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EXCEL - IDEA: XBRL DOCUMENT - China Housing & Land Development, Inc.Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - China Housing & Land Development, Inc.v410394_ex31-2.htm
EX-99.1 - EXHIBIT 99.1 - China Housing & Land Development, Inc.v410394_ex99-1.htm
EX-31.1 - EXHIBIT 31.1 - China Housing & Land Development, Inc.v410394_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - China Housing & Land Development, Inc.v410394_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - China Housing & Land Development, Inc.v410394_ex32-1.htm

  

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, 2015

 

¨   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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

incorporation or organization)

 

(IRS Employer Identification

No.)

 

1008, Liuxue Road, Baqiao District

Xi’an, Shaanxi Province

China 710038

(Address of principal executive offices)

 

86-029-8332-8813

(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). Yes x 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 company x

(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 ☐ No x

 

The number of shares of Common Stock outstanding on May 13, 2015 was 6,960,369 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 and Exchange Commission of the United States of America.

“GFA” means gross floor area.

 

 
 

  

CHINA HOUSING & LAND DEVELOPMENT, INC.

 

Index

 

      Page
Number
       
    Special Note Regarding Forward Looking Statements 2
       
PART I   FINANCIAL INFORMATION 3
       
Item 1.   Financial Statements 3
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 41
       
Item 4.   Controls and Procedures 41
       
PART II.   OTHER INFORMATION 42
       
Item 1.   Legal Proceedings 42
       
Item 1A.   Risk Factors 43
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 43
       
Item 3.   Defaults Upon Senior Securities 43
       
Item 4.   Mining Safety Disclosures 43
       
Item 5.   Other Information 43
       
Item 6.   Exhibits 44
       
SIGNATURES     45
       
EX-3.1   (Certificate of Change Pursuant to NRS 78.209)  
       
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)  
       
Ex-99.1   (Press release reporting our results of operations for the first quarter of 2015)  

 

1
 

  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial position, business strategy and plans and objectives of management for future operations. When used in this filing, the words believe, may, will, estimate, continue, anticipate, intend, expect, and similar expressions are intended to identify forward-looking statements.

 

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission (SEC). Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.

 

2
 

  

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

 

Unaudited Interim Condensed Consolidated Balance Sheets

As of March 31, 2015 and December 31, 2014

 

   March 31,
2015
   December 31,
2014
 
ASSETS          
Cash  $8,260,186   $33,223,127 
Cash - restricted   89,709,270    90,328,084 
Accounts receivable, net of allowance for doubtful accounts of $580,450 and $579,926, respectively   23,345,523    33,041,324 
Other receivables, prepaid expenses and other assets   10,382,084    9,377,150 
Real estate held for development or sale   376,101,436    374,083,969 
Property and equipment, net   42,824,394    43,383,002 
Advance to suppliers   1,368,742    1,033,359 
Deposits on land use rights   16,131,634    16,136,415 
Intangible assets, net   23,713,295    23,561,951 
Goodwill   1,923,789    1,922,053 
Deferred financing costs   169,943    438,926 
Total assets  $593,930,296   $626,529,360 
           
LIABILITIES          
Accounts payable  $61,863,875   $75,845,987 
Advances from customers   38,654,619    35,172,506 
Accrued expenses   23,709,953    21,842,922 
Income taxes payable   23,238,664    24,280,260 
Other taxes payable   10,920,606    9,318,119 
Other payables   14,340,659    11,692,913 
Loans from employees   30,258,726    29,819,381 
Loans payable   266,184,928    293,660,575 
Deferred tax liability   14,121,278    14,395,327 
Total liabilities   483,293,308    516,027,990 
           
SHAREHOLDERS’ EQUITY          
Common stock: $0.001 par value, authorized 20,000,000 shares;
Issued 6,960,145 and 6,960,145, respectively
   6,960    6,960 
Additional paid in capital   52,511,350    52,511,350 
Statutory reserves   11,700,198    11,700,198 
Retained earnings   23,568,139    24,046,686 
Accumulated other comprehensive income   22,850,341    22,236,176 
Total shareholders’ equity   110,636,988    110,501,370 
           
