foreign exchange 3,047,864 253,357
------------ ------------
Comprehensive income $ 3,095,549 $ 1,045,859
============ ============
Weighted average shares outstanding
Basic 30,142,565 $ 20,669,223
============ ============
Diluted 30,230,664 $ 20,669,223
============ ============
Earnings per share
Basic $ 0.00 $ 0.04
============ ============
Diluted $ (0.01) $ 0.04
============ ============
3
China Housing & Land Development Inc. and subsidiary
Consolidated Statement of Cash Flow
As of March 31, 2008 and 2007
31/Mar 31/Mar
----------- -----------
2008(USD) 2007
----------- -----------
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
Net income 47,685 792,502
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Allowance for bad debt -- 512,654
Depreciation 93,821 169,861
Amortization on deferred financing costs 28,458 --
Loss on disposal of fixed assets and inventory 86 472
Issuance of stock for investor relations fees
Amortization of stock issued for investor
relations fees -- 32,850
Gain on sales of investment
Change in fair value of warrants (9,489) --
Change in fair value of embedded derivatives 284,511 --
Accretion expense on convertible debt 171,683 --
Non-cash proceeds from sales (2,851,908) --
(Increase) decrease in assets:
Accounts receivable (141,670) 401,374
Real estate (670,715) 5,097,643
Advance to suppliers (298,253) (4,691,540)
Deposit on Land use rights (1,147,224) --
Other receivable (12,024) (388,692)
Increase (decrease) in liabilities:
Accounts payable (503,618) 170,026
Advances from customers 444,062 (913,140)
Accrued expense 337,253 (274,003)
Other payable 239,699 (734,292)
Income and other taxes payable 459,799 332,894
----------- -----------
Net cash provided by (used in)
operating activities (3,527,844) 508,609
=========== ===========
Cash flows from investing activities:
Change in restricted cash (188) (102,718)
Purchase of buildings, equipment and automobiles (313,056) (1,891)
Proceeds from sales of fixed assets 14 --
Notes receivable 67,613 (108,838)
Payments to acquire subsidiary, net of cash received
----------- -----------
Net cash provided by (used in)
investing activities (245,617) (213,447)
=========== ===========
Cash flows from financing activities:
Net proceeds from issuance of convertible debt 19,230,370 --
Loan proceeds -- 645,050
Payments on loans -- (1,457,813)
Repayments on employee loans (470,781) --
Proceeds from employee loans 154,688 391,290
Loans from original shareholders (2,961,307) --
Proceeds from issuance of common stock and warrants 8,415 --
----------- -----------
Net cash provided by financing activities 15,961,385 (421,473)
=========== ===========
Increase in cash 12,187,924 (126,311)
Effects on foreign currency exchange 394,163 3,865
Cash, beginning of period 2,351,015 379,633
Cash, end of period 14,933,102 257,187
4
China Housing & Land Development Inc. and subsidiary
Consolidated Statements of Shareholders' equity
For the three months ended March 31, 2008, 2007, 2006 and 2005
Common Stock Additional
--------------------------- paid in Statutory
Shares Par Value capital reserves
------------ ------------ ------------ ------------
Balance, December 31, 2004 20,000,000 $ 20,000 $ 5,442,798 $ 523,538
Net Income -- -- -- --
Adjustment to statutory reserve -- -- -- 710,640
Foreign currency translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2005 20,000,000 $ 20,000 $ 5,442,798 $ 1,234,178
------------ ------------ ------------ ------------
Common stock issued for cash at $3.25 619,223 619 1,749,802 --
Net Income -- -- -- --
Adjustment to statutory reserve -- -- -- 915,960
Capital contribution receivable -- -- -- --
Foreign currency translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2006 20,619,223 $ 20,619 $ 7,192,600 $ 2,150,138
------------ ------------ ------------ ------------
Common stock issued for consulting service 60,000 60 131,340 --
Common Stock and warrants issued at $2.70 9,387,985 9,388 20,532,623 --
Common Stock issued from warrants conversion 74,679 75 524,971 --
Net Income -- -- -- --
Adjustment to statutory reserve -- -- -- 735,141
Capital contribution receivable -- -- -- --
Foreign currency translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2007 30,141,887 $ 30,142 $ 28,381,534 $ 2,885,279
------------ ------------ ------------ ------------
Common Stock issued from warrants conversion 1,870 2 9,966 --
Net Income -- -- -- --
Foreign currency translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balance, March 31, 2008 30,143,757 30,144 28,391,500 2,885,279
------------ ------------ ------------ ------------
(Continued)
Accumulated
Capital other
Retained contribution comprehensive
earnings receivable income Totals
------------ ------------ ------------ ------------
Balance, December 31, 2004 $ 2,252,373 $ -- $ -- $ 8,238,709
Net Income 4,737,598 -- -- 4,737,598
Adjustment to statutory reserve (710,640) -- -- --
Foreign currency translation adjustment -- -- 242,783 242,783
------------ ------------ ------------ ------------
Balance, December 31, 2005 $ 6,279,331 $ -- $ 242,783 $ 13,219,090
------------ ------------ ------------ ------------
Common stock issued for cash at $3.25 -- -- -- 1,750,421
Net Income 9,050,810 -- -- 9,050,810
Adjustment to statutory reserve (915,960) -- -- --
Capital contribution receivable -- (5,462,798) -- (5,462,798)
Foreign currency translation adjustment -- -- 655,435 655,435
------------ ------------ ------------ ------------
Balance, December 31, 2006 $ 14,414,181 $ (5,462,798) $ 898,218 $ 19,212,958
------------ ------------ ------------ ------------
Common stock issued for consulting service -- -- -- 131,400
Common Stock and warrants issued at $2.70 -- -- -- 20,542,011
Common Stock issued from warrants conversion -- -- -- 525,046
Net Income 16,686,116 -- -- 16,686,116
Adjustment to statutory reserve (735,141) -- -- --
Capital contribution receivable -- 5,462,798 -- 5,462,798
Foreign currency translation adjustment -- -- 4,098,027 4,098,027
------------ ------------ ------------ ------------
Balance, December 31, 2007 $ 30,365,156 $ -- $ 4,996,245 $ 66,658,356
------------ ------------ ------------ ------------
Common Stock issued from warrants conversion -- -- -- 9,968
Net Income 47,685 -- -- 47,685
Foreign currency translation adjustment -- -- 3,047,864 3,047,864
------------ ------------ ------------ ------------
Balance, March 31, 2008 30,412,841 -- 8,044,109 69,763,873
------------ ------------ ------------ ------------
5
________________________________________________________________________________
Note 1 -- Organization and Basis of Presentation
The interim consolidated financial statements are unaudited but, in the opinion
of management, reflect all adjustments necessary for a fair statement of the
Company's consolidated financial position, results of operations and cash flows
for the periods presented. 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 interim consolidated financial statements and
notes are presented as permitted by the requirements for Quarterly Reports on
Form 10-Q.
The consolidated financial statements do not include certain footnote
disclosures and financial information normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America and, therefore, should be read in
conjunction with the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2007 ("2007
Annual Report").