Total liabilities and shareholders’ equity  $593,930,296   $626,529,360 

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

3
 

 

CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

 

Unaudited Interim Condensed Consolidated Statements of Loss

For The Three Months Ended March 31, 2015 and 2014

 

   3 Months
March 31,
2015
   3 Months
March 31,
2014
 
REVENUES          
Real estate sales  $20,674,496   $15,806,784 
Other income   3,147,781    6,235,627 
Total revenues   23,822,277    22,042,411 
           
COST OF SALES          
Cost of real estate sales   18,224,596    12,716,886 
Cost of other revenue   1,732,632    4,009,457 
Total cost of revenues   19,957,228    16,726,343 
           
Gross margin   3,865,049    5,316,068 
           
OPERATING EXPENSES          
Selling, general, and administrative expenses   3,249,989    3,989,482 
Stock-based compensation   -    132,840 
Other expenses    6,204    3,907 
Financing expense   1,072,822    1,394,530 
Total operating expenses   4,329,015    5,520,759 
           
Loss from disposal of property and equipment   -    563,710 
           
Loss before provision for income taxes   (463,966)   (768,401)
           
Provision for income taxes   25,720    17,036 
Recovery of deferred taxes   (11,139)   (11,384)
Provision for income taxes   14,581    5,652 
           
NET LOSS   $(478,547)  $(774,053)
           
WEIGHTED AVERAGE SHARES OUTSTANDING          
Basic   6,960,145    6,903,632 
           
Diluted   6,960,145    6,903,632 
           
NET LOSS PER SHARE          
Basic  $(0.07)  $(0.11)
           
Diluted  $(0.07)  $(0.11)

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

4
 

  

CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

 

Unaudited Interim Condensed Consolidated Statements of Comprehensive Income (Loss)

For The Three Months Ended March 31, 2015 and 2014

 

   3 Months
March 31,
2015
   3 Months
March 31,
2014
 
         
NET LOSS  $(478,547)  $(774,053)
           
OTHER COMPREHENSIVE INCOME          
Gain (loss) in foreign exchange   614,165    (6,511,663)
           
COMPREHENSIVE INCOME (LOSS)  $135,618   $(7,285,716)

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

5
 

  

CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARIES

Unaudited Interim Condensed Consolidated Statements of Cash Flows

For The Three Months Ended March 31, 2015 and 2014

 

   March 31,
2015
   March 31,
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss for the period  $(478,547)  $(774,053)
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities:          
Depreciation   633,935    591,907 
Stock-based compensation   -    132,840 
Loss on disposal of property and equipment   -    563,710 
Amortization of intangible assets   55,252    12,610,339 
Recovery of deferred income taxes   (11,139)   (11,384)
(Increase) decrease in assets:          
Accounts receivable   9,667,917    (876,377)
Other receivable prepaid expenses and other assets   (937,971)   (1,735,046)
Real estate held for development or sale   (1,569,229)   (62,583,224)
Advances to suppliers   (332,197)   (443,760)
 Deposit on land use right   19,243    30,665,151 
Deferred finance costs   267,795    188,146 
Increase (decrease) in liabilities:          
Accounts payable   (13,967,221)   (15,956,843)
Advances from customers   3,429,857    5,956,860 
Accrued expenses   1,837,402    (1,344,586)
Other payables   2,621,570    1,975,624 
Income and other taxes payable   474,679    426,456 
Net cash provided by (used in) operating activities   1,711,346    (30,614,240)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (140,072)   (382,635)
Net cash used in investing activities   (140,072)   (382,635)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Change in restricted cash   696,255    2,871,458 
Loans from external parties   16,452,807    24,648,464 
Repayments on loans   (43,938,295)   (7,374,873)
Loans from employees, net   409,959    5,277,131 
Purchase of treasury stock   -    (318,589)
Net cash (used in) provided by financing activities   (26,379,274)   25,103,591 
           
DECREASE IN CASH   (24,808,000)   (5,893,284)
           
Effects on foreign currency exchange   (154,941)   (491,471)
           
CASH, beginning of period   33,223,127    21,320,071 
           
CASH, end of period  $8,260,186   $14,935,316 

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.  