Note 2 -- Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
- -----------------------------------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, XTHDC, New Land and Hao Tai. All
inter-company accounts and transactions have been eliminated on consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reporting Currency and Foreign Currency Translation
- ---------------------------------------------------
As of December 31, 2007, the accounts of the Company are maintained in their
functional currency, the Chinese Yuan Renminbi (RMB). The reporting currency for
the consolidated financial statements is the United States Dollars (USD) which
is in accordance with Statement of Financial Accounts Standards ("SFAS") No. 52,
"Foreign Currency Translation," with the RMB as the functional currency.
According to SFAS No. 52, all assets and liabilities are translated at the
exchange rate on the balance sheet date, shareholders' equity is translated at
the historical rates and the statements of operations and cash flows are
translated at the weighted average exchange rate for the year. The resulting
translation adjustments are reported under other comprehensive income in
accordance with SFAS No. 130, "Reporting Comprehensive Income."
Revenue Recognition
- -------------------
Effective January 1, 2008, the Company changed its revenue recognition policy
for sales of development properties to the percentage completion method.
Previously, the full accrual method was used. The percentage completion method
will be based on estimate costs incurred. The change is preferable because it
has been made to more accurately reflect the business activity in the Company
and match revenues with the costs incurred in the pursuit of such revenue. SFAS
No. 154, "Accounting Changes and Error Corrections," requires that a change in
accounting principle be reflected through retrospective application of the new
accounting policy to all prior periods, unless it is impracticable to do so. The
company has determined that retrospective application to a period prior to
January 1, 2008 is not practical as the necessary information needed to restate
prior periods is not available. Therefore, the Company began to apply the
percentage completion method beginning January 1, 2008.
Real estate sales are reported in accordance with the provisions of Statement of
Financial Accounting Standard No. 66, "Accounting for Sales of Real Estate".
Profit from the sales of development properties, less 5% business tax, is
recognized by the percentage of completion method on the sale of individual
units when all the following criteria are met:
a. Construction is beyond a preliminary stage.
b. The buyer is committed to the extent of being unable to require a refund
except for non-delivery of the unit or interest.
c. Sufficient units have already been sold to assure that the entire property
will not revert to rental property.
d. Sales prices are collectible. e. Aggregate sales proceeds and costs can be
reasonably estimated.
If any of the above criteria is not met, proceeds shall be accounted for as
deposits until the criteria are met.
6
________________________________________________________________________________
Under the percentage of completion method, revenues from condominium units sold
and related costs are recognized over the course of the construction period,
based on the completion progress of a project. In relation to any project,
revenue is determined by calculating the ratio of incurred costs, including land
use rights costs and construction costs, to total estimated costs and applying
that ratio to the contracted sales amounts. Cost of sales is recognized by
determining the ratio of contracted sales during the period to total estimated
sales value, and applying that ratio to the incurred costs. Current period
amounts are calculated based on the difference between the life-to-date project
totals and the previously recognized amounts.
Our significant judgments and estimates related to applying the percentage of
completion method include our estimates of the time necessary to complete the
project, the total expected revenue and the total expected costs. Fluctuations
in sales prices and variances in costs from budgets could change the percentages
of completion and affect the amount of revenue and costs recognized. Changes in
total estimated project costs or losses, if any, are recognized in the period in
which they are determined. Revenue recognized to date in excess of amounts
received from customers is classified as as unbilled revenue. Amounts received
from customers in excess of revenue recognized to date are classified as current
liabilities under customer deposits.
For Company financed sales, the Company recognizes sales based on the full
accrual method provided that the buyer's initial and continuing investment is
adequate according to SFAS No. 66. The initial investment is the buyer's
down-payment less the loan amount provided by the Company. Interests on these
loans are amortized over the terms of the loans.
For land sales, the Company recognizes the revenue when title of the land
development right is transferred and collectability is assured.
For the reimbursement on infrastructure costs, the Company recognizes the
income, which is at the fair market value agreed between the Company and the PRC
government, when they enter into a binding agreement with the government
agreeing on the reimbursement.
Real Estate Capitalization and Cost Allocation
- ----------------------------------------------
Real estate held for development or sale consists of residential and commercial
units under construction and units completed. Construction in progress includes
costs associated in development and construction of the Baqiao project.
Real estate held for development or sale are stated at cost or estimated net
realizable value, whichever is lower. Costs include land and land improvements,
direct construction costs and development costs, including predevelopment costs,
interest on indebtedness, real estate taxes, insurance, construction overhead
and indirect project costs. Selling and advertising costs are expensed as
incurred. Total estimated costs of multi-unit developments are allocated to
individual units based upon specific identification methods.
Land and land improvement costs include cost of land use rights, land
improvements, interest on indebtedness and real estate taxes. Appropriate costs
are allocated to projects on the basis of acreage, dwelling units and relative
sales value.
Land and land improvements applicable to condominiums, town homes and
single-family homes, are transferred to construction in progress when
construction commences.
If the real estate is determined to be impaired, it will be written down to its
fair market value. Real estate held for development or sale costs include the
cost of land use rights, land development and home construction costs,
engineering costs, insurance costs, wages, real estate taxes, and interest
related to development and construction. All costs are accumulated by specific
projects and allocated to residential and commercial units within the respective
projects. The Company leases the land for the residential unit sites under land
use rights with various terms from the government of the PRC. The Company
evaluates the carrying value for impairment based on the undiscounted future
cash flows of the assets. Write-downs of inventory deemed impaired would be
recorded as adjustments to the cost basis. No impairment loss was incurred or
recorded for the period ended March 31, 2008 (March 31, 2007-- $Nil).
No depreciation is provided for construction in progress.
Capitalization of Interest
- --------------------------
In accordance with SFAS 34, interest incurred during construction is capitalized
to construction in progress. All other interest is expensed as incurred.
For the three months ended March 31, 2008, interest incurred by the Company was
$803,031 (March 31, 2007 --$531,103) and capitalized interest for the same
period was $370,975 (March 31, 2007 --$323,277).
Concentration of Risks
- ----------------------
The Company sells residential and commercial units to residents and small
business owners and the Company sells land to the local real estate developers.
The Company had one major customer that accounted for approximately 99% of the
Company's sales for the three months ended March 31, 2008 (2007 - 47%) The
customer accounted for 76% of notes receivable as at March 31, 2008(March 31,
2007 - 46%).
7
________________________________________________________________________________
The Company is dependent on third-party sub-contractors, manufacturers, and
distributors for all of construction services and supply of construction
materials. Construction services or products purchased from the Company's five
largest subcontractors/suppliers accounted for 56% of total services and
supplies for the three months ended March 31, 2008 (2007 - 16%).
Accounts payables to these subcontractors/suppliers amounted to $295,644 at
March 31, 2008 (2007 -- $1,260,133).
The Company's operations are carried out in the People's Republic of China.
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environments
in the People's Republic of China and by the general state of the People's
Republic of China's economy. The Company's business may be influenced by changes
in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Cash and Concentration of Risk
- ------------------------------
Cash includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at March 31,
2008 amounted to $14,546,304 (December 31, 2007 --$2,296,766) of which no
deposits are covered by insurance. The Company has not experienced any losses in
such accounts.
Restricted Cash
- ---------------
The bank grants mortgage loans to home purchasers and will credit these amounts
to the Company's bank account once title passes. If the houses are not completed
and the new home owners have no ownership documents to secure the loan, the bank
will deduct 10% of the home owner's loan from the Company's bank account and
transfer that amount to a designated bank account classified on the balance
sheet as restricted cash. Interest earned on the restricted cash is credited to
the Company's normal bank account. The bank will release the restricted cash
after home purchasers have obtained the ownership documents to secure the
mortgage loan. Total restricted cash amounted to $105,627 as of March 31, 2008
(December 31, 2007 --$101,351).