 

6
 

  

CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

 

Unaudited Interim Condensed Consolidated Statements of Shareholders’ Equity

As of March 31, 2015 and December 31, 2014

 

   Common Stock   Additional
Paid in
   Statutory   Retained   Accumulated
Other
Comprehensive
     
   Shares   Par Value   Capital   Reserves   Earnings   Income   Totals 
BALANCE, December 31, 2014   6,960,145   $6,960   $52,511,350   $11,700,198   $24,046,686   $22,236,176   $110,501,370 
Net loss for the period   -    -    -    -    (478,547)   -    (478,547)
Foreign currency translation adjustment   -    -    -    -    -    614,165    614,165 
BALANCE, March 31, 2015   6,960,145   $6,960   $52,511,350   $11,700,198   $23,568,139   $22,850,341   $110,636,988 

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

7
 

  

Note 1 – Business, Organization and Basis of Presentation

 

China Housing & Land Development, Inc. (“CHLN”) is a Nevada corporation, originally incorporated on July 6, 2004 under the name Pacific Northwest Productions Inc. CHLN and its subsidiaries (the “Company”) are 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 (the “PRC” or “China”).

  

The accompanying unaudited interim condensed consolidated financial statements include the accounts of CHLN 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 have been inactive since incorporation.

 

The Company’s real estate and development sales operations are dependent on continuous financing from external sources. The Company has, in the past, been successful in obtaining financing from financial institutions, third parties and related parties to support the development of its real estate projects. Management believes the Company will continue to have the ability to fund and develop its current and future projects.

 

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

 

Principles of Consolidation and Basis of Presentation

 

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 presentation of the Company’s interim condensed consolidated balance sheet as at March 31, 2015, the Company’s interim condensed consolidated statements of loss and comprehensive income (loss) for the three months ended March 31, 2015 and March 31, 2014, and the Company’s interim condensed consolidated statements of cash flows for the three months ended March 31, 2015 and March 31, 2014. 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 filed on March 31, 2015 for the year ended December 31, 2014 (“2014 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 2014 Annual Report.

 

Reclassifications

 

Certain reclassifications have been made to the prior year’s financial statements to conform to the current presentation. The effects of the reclassifications were not material to the Company’s interim condensed consolidated financial statements.

 

Accounting Principles Recently Adopted

 

On April 10, 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The guidance amends the guidance in FASB Accounting Standards Codification (FASB ASC) 205, Presentation of Financial Statements, and FASB ASC 360, Property, Plant, and Equipment, to change the definition of discontinued operations and the criteria for reporting discontinued operations and require expanded disclosures about discontinued operations. A discontinued operation may include a component or group of components of an entity, or a business or nonprofit activity. In accordance with the new guidance, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results would qualify as discontinued operations. In addition, ASU 2014-08 (a) expands the disclosure requirements for disposals that meet the definition of a discontinued operation; (b) requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations; and (c) conforms the definition of “discontinued operations” similarly to how it is defined under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. The amendments in this update are effective in the first quarter of 2015. The adoption of ASU 2014-08 did not have a material impact on the Company’s consolidated financial statements.