Accounts Receivable
- -------------------
Accounts receivable consists of balances due from customers for the sale of
residential and commercial units in the PRC. The Company provides an allowance
for doubtful accounts equal to the estimated uncollectible amounts. The
Company's estimated uncollectible amounts are based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company's estimate of the allowance for doubtful
accounts will change. Accounts receivable are presented net of an allowance for
doubtful accounts of $98,323 at March 31, 2008 (December 31, 2007 -- $94,514).
Other Receivables
- -----------------
Other receivables consist of various cash advances to unrelated companies and
individuals with which management of the Company has business relationships.
These amounts are not related to operations of the Company, are unsecured,
non-interest bearing and generally short term in nature. The balance of other
receivables was $660,134 (December 31, 2007 -- $567,308) as March 31, 2008.
Other receivables are reviewed annually as to whether their carrying value has
become impaired. As of March 31, 2008, the Company has established an allowance
for doubtful accounts of $198,044 (December 31, 2007 - $190,372).
Notes Receivable
- ----------------
The Company finances sales to certain new homeowners. Financing agreements are
signed and the loans are due in 1 to 3 years. The loans are non-interest
bearing, therefore the Company has discounted the carrying amount of notes
receivable at the market mortgage rate. Notes receivable are presented net of
allowance for doubtful accounts.
2008 2007
----------- -----------
Notes receivable $ 4,045,095 $ 1,036,775
Less: unamortized interest (216,308) (88,857)
Less: allowance for doubtful accounts _ _
----------- -----------
Notes receivable, net $ 3,828,787 $ 947,918
=========== ===========
8
________________________________________________________________________________
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Depreciation
expense for the quarters ended March 31, 2008 and 2007 amounted to $93,821 and
$169,861. Estimated useful lives of the assets are as follows:
Estimated
Useful Life
------------
Head office buildings and improvements 30 years
Vehicles 6 years
Electronic equipment 5 years
Office furniture 5 years
Computer software 3 years
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Major additions and betterment to property and equipment are
capitalized and depreciated over the remaining useful life of the assets.
Asset Held for Sale
- -------------------
The Company intends to sell one of its fixed assets which consist of 14,478
square meters of retail units with net book value of $13,430,748 as of March 31,
2008 (December 31, 2007 - $12,910,428).
Advances to Suppliers
- ---------------------
Advances to suppliers consist of amounts paid in advance to contractors and
vendors for services and materials. Advances amounted to $2,459,543 as of March
31, 2008 (December 31, 2007 - $2,071,549).
Deposits on Land Use Rights
- ---------------------------
Deposits on land use rights consist of deposits held by the government to
purchase land use rights in Baqiao Park. Deposits amounted to $32,062,120 as of
March 31, 2008 (December 31, 2007 - $29,694,103).
Deferred financing cost
- -----------------------
Debt issuance costs are capitalized as deferred financing cost and amortized on
a straight line basis over the term of the debt. The amortization expense for
three months ended March 31, 2008 was $28,458 (2007 - $Nil) and was included in
the general administrative expense.
Intangible Asset
- ----------------
Intangible asset relates to the development right for the 487 acres of land in
Baqiao Park. The intangible asset is considered a definite lived intangible
asset. In accordance with SFAS No. 142, the intangible asset is subject to
amortization over its useful life. The method of amortization selected reflects
the pattern in which the economic benefit of the intangible asset is realized.
The amortization is based on the acreage of land sold or developed and
weighted-average expected profit margins. This method is intended to match the
pattern of amortization with the income-generating capacity of the asset.
As of March 31, 2008, the amount recorded for its intangible asset was
$50,148,499. The Company evaluates its intangible asset for impairment issues
and whenever events or changes in circumstances indicate that the carrying value
of its intangible may not be recoverable from its estimated future cash flows it
records a write-down for this impairment. For the quarters ended March 31, 2008
and 2007, the Company recorded $0 of amortization on the intangible asset.
Long-lived Assets
- -----------------
The Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal. Based on its review, the Company believes
there were no impairments of its long-lived assets as of March 31, 2008 and
2007.
9
________________________________________________________________________________
Fair Value of Financial Instruments
- -----------------------------------
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements," (as impacted by FSP No. 157-1 and 157-2), which provides a
framework for measuring fair value under GAAP. As defined in SFAS No. 157, fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price). The Company utilizes market data or assumptions
that the Company believes market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs
to the valuation technique. These inputs can be readily observable, market
corroborated or generally unobservable.
The Company primarily applies the market approach for recurring fair value
measurements and endeavors to utilize the best available information.
Accordingly, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs. The Company is
able to classify fair value balances based on the observability of those inputs.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used
to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The three levels of the fair value hierarchy defined by SFAS No.
157 are as follows:
Level 1 Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. Active markets are those in
which transactions for the asset or liability occur in sufficient
frequency and volume to provide pricing information on an ongoing
basis. Level 1 primarily consists of financial instruments such as
exchange-traded derivatives, listed equities and U.S. government
treasury securities.
Level 2 Pricing inputs are other than quoted prices in active markets included
in Level 1, which are either directly or indirectly observable as of
the reporting date. Level 2 includes those financial instruments that
are valued using models or other valuation methodologies. These models
are primarily industry-standard models that consider various
assumptions, including quoted forward prices for commodities, time
value, volatility factors, and current market and contractual prices
for the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in the
marketplace throughout the full term of the instrument, can be derived
from observable data or are supported by observable levels at which
transactions are executed in the marketplace. Instruments in this
category include non-exchange-traded derivatives such as over the
counter forwards, options and repurchase agreements.
Level 3 Pricing inputs include significant inputs that are generally less
observable from objective sources. These inputs may be used with
internally developed methodologies that result in management's best
estimate of fair value from the perspective of a market participant.
Level 3 instruments include those that may be more structured or
otherwise tailored to customers' needs. At each balance sheet date,
the Company performs an analysis of all instruments subject to SFAS
No. 157 and includes in Level 3 all of those whose fair value is based
on significant unobservable inputs.
Assets and liabilities measured at fair value on a recurring basis include the
following as of March 31, 2008:
Fair Value Measurements Using Assets/Liabilities
Level 1 Level 2 Level 3 At Fair Value
Derivative liabilities -- $10,247,192 -- $ 10,247,192
Accounts Payable
- ----------------
Accounts payable consists of balances due to subcontractors and suppliers for
the purchase of construction services and the Baqiao government for land use
right. Accounts payable amounted to $9,173,114 at March 31, 2008 (December 31,
2007 --$9,311,995).
Advances from Customers
- -----------------------
Advances from customers represent prepayments by customers for home purchases.
The Company records such prepayment as advances from customers when the payments
are received. Advances from customers amounted to $5,923,646 at March 31, 2008
(December 31, 2007 --$5,258,351).
Other Payables
- --------------
Other payables consist of various cash advances from unrelated companies and
individuals which management of the Company has business relationships. These
amounts are not related to operations of the Company, are unsecured,
non-interest bearing and short term in nature. Other payables amounted to
$4,282,280 as of March 31, 2008 (December 31, 2007 -- $3,881,137).
10
________________________________________________________________________________
Advertising Costs
- -----------------
Advertising and sales promotion costs are expensed as incurred. Advertising
expense totaled $281,898 and $62,891 for the three months ended March 31, 2008
and 2007, respectively.
Warranty Costs
- --------------
Generally, the Company provides all of its customers with a limited (half a year
to 5 years) warranty period for defective workmanship. The Company accrues the
estimated warranty costs into the cost of its homes as a liability after each
project is closed based on the Company's historical experience, which normally
is less than 0.2% of total costs of the project. Any excess amounts are expensed
in the period when they occur. Many of the items relating to workmanship are
completed by the existing labor force utilized to construct other new houses and
are therefore already factored into the labor and overhead costs of another
project. Any significant material defects are generally under warranty with the
Company's suppliers. Currently, the Company retains 5% of the total construction
contract from the construction contractors for a period of one year after the
completion of the construction. Such retention amounts will be used to pay for
any repair expense incurred due to defects in the construction. The Company has
not historically incurred any significant litigation requiring additional
specific reserves for its product offerings. As of March 31, 2008 and December
31, 2007, the Company accrued $0 as warranty costs.
Income Taxes
- ------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. At March 31, 2008 the significant book to tax
difference was related to the intangible asset which has no tax value. There was
no significant book to tax differences for 2007.
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109",
("FIN 48"), on January 1, 2007. The Company did not have any material
unrecognized tax benefits and there was no effect on its financial condition or
results of operations as a result of implementing FIN 48.
The Company files income tax returns in the PRC jurisdictions. The Company does
not believe there will be any material changes in its unrecognized tax positions
over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of general and administrative expense.
As of the date of adoption of FIN 48, the Company did not have any accrued
interest or penalties associated with any unrecognized tax rate differences from
the federal statutory rate primarily due to non-deductible expenses, temporary
differences and preferential tax treatment. No assessments on the income taxes
for the 2006, 2007 and 2008 have been received by the Company.
Local PRC Income Tax
- --------------------
The subsidiaries of the Company are governed by the Income Tax Laws of the PRC
concerning Chinese registered limited liability companies. Under the Income Tax
Laws of the PRC, Chinese enterprises are generally subject to an income tax at
an effective rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments, unless the enterprise is located
in a specially designated region for which more favorable effective tax rates
are applicable. New Land and Hao Tai are entitled to a refund of 6% of taxes
otherwise payable.
The provision for income taxes for the quarters ended March 31, 2008 and 2007
consisted of the following:
2008 2007
-------- --------
Provision for China income and local tax $280,951 $413,663
Recovery of deferred taxes -- --
-------- --------
Total provision for income taxes $280,591 $413,663
======== ========
11
________________________________________________________________________________
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate at March 31, 2008 and 2007:
2008 2007
---- ----
U.S. statutory rates 34% 34%
Foreign income not recognized in USA -34% -34%
U.S. loss not recognized 60% --
Statutory income taxes in China 25% 33%
Totals 85% 33%
Basic and Diluted Earnings Per Share
- ------------------------------------
Earning per share is calculated in accordance with the SFAS No. 128, "Earnings
per share". Basic net earnings per share is based upon the weighted average
number of common shares outstanding. Diluted net earnings per share is based on
the assumption that all dilutive convertible shares and stock options and
warrants were converted or exercised. Dilution is computed by applying the
treasury stock method.
Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if funds
obtained thereby were used to purchase common stock at the average market price
during the period.
Comprehensive Income
- --------------------
Comprehensive income consists of net income and foreign currency translation
gains and losses affecting shareholders' equity that, under GAAP, are excluded
from net income. Gain on foreign exchange translation totaled $3,047,864 and
$253,357 for March 31, 2008 and 2007, respectively.
Statement of Cash Flows
- -----------------------
In accordance with SFAS No. 95, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheet.
Accounting Principles Recently Adopted.
- ---------------------------------------
SFAS No. 159, "The Fair Value Option for Financial Assets and Financials
Liabilities -- Including an Amendment of FASB Statement No.115" issued by FASB
in February 2007, this standard permits measurement of certain financial assets
and financial liabilities at fair value. If the fair value option is elected,
the unrealized gains and losses are reported in earnings at each reporting date.
Generally, the fair value option may be elected on an instrument-by-instrument
basis, as long as it is applied to the instrument in its entirety. The fair
value option election is irrevocable, unless a new election date occurs. SFAS
No. 159 requires prospective application and certain additional presentation and
disclosure requirements. The adoption on January 1, 2008 of this statement did
not have a material impact on the Company's consolidated financial statements.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS No. 141(R)") which revised SFAS No. 141, "Business Combinations". SFAS
No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS No. 141(R) also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. This standard is effective for fiscal years
beginning after December 15, 2008. As the provisions of SFAS No. 141(R) are
applied prospectively, the impact of this standard cannot be determined until
the transactions occur.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements". SFAS No. 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. This standard is effective for fiscal years beginning
after December 15, 2008. The impact of this standard cannot be determined until
the transactions occur.
12
________________________________________________________________________________
Recent Accounting Pronouncements - continue
- -------------------------------------------
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and
expands the disclosure requirements of FASB Statement 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") to require
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit risk-related contingent
features in derivative agreements. The Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Early application is encouraged. The Company is currently evaluating
the impact of the adoption of SFAS No. 161.
Note 3 -- Supplemental Disclosure of Cash Flow Information
Income taxes paid amounted to $0 for the three months ended March 31, 2008 and
2007. Interest paid for the three months ended March 31, 2008 and 2007 amounted
to $377,145 and $531,103, respectively. Cash financing activities included the
issuance of $20 million of senior secured convertible notes to institutional
investors. In addition, 1,437,467 five-year warrants with a strike price of
$6.07 per common share, which are callable if certain stock price thresholds are
met. Approximately 215,620 warrants are also available as a management incentive
if certain milestones are met.
Non-cash operating activity included the reclassification of inventory -
construction in progress to fixed assets with book value of $285,143. In
addition, the interest income of $341,796 receivable on the reimbursement of
infrastructure from the Baqiao government will be applied against future
purchase of land use right and is recorded as deposit on land use right.