 

8
 

  

New Accounting Pronouncement Not Yet Adopted

 

In May 2014, the FASB issued ASU 2014-09 with the intent of significantly enhancing comparability of revenue recognition practices across entities and industries. The new standard provides a single principles-based, five-step model to be applied to all contracts with customers and introduces new, increased disclosure requirements. The new standard is effective for annual and interim periods beginning on or after December 15, 2016 and may be applied on either a full or modified retrospective basis. The Company is currently assessing the impact of the new standard to the Company’s consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, an update on stock compensation. The guideline requires performance targets, which affect vesting and can be achieved after the requisite service period, to be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If achievement of the performance target becomes probable before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The amendments are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of the new standard on its consolidated financial statements.

 

In April 2015, FASB issued ASU 2015-03 “Interest – Imputation of interest (Subtopic 835-30): Simplifying the presentation of Debt Issuance Costs”. The updates are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. The new guidance should be applied on a retroactive basis. The guidance in this section does not apply to the amortization of premium and discounts of assets and liabilities that are reported at fair value and the debt issuance costs of liabilities that are reported at fair value. The Company is currently assessing the impact of this new standard.

 

Foreign Exchange Rates Used:

 

   March 31,
2015
   December 31,
2014
   March 31,
2014
 
Period end RMB/U.S. Dollar exchange rate   6.1990    6.2046    6.2164 
Average RMB/U.S. Dollar exchange rate   6.2360    6.1620    6.1018 

 

Note 3 – Supplemental Disclosure of Cash Flow Information

 

Income taxes paid amounted to $1,078,601 and $587,733 for three months ended March 31, 2015 and 2014, respectively. Interest paid for three months ended March 31, 2015 and 2014 amounts to $5,364,937and $7,019,732, respectively.  

 

Note 4 – Restricted Cash

 

The following summarizes the restricted cash held by the Company:

 

   March 31,
2015
   December 31,
2014
 
Banks’ security requirement in providing mortgages to home buyers  $2,609,738   $2,577,788 
Guaranteed deposits for loans with foreign banks (Note 12)   87,099,532    87,536,586 
Government regulatory fees   -    213,710 
   $89,709,270   $90,328,084 

 

9
 

  

Note 5 – Real Estate Held for Development or Sale

 

The following summarizes the components of real estate inventories as of March 31, 2015 and December 31, 2014:

 

   March 31,
2015
   December 31,
2014
 
Real estate projects completed and held for sale          
Junjing I  $1,611,935   $1,610,480 
Junjing II  81,352   81,277 
Gangwan   9,608    9,600 
Junjing III   796,249    802,364 
Puhua Phase I   5,126,370    5,421,141 
Puhua Phase II – West Region and New Coastal Line   6,474,980    6,692,581 
Real estate completed and held for sale   14,100,494    14,617,443 
           
Real estate projects held for development          
Puhua Phase II (East Region), III, IV and V   93,771,573    98,207,424 
Park Plaza   56,917,930    59,308,044 
Golden Bay   158,481,214    150,562,541 
Jiyuan   29,296,886    29,784,510 
Golden Bay Apartment   16,212,442    14,529,266 
Other   7,320,897    7,074,741 
Real estate held for development   362,000,942    359,466,526 
           
Total real estate held for development or sale  $376,101,436   $374,083,969 

 

Note 6 – Accounts Receivable

 

Accounts receivable consist of the following as of March 31, 2015 and December 31, 2014:

 

   March 31,   December 31, 
   2015   2014 
Accounts receivable  $23,925,973   $33,621,250 
Allowance for doubtful accounts   (580,450)   (579,926)
Accounts receivable, net  $23,345,523   $33,041,324 

 

Note 7 – Other Receivables, Prepaid Expenses and Other Assets

 

Other receivables, prepaid expenses and other assets consist of the following as of March 31, 2015 and December 31, 2014:

 

   March 31,
2015
   December  31,
2014
 
Interest receivable (a)  $4,767,774   $3,954,195 
Other receivables (b)   4,061,695    4,063,747 
Allowance for doubtful receivables   (146,484)   (147,940)
Prepaid expenses   1,662,439    1,473,512 
Prepaid other tax expenses   36,660    33,636 
Other receivables, prepaid expenses and other assets, net  $10,382,084   $9,377,150 

 

10
 

  

(a)Interest receivable represents interest income accrued on the restricted cash pledged as security for the loans obtained from Bank of Communications Offshore Branch, Bank of China Macau Branch, Bank of China Singapore branch and LUSO International Bank.

 

(b)Other receivable mainly represents various deposits made to government agencies and/or utility companies as security or guarantee during the project construction. These amounts will be refunded when the projects are completed.

 

Note 8 – Property and Equipment

 

Property and equipment consist of the following as of March 31, 2015 and December 31, 2014:

 

   March 31,
2015
   December  31,
2014
 
Income producing properties and improvements  $18,215,549   $21,469,734 
Buildings and improvements   32,147,257    28,808,632 
Electronic equipment   1,089,117    1,089,142 
Vehicles   795,309    794,591 
Computer software   323,589    323,578 
Office furniture   907,597    904,601 
Total   53,478,418    53,390,278 
Accumulated depreciation   (10,654,024)   (10,007,276)
Property and equipment, net  $42,824,394   $43,383,002 

 

Depreciation expense for the three months ended March 31, 2015 and 2014 amounted to $633,935 and $591,907, respectively. 

 

Note 9 – Intangible Assets

 

The intangible assets consisted of the following as of March 31, 2015 and December 31, 2014:

 

   March 31,
2015
   December 31,
2014
 
Development right acquired (a)  $52,095,265   $52,048,245 
Land use right acquired (b)   8,794,216    8,786,279 
Construction license acquired (c)   1,214,417    1,213,321 
    62,103,898    62,047,845 
Accumulated amortization   (38,390,603)   (38,485,894)
Intangible assets, net  $23,713,295   $23,561,951 

 

(a)The development right for 487 acres of land in Baqiao Park was obtained from the acquisition of New Land in fiscal 2007. The intangible asset has a finite life. The development right will expire on June 30, 2016.

 

The Company acquired the land use right for the remaining parcel of the Golden Bay project and recorded amortization of $12,553,872 during the first quarter of 2014 and capitalized this amount in the real estate held for development or sale. The Company acquired the land use right for the Company’s head office and certain future resident project and recorded amortization of $5,222,987 during the second quarter of 2014. $2,121,055 was capitalized in the Company’s buildings and improvements and $3,101,932 in the real estate held for development or sale.

 

11
 

  

The $12,553,872 amortization recorded in the first quarter of 2014 was calculated by multiplying the $33,092,754 remaining carrying value of the development right immediately before this amortization by 37.94%, the percentage of profit expected to be realized from acquiring the land use right through the utilization of the development right over the total expected profit from acquiring land use rights through the utilization of the development right.

 

The $5,222,987 amortization recorded in the second quarter of 2014 was calculated by multiplying the $20,977,221 remaining carrying value of the development right immediately before this amortization by 24.90%, the percentage of profit expected to be realized from acquiring the land use right through the utilization of the development right over the total expected profit from acquiring land use rights through the utilization of the development right.

 

Upon the acquisition of Puhua’s land use right in 2009, the Company recorded $4,665,592 of amortization on the development right and capitalized the amount in the real estate held for development or sale. The capitalized amortization amount is expensed as part of the cost of real estate sales as Puhua recognizes its real estate sales revenues under the percentage of completion method.

 

(b) The land use right was acquired through the acquisition of Suodi. The land use right certificate will expire in November 2048. The Company amortizes the land use right over 39 years starting from the date of acquisition. For the three months ended March 31, 2015, the Company has recorded $55,252 of amortization expense on the land use rights (March 31, 2014 - $56,467). The amortization was included in selling, general and administrative expenses. For the next five years, the Company will amortize approximately $220,000 annually on the land use right.
   
(c) The construction license was acquired through the 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 it will be able to continuously renew the license in future years. The license is subject to renewal on January 1, 2016.

 

No impairment write-down was recognized for the three months ended March 31, 2015 and 2014, respectively, on the intangible assets.