Note 4 -- Accounts Receivable
Accounts receivable consist of the following at March 31, 2008 and December 31,
2007:
March 31, December 31,
2008 2007
------------ ------------
Accounts receivable $ 12,838,821 $ 12,202,396
Allowance for doubtful accounts (98,323) (94,514)
------------ ------------
Accounts receivable, net $ 12,740,498 $ 12,107,882
------------ ------------
Note 5 - Other Receivables, Prepaid Expenses and Other Assets
Other receivables, prepaid expenses and other assets consist of the following at
March 31, 2008 and December 31, 2007:
March 31, December 31,
2008 2007
--------- ---------
Other receivables $ 796,997 $ 749,890
Allowance for bad debts (198,044) (190,372)
Prepaid expenses 36,529 7,790
Other asset 24,652
--------- ---------
Other receivables, prepaid expense
other assets $ 660,134 $ 567,308
========= =========
Note 6 -- Property and Equipment, Net
Property and equipment consist of the following at March 31, 2008 and December
31, 2007:
March 31, December 31,
2008 2007
------------ ------------
Head office buildings and improvements $ 1,059,541 $ 1,018,494
Income producing properties 19,499,361 18,469,840
Electronic equipment 204,128 195,244
Vehicles 91,276 87,740
Office furniture 124,801 119,960
Computer software 83,100 48,180
------------ ------------
Totals 21,062,207 19,939,470
Accumulated depreciation (1,470,710) (1,322,030)
Net book value of building held for sale (13,430,748) (12,910,428)
------------ ------------
Property and equipment, net $ 6,160,749 $ 5,707,012
============ ============
13
________________________________________________________________________________
Note 7 - Intangible asset
Intangible asset consists of the following at March 31, 2008 and December 31,
2007:
March 31, December 31,
2008 2007
----------- -----------
Intangible acquired $51,404,300 $49,412,847
Accumulated depreciation 1,255,801 1,207,150
----------- -----------
Intangible asset, net 50,148,499 48,205,697
=========== ===========
Note 8 - Loans Payable to New Land's Previous Shareholders
The Company has loans payable to previous shareholders of New Land that totaled
to $8,849,820 at March 31, 2008 (December 31, 2007 -- $11,413,229).
$6,074,161(December 31, 2007 - $8,717,684) of the total relates to the
acquisition of New Land and is due January 2009. The remaining balance pertains
to additional loans made by these shareholders and is due in June 2008. The
loans bear interest at 10% per annum.
Note 9 -- Loans from Employees
The Company has borrowed monies from certain employees to fund the Company's
construction projects. The loans bear interest ranging between 7% and 12% and
the principal matures in 2009. At March 31, 2008, loans from employees amounted
to $2,162,420 (December 31, 2007 -- $2,388,862).
Note 10 -- Loans Payable
Loans payable represent amounts due to various banks and are due on demand or
within one year. These loans generally can be renewed with the banks when they
expire. Loans payable at March 31, 2008 and December 31, 2007 consisted of the
following:
March 31, December 31,
2008 2007
------------ ------------
Commercial Bank Weilai Branch
originally due August 7, 2007 and renewed to
August 29, 2008, annual interest rate is at
percent, 11.34 percent secured by the Company's
Xin Xing Gangwan, Xin Xing Xing Gang Wan Xin
Xing Tower and Ming Yuan Yuan projects $ 5,419,280 $ 5,209,333
Commercial Bank Weilai Branch
originally due December 31, 2007 and renewed to
December 31, 2008, annual interest is at 9.79
percent, secured by the Company's 24G 5,704,507 5,483,508
projects
Xi'an Rural Credit union Zao Yuan Rd. Branch,
Due June 14, 2008, annual interest is at 9.527
percent, secured by the Company's Jun Jing Yuan I,
Yuan I, Han Yuan and Xin Xing Tower 3,565,317 3,427,193
projects
------------ ------------
Total $ 14,689,104 $ 14,120,034
============ ============
14
________________________________________________________________________________
All loans were borrowed for construction projects. All interest paid was
capitalized and allocated to various construction projects.
Note 11 - Convertible debt
On January 28, 2008, the Company issued Senior Secured Convertible Notes due in
2013 (the "Convertible debt") and warrants to subscribe for common shares for an
aggregated purchase price of US$20 million. The Convertible debt bears 5% per
annum (computed based on the actual days elapsed in a period of 360 days) of the
RMB notional principle amount, payable quarterly in arrears in U.S. Dollars on
the first business day of each calendar quarter and on the maturity date.
The holders have the right to convert up to 45% ($9 million) of the principle
amount of the Convertible debt into common shares at an initial conversion price
of $5.57, subject to upward adjustment. The Company, at its discretion, may
redeem the remaining $11 million of Convertible debt at 100% of the principle
amount, plus any accrued and unpaid interest. The warrants associated with the
Convertible debt grant the holders the right to acquire shares of common stock
at $6.07 per share, subject to customary anti-dilution adjustments. The warrants
may be exercised to purchase common stock at any time up to and including
February 28, 2013.
The convertible debt is secured by a first priority, perfected security interest
in certain shares of common stock of Lu PingJi, the president of the Company.
The convertible debt is subject to events of default customary for convertible
securities and for a secured financing.
Both warrant and embedded derivative associated with convertible debt meet the
definition of a derivative instrument according to FASB No. 133 and should be
recorded as a derivative instrument liabilities and periodically
marked-to-market. The fair value of warrants and embedded derivative on
inception were determined to be $3,419,653 and $3,927,375, respectively, using
the Cox-Rubinstein-Ross Binomial Lattice Model with the following assumption:
expected life 5 years, expected volatility - 75%, risk free interest rate -
2.46% and dividend rate - 0%. The fair value of the warrants and embedded
derivative at March 31, 2008 were determined to be of $3,663,409 and $4,211,886,
respectively. A change in fair value for warrants and embedded derivative of
$243,756 and $284,511, respectively were recorded in the Company's consolidated
statement of income.
After allocating the gross proceeds to the fair value of the warrants and the
embedded derivative instrument, the remaining proceeds were allocated as the
initial carrying value of the Convertible debt. It is accreted to its face
amount at maturity using the effective interest method. The effective interest
rate was determined to be 15.42%. The carrying value of Convertible debt at
March 31, 2008 was $12,824,655. Related interest expense and accretion expense
for three months ended March 31, 2008 were $177,777 and $171,683, respectively.
Note 12 -- Shareholders' Equity
Common stock
On January 15, 2007, the Company issued 60,000 shares of common stock to an
investor relations company in consideration for one year of consulting service
through December 31, 2007. The 60,000 shares of common stock have been recorded
at $2.19 per share or $131,400 based on the trading price of the shares at
January 12, 2007. This amount was included in prepaid expenses and is being
amortized over the service period.
Pursuant to securities purchase agreements with accredited investors dated May
7, 2007, the Company received $25,006,978 and issued 9,261,847 shares of common
stock and 2,778,554 warrants. Each warrant is exercisable for five years at
$4.50 per share. In connection with the offering, the Company paid a 7%
placement fee and $173,689 in legal fees. The fair value of the warrants at
December 31, 2007 was determined to be $0.76 per warrant using the CRR Binomial
Lattice Model with the following assumptions: expected life - 4.34 years;
expected volatility - 75%, risk fee interest rate - 3.35% and dividend rate -
0%.
15
________________________________________________________________________________
According to Section 4.8, Anti-Dilute of the Share Purchase Agreements dated
June 28, 2006, July 7, 2006 and August 21, 2006, the Company issued 126,138
shares of common stock and 27,364 warrants; additionally, the Company reduced
the exercise price of all related warrants from $3.60 to $3.31. The fair value
of the warrants at December 31, 2007 was determined to be $2.55 per warrant
using the CRR Binomial Lattice Model with the following assumptions: expected
life - 1.53 years; expected volatility - 75%, risk fee interest rate - 3.20% and
dividend rate - 0%.
Pursuant to EITF 00-19, "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 Black
Scholes valuation in certain circumstances. Therefore, under EITF 00-19 and SFAS
No. 133, the Company recorded the warrants as a liability at their fair value on
the date of grant and then marked them to $6,035,306 at March 31, 2008. The
change in fair value of warrants totaled $-9,489.
1,870 warrants having an exercise price of $4.50 were exercised in Feb 2008 on a
cash basis, resulting in the issuance of 1,870 shares of common stock with
proceeds of $8,415.
Warrants
Following is a summary of the warrant activity:
Warrants Warrants Weighted Average
Outstanding Exercisable Exercise Price
----------- ----------- ----------------
December 31, 2007 2,946,383 2,946,383 $ 4.41
Granted 1,437,467 1,437,467 $ 6.07
Exercised (1,870) (1,870) $ 4.50
---------- ---------- ----------------
March 31, 2008 4,381,980 4,381,980 $ 4.95
---------- ---------- ----------------
Following is a summary of the status of warrants outstanding at March 31, 2008:
Outstanding Warrants Exercisable Warrants
- --------------------------------------------------------------------------------
Exercise Number Average Remaining Average Exercise
Price Contractual Life Price Number
-------- --------- ----------------- ------- ---------
$3.31 213,131 1.28 years $3.31 213,131
$4.50 2,731,382 4.09 years $4.50 2,731,382
$6.07 1,437,467 4.83 years $6.07 1,437,467
Statutory Reserves
- ------------------
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises' income, after the payment of the PRC income taxes, shall
be allocated to the statutory surplus reserves. The proportion of allocation for
reserve funds is no less than 10 percent of the profit after tax until the
accumulated amount of allocation for statutory surplus reserve funds reaches 50
percent of the registered capital. Statutory reserves represent restricted
retained earnings.
Statutory surplus reserves are to be utilized to offset prior years' losses, or
to increase its share capital. When a limited liability company converts its
surplus reserves to capital in accordance with a shareholders' resolution, the
Company will either distribute new shares in proportion to the number of shares
held by each shareholder, or increase the par value of each share. Except for
the reduction of losses incurred, any other usage should not result in this
reserve balance falling below 25% of the registered capital. Registered capital
at March 31, 2008 is approximately $33.8 million (December 31, 2007 -- $23.6
million)
Pursuant to the board of directors' resolution, XTHDC transferred 10% of its net
income, as determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such reserve balance
reaches 50% of the Company's registered capital.
The transfer to this reserve must be made before distributions of any dividends
to shareholders. For the three months ended March 31, 2008, the Company
appropriated $0 (March 31,2007 - $83,986) to this surplus reserve.
Note 13 -- Employee Welfare Plan
Regulations in the PRC require the Company to contribute to a defined
contribution retirement plan for all permanent employees. The Company
established a retirement pension insurance, unemployment insurance, health
insurance and house accumulation fund for the employees during the term they are
employed. For the three months ended March 31, 2008 and 2007, the Company made
contributions in the amount of $6,581 and $6,218, respectively.
Note 14 -- Earnings Per Share
Earnings per share for the three months ended March 31, 2008 and 2007 were
determined by dividing net income for the years by the weighted average number
of both basic and diluted shares of common stock and common stock equivalents
outstanding. The net income for diluted Earnings per share was adjusted.
16
________________________________________________________________________________
2008 2007
------------ ------------
Net income for basic earnings per share $ 47,685 $ 792,502
Change in fair value on dilutive warrants: (253,245)
------------ ------------
Net (loss) income for diluted earnings per share (205,560) 792,502
Weighted average shares outstanding - basic 30,142,565 20,669,223
Effect of diluted securities and warrants: 155,525
------------ ------------
Weighted average shares outstanding - diluted 30,298,090 20,669,223
Earnings per share
- basic $ 0.00 $ 0.04
- diluted (0.01) 0.04
The convertible debt and warrants issued along with the debt have an
anti-dilutive effect on the earnings per share and are therefore excluded from
the determination of diluted earnings per share calculation.
Note 15 -- Commitments and Contingencies
The Company leases part of its office space under long-term, non-cancelable
operating lease agreements. The leases expire on December 31, 2008. The future
minimum rental payments required under the operating lease agreements are
$71,816.
As of March 31, 2008, the Company had one land use right with an unpaid balance
of approximately $2.5 million. The balance is not due until the vendor removes
the existing building on the land and changes the zoning status on the land use
right certificate.
ITEM 2. Management's Discussion and Analysis
FORWARD LOOKING STATEMENTS
Some of the statements contained in this Form 10-Q that are not historical facts
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 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:
o Our ability to attract and retain management, and to integrate and
maintain technical information and management information systems;
o Our ability to raise capital when needed and on acceptable terms and
conditions;
o The intensity of competition; and
o 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.
17
________________________________________________________________________________
CONSOLIDATED OPERATING RESULTS
Revenues
Total revenues for the three months ended March 31, 2008 decreased 42.09 percent
to $4,746,637 from $8,196,197 for the three months ended March 31, 2007.
Revenues by our major projects, Project Tsining-24G revenues for the three
months ended March 31, 2008 decreased 102.04 percent to $(145,931) compared with
$7,128,387 for the three months ended March 31, 2007. The decrease was due to
the 24G project being completed and sold during 2007, but three disputed units
were returned from customers in the first quarter of 2008.
Project Tsining JunJing I revenues for the three months ended March 31, 2008
increased 676.45 percent to $4,206,958 from $541,817 for the three months ended
March 31, 2007 because we sold multiple floors in one building for hotel
business in the project in March 2008.
Revenues for the three months ended March 31, 2008 for additional projects
decreased 67.73 percent and totaled $121,122 compared with $375,372 for the
three months ended March 31, 2007. Additional projects principally included
small projects. The increase in additional projects revenues for the three
months ended March 31, 2008 was primarily due to the sale of an occupied
residential-commercial building and the sale of several units in the Company's
previous projects.
The Baqiao infrastructure construction project generated revenues of $328,181
for the three months ended March 31, 2008 compared with no revenue for the three
months ended March 31, 2007. The company acquired the infrastructure
construction project in March 2007, and the first revenues occurred in the
fourth quarter of 2007. The revenues in the first quarter 2008 were interest
income generated from investing, and continued river management and suburban
planning for the entire Baqiao high-technology industrial park.
Revenue by project: 3 months ended 3 months ended
(US$ in millions) March 31, 2008 March 31, 2007
- ------------------- -------------- --------------
Projects
- -------------------
Tsining 24G -0.1 7.1
Tsining JunJing I 4.2 0.5
Additional projects 0.1 0.4
Baqiao infrastructure construction 0.3
Sales of properties 4.5 8.0
Other income for the three months ended March 31, 2008 increased 47.85 percent
to $222,693 from $150,621 for the three months ended March 31 2007 primarily due
to a property clean-up project performed in first quarter 2008.
Cost of sales The cost of sales for the three months ended March 31, 2008
decreased 62.14 percent to $2,367,112 compared with $6,251,458 for the three
months ended March 31, 2007. The lower cost of sales for the three months ended
March 31, 2008 were primarily due to the completion of the Tsining-24G project
and related cost of sales that were recognized when the project was sold in the
first quarter of 2007.
Gross profit and gross profit margin
Gross profit for the three months ended March 31, 2008 was $2,379,525, up 22.36
percent from $1,944,739 for the three months ended March 31, 2007. The gross
profit margin for the three months ended March 31, 2008 was 50.13 percent
compared to 23.73 percent for the three months ended March 31, 2007. The
increases in gross profit and gross profit margin were primarily due to the sale
of commercial-and-apartment buildings that had higher profit margins than the
residential buildings sold in the first quarter of 2007.
Selling, general, and administrative expenses
Selling, general, and administrative expenses for the three months ended March
31, 2008 increased 130.61 percent to $1,148,601 from $498,079 for the three
months ended March 31, 2007. The higher selling, general, and administrative
expenses in the first quarter 2008 were due primarily to the selling expenses
for the new Tsining-Junjing II project, for which the sales effort began in the
fourth quarter of 2007.
Other expenses
Other expenses for the three months ended March 31, 2008 decreased 51.23 percent
to $15,910 compared with $32,619 for the three months ended March 31, 2007. The
first quarter 2008 decline was primarily due to the 2008 absence of the expenses
in the first quarter 2007 associated with the normal added finishing in the
Tsining JunJing I and Tsining 24G projects desired by the customers to reach
final satisfaction.
Operating profit and operating profit margin
Operating profit for the three months ended March 31, 2008 decreased 14.07
percent to $1,215,014 from $1,414,041 for the three months ended March 31, 2007
due primarily to the absence of profits from the Tsining-24G sold in the first
quarter of 2007 and the higher selling expenses for the new Tsining-JunJing II
project in the first quarter of 2008.
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The operating profit margin increased to 25.60 percent for the three months
ended March 31, 2008, compared with 17.25 percent for the three months ended
March 31, 2007, primarily due to the higher profit margins on the
commercial-and-apartment buildings sold in the first quarter of 2008, compared
to the profit margins on the residential buildings sold in the first quarter of
2007.
Interest expense
Interest expense for the three months ended March 31, 2008 increased 111.51
percent to $439,673 from $207,876 for the three months ended March 31, 2007. The
increase for the three months ended March 31, 2008 was due primarily to the 2007
and 2008 financings associated with the purchase in March 2007 of the company
that owned the exclusive right to develop the Baqiao project and perform the
related infrastructure construction. The financings included the issuance of
common stock and warrants in the December 2007 and the issuance of convertible
debt and warrants in January 2008.
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
shareholders to buy additional common shares at the prices specified in the
warrant agreements. In the three months ended March 31, 2008, shareholders
exercised a total of 1,870 warrants to buy a total of 1,870 common shares. When
a shareholder exercises a warrant to buy common shares, typically only when the
stock price is higher than the warrant exercise price, the shareholder covers
the exercise price and Company covers the balance of the value to provide the
common shares. In addition, for the three months ended March 31, 2008, the
Company was required to estimate the fair value of its remaining warrants
outstanding, 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 of $9,489 in the three months ended March
31, 2008 consisted of (a) the cost to the Company of the warrants issued in
2008, (b) a result of the exercise of warrants in February 2008, and (c) the
periodic adjustment to the estimated cost to the Company to provide the common
shares, assuming that all the warrants will be exercised sometime in the future.
The basis for estimating the cost to provide those common shares was provided by
the valuation model.
Provision for income taxes
The effective tax rates for the years 2008 and 2007 were 85.49 percent and
34.30 percent, respectively. The primary reason for the high effective tax rates
was that the Change in fair value of embedded derivatives and warrants could not
be deducted from the income before taxes. The China government changed the
income tax rate from 33 percent to 25 percent, effective January 1, 2008.
Net income
Net income for the three months ended March 31, 2008 decreased 93.98 percent to
$47,686 from $792,502 for the three months ended March 31, 2007. The decrease in
net income was due primarily to four reasons. First was lower net revenues.
Because most of the housing units in the finished projects had already been sold
prior to the first quarter of 2008, only a few units were available to be sold
during the first quarter of 2008. The new Tsining JunJing II project was not yet
able to generate revenues because it was still being constructed. Second, the
company incurred selling expenses for the new Tsining JunJing II project, for
which the sales effort began in the fourth quarter of 2007. Third, the company
issued convertible debt and warrants in January 2008, which required higher
interest expense during the first quarter of 2008, a $171,683 accretion expense
on the convertible debt during the first quarter 2008, a $284,511 change in fair
value of embedded derivatives as of March 31, 2008, and a $9,389 net reduction
to the change in fair value of warrants as of March 31, 2008. The fourth reason
was the higher provision for income taxes as explained above.
Basic and diluted earnings per share
Basic earnings per share were $0.00 for the three months ended March 31, 2008,
down 100.00 percent from $0.04 for the three months ended March 31, 2007.
Diluted earnings per share were $0.01 for the three months ended March 31,
2008, down 125.00 percent from $0.04 for the three months ended March 31,
2007. The basic and diluted earnings per share were both $0.04 for the three
months ended March 31, 2007 because the warrants were anti-dilutive.
Common shares used to calculate EPS
The weighted average shares outstanding used to calculate the basic earnings per
share were 30,142,565 shares for the three months ended March 31, 2008 and
20,669,223 shares for the three months ended March 31, 2007.
The weighted average shares outstanding used to calculate the diluted earnings
per share were 30,230,664 shares for the three months ended March 31, 2008 and
20,699,223 shares for the three months ended March 31, 2007.
The increases in the weighted average shares outstanding used to calculate basic
and diluted earnings per shares for the first quarter of 2008 compared with the
first quarter of 2007 were due to the common shares and warrants issued in
December 2007 and the convertible debt and warrants issued in January
2008.
19
Gain on foreign exchange
The Company operates in China, accounts in the Chinese renminbi but reports its
financial results in U.S. dollars based on the exchange rates of the two
currencies. During 2008, the renminbi appreciated in value against the U.S.
dollar, which when translating the operating results and financial positions at
different exchange rates created the accrued gain on foreign exchange.
Cash flow discussion
Cash flow from operating activities for the three months ended March 31, 2008
decreased 793.63 percent to $3,527,844 from the first quarter of 2007, primarily
due non-cash proceeds from sales of real estate and deposit on Land use rights.
The use of cash in investing activities in 2008 was $245,617, which was 15.07
percent less than was in the first quarter 2007, primarily due to the absence of
the first quarter 2007 purchases of buildings, equipment, and automobiles.
Cash flow from financing activities in the first quarter of 2008 provided
$15,961,385, up 3,887.05 percent from the first quarter of 2007, primarily due
to the issuance of convertible debt and warrants in the first quarter of 2008,
partly offset by payments on loans payable to New Land's previous shareholders
during the first quarter of 2008.
As a result of the above cash flow changes from operating, investing, and
financing activities, the increase in cash for the three months ended March 31,
2008 was $12,187,924 compared with a decrease of $126,311 for the three months
ended March 31, 2007.
Debt leverage
Total debt outstanding as of March 31, 2008 was $38,526,000 compared with
$27,922,125 on December 31, 2007. Net debt outstanding (total debt less cash) as
of March 31, 2008 was $23,487,270 compared with $25,469,759 on December 31,
2007. The company's net debt as a percent of total capital (net debt plus
shareholders' equity) was 25.19 percent on March 31, 2008 and 27.79 percent on
December 31, 2007. The decrease in net debt as a percent of total capital was
primarily due to the issuance of convertible debt and warrants in January 2008
and payments on loans payable to New Land's previous shareholders in January
2008.
Total debt consists of the sum of the balance sheet lines titled payable to
original shareholders, loans payable to New Land's previous shareholders, loans
from employees, loans payable, and convertible debt.
Liquidity and Capital Resources
Our principal demands for liquidity are for development of new properties,
property acquisitions, and general corporate purposes.
As of March 31, 2008, we had $15,038,730 of cash and cash equivalents on hand,
an increase of $12,586,364 compared to $2,452,366 of cash and cash equivalents
on hand as of December 31, 2007.
Financial obligations
As of March 31, 2008, we had total bank loans of $14,689,104 with a weighted
average interest rate of 10.30 percent. Future scheduled maturities of loans
payable were as follows:
December 31, 2008 - $5,704,507;
June 14, 2008 - $3,565,317; and
August 7, 2008 - $5,419,281.
The mortgage debt is secured by the assets of the Company.
Loans payable
Loans payable represent amounts due to various banks and are due on demand or
normally due within one year. These loans generally can be renewed with the
banks when the loans mature.
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Most of the obligations of the company are tied to specific projects. The terms
of the loans typically are 1 to 1.5 years. Loan extensions are determined by
mutual agreement when the current term expires and both parties will consider
the remaining time needed to complete the project. Most of these loans are
payable when the project has been completed and the residents or businesses take
possession.
The following table summarizes the Company's loans payable that were outstanding
as of March 31, 2008:
(Millions of dollars) Balance Interest rate Due date
- --------------------- ------- ------------- ------------
Commercial Bank Weilai $ 5.4 11.34% Aug 29, 2008
Commercial Bank Weilai $ 5.7 9.79% Dec 31, 2008
Xi'an Rural Credit Union $ 3.6 9.53% Jun 14, 2008
Total $ 14.7 10.30% weighted average interest rate
The annual interest requirement on these loans totals about $1.51 million.
The following table summarizes the amounts and types of the Company's
obligations and provides the estimated period of maturity for the financial
obligations by class as of March 31, 2008:
Obligations Due by Period 1 yr 1-3 yrs 4-5 yrs
(Millions of dollars)
- ------------------------- ------ ------- -------
Current liabilities
- -------------------
Accounts payable $9.2
Income and other taxes payable $24.1
Other payables $4.3
Advances (deposits) from customers $5.9
Accrued expenses $2.0
Long-term liabilities
- ---------------------
Warranties liabilities $6.0
Deferred tax $16.5
Fair value of embedded derivatives $4.2
Convertible debt $12.8
Long-term debt
- --------------
Loans payable $14.7
Loans payable to New Land's
previous shareholders $8.8
Loans from employees $2.2
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 2008.
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 development, we intend to raise funds
to develop our projects by obtaining mortgage financing 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.
As part of our funding plan, on March 9, 2007, we entered into a Shares Transfer
Agreement with the shareholders of Xi'an New Land Development Co., Ltd. (the
"New Land"), pursuant to which we have acquired 32,000,000 shares of the New
Land, constituting 100 percent equity ownership of the New Land.
The New Land is now in cooperation with the Baqiao District Government of Xi'an
City in developing the Baqiao Science & Technology Industrial Park, a provincial
development zone in Shaanxi Province. This acquisition has been completed, and
the Company has the right to develop and sell 487 acres of property which has
been targeted for new residential developments.
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.
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Other Events
On January 1, 2008, Tsining Housing Development Company Inc., which is one of
the Company's subsidiary companies, planned to adopt the
percentage-of-completion method as its new revenue recognition method. Prior to
January 1, 2008, the Company adopted the full accrued method as the Company's
revenue recognition method. Under the new revenue recognition method, the total
revenue and net income of 2007 will not be affected.
On January 28, 2008, the company raised $20 million through the issuance of
senior secured convertible debt to institutional investors. As part of the
private placement, the Company issued five-year senior secured convertible debt
with an aggregate principal amount of $20 million that pays cash interest of 5
percent per annum. $9 million of the notes are convertible into common stock and
carry an initial conversion price of $5.57 per share, which can be increased if
certain stock price thresholds are met. Additionally, forced conversion can also
occur at the Company's discretion if certain stock price thresholds are met. The
notes are secured by certain real estate assets and additionally through a
pledge of common shares owned by Mr. Pingji Lu, the Company's Chairman and CEO.
Additionally, investors in the private placement were granted 1,437,467
five-year warrants with a strike price of $6.07 per common share, which are
callable if certain stock price thresholds are met. Approximately 215,620 of the
warrants are available as a management incentive if certain milestones are met.
As of March 31, 2008, there were $171,683 accretion expense on convertible debt,
$284,511 change in fair value of embedded derivatives, and $ 243,756 change in
fair value of warrants through this financing as of March 31, 2008.
Beginning in mid-September 2007, the Company started the first round to offer
selected `club members' the opportunity for an initial cash payment of 100,000
RMB or approximately $13,300 USD to secure a purchase right for a unit in the
highly sought after Tsining Junjing II development. And, in mid-April 2008, the
Company started the second round to offer selected `club members' the
opportunity to secure a purchase right for a unit in the highly sought-after
Tsining Junjing II development. As of May 10, 2008, more than 488,860 square
footage were pre-sold, covering $24.68 million of revenue. In the first round of
offering, there were 406 units pre-sold of more than 440,478 square footage,
covering $ 21.38 million of revenue and the average price was over $48.55 per
square footage. In the second round, there were 51 units pre-sold of more than
53,930 square footage, covering $ 3.30 million of revenue, and the average price
was over $61.70 per square footage. So far, we have received over $8 million in
cash deposits. The Company will use these proceeds for working capital. Once the
units are complete and the title is officially transferred to the new owner,
which is anticipated to occur late next year, these initial transactions will be
recognized as revenue and subsequent profit. The buyers will be responsible for
approximately a balance of $40,000 for each unit at the time of closing and
officially consummate the purchase of the unit. There are risks that certain
pre-sale units may not reach final closings, and if the transactions cannot
close in 2008, a portion of the deposits may be returned to customers. Pre-sales
are customary in China and enable developers to have visibility into
sell-through rates, while providing access to capital to complete projects that
augments overall internal rate of return.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to the following market risks, including but not limit
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 of approximately $13
million at the end of December, 2007, 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 our full
value, particularly in a poor market.
Foreign Currency Exchange Rate Risk
The Company is doing all our business in P.R. China. All the revenue and profit
is denominated in RMB. When RMB depreciates, it may adversely affect the
company's financial performance. Specifically, since the Company's recent $20
million senior convertible note interest payment is denominated in US dollars,
the depreciation of RMB may incur additional cost to our financial cost.
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the United States Securities
and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer
have reviewed the effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))
within the end of the period covered by this Quarterly Report on Form 10-Q and
have concluded that the disclosure controls and procedures are effective to
ensure that material information relating to the Company is recorded, processed,
summarized, and reported in a timely manner. There were no significant changes
in our internal controls or in other factors that could significantly affect
these controls subsequent to the last day they were evaluated by our Chief
Executive Officer and Chief Financial Officer
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended March 31, 2008, there have been no changes in
the Company's internal control over financial reporting, identified in
connection with our evaluation thereof, that have materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
22
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Item 6. Exhibits
(a) Exhibits
Exhibit
Number Description of Exhibit
- -------------------------------------------------------------------------------
18.1 Letter from MSCM LLP
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)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Housing & Land Development, Inc.
May 14, 2008 By: /s/ LU PINGJI
-------------
Lu Pingji
Chief Executive Officer
(Principal Executive Officer)
May 14, 2008 By: /s/ William Xin
---------------
William Xin
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23