 

Note 10 – Accrued Expenses

 

   March 31,
2015
  

December 31, 

2014

 
Accrued expenses  $16,443,867   $18,625,788 
Accrued interest on loans   7,266,087    3,217,134 
Total  $23,709,953   $21,842,922 

 

Note 11 – Loans from Employees

 

The Company has borrowed monies from certain employees to fund the Company’s construction projects. All loans from employees have a six month maturity period. These unsecured loans bear interest at 15% (December 31, 2014 – 15%) per annum and are available to all employees.

 

12
 

 

 Included in these loans are loans from the Company’s executives:

 

   March 31,
2015
  

December 31, 

2014

 
Chairman  $2,123,874   $1,063,649 
Chief financial officer   2,115,859    1,998,517 
Chief operating officer   1,461,866    1,228,121 
Total  $5,701,599   $4,290,287 

 

Note 12 – Loans Payable  

 

   March 31,
2015
  

December 31, 

2014

 
           
Construction Bank of China           
Annual interest rate is 105% of People’s Bank of China prime rate (5.75%). The loan is secured by the Park Plaza Phase I project and land use right. The repayment schedule is as follows: the loan is due on May 29, 2016. The loan is also subject to certain repayment requirements based on percentage of sales contracts signed over total estimated sales amount of Park Plaza Phase I.   $15,809,001   $19,662,831 
           
Bank of China, Macau Branch           
Originally due on December 16, 2013 and extended to December 16, 2015, annual interest rate is based on 3-month London interbank offered rate (“LIBOR”) rate plus 2.5%, and the loan is also subject to a 1.3% handling fee making effective interest rate 4.06%. The 3-month LIBOR rate on March 31, 2015 was 0.2604% (December 31, 2014 - 0.2457%), secured by $32,263,268 (RMB200 million) of restricted cash.    31,000,000    31,000,000 
           
Bank of Communications Offshore Branch (Loan 1)           
Due on November 13, 2015, annual interest rate is 2.9%, secured by $36,296,177 (RMB225 million) of restricted cash and it is also subject to a 0.3% handling fee. The effective interest rate is 3.2%.    30,000,000    30,000,000 
           
LUSO International Bank (1)           
The Company signed an agreement for a line of credit of $8 million with LUSO International Bank. The amount that can be withdrawn is limited to 97% of the restricted cash secured for the line of credit. The total amount will be due on January 27, 2016. As of March 31, 2015, the Company has drawn $7,761,153 from the line of $9.7 million which is 96% of $ 8,065,817 (RMB50 million) restricted cash secured. Annual interest is based on the 12-month LIBOR rate plus 2.9%. The 12-month LIBOR rate on March 31, 2015 was 0.6609% (December 31, 2014 - 0.6044%).    7,761,153    7,761,153 
           
Xi’an Xinxing Days Hotel & Suites Co., Ltd. (“Days Hotel”) (Note 18)           
There are several loans from Days Hotel, including: $161,316 (RMB1 million) due on April 1, 2015; $419,422 (RMB2.6 million) due on April 19, 2015; $1,129,214 (RMB7 million) due on April 26, 2015; $20,793,678 (RMB128.9 million) due on April 30, 2015; $806,582 (RMB5 million) due on May 13, 2015; $8,065,817 (RMB50 million) due on June 13, 2015; $1,613,163 (RMB10 million) due on November 4, 2015; $1,774,480 (RMB11 million) due on November 26, 2015; $8,065,817 (RMB50 million) due on January 9, 2016. $4,291,014 (RMB26.6 million) of the loan has an annual interest rate of 15%; $38,538,474 (RMB238.9 million) of the loan has an annual interest rate of 20%. The loans due in April and May 2015 were either repaid or extended subsequent to the period end (note 19).   42,829,489    42,371,788 

 

13
 

  

Zhongyuan Trust           
Annual interest rate is 15.11%, including to a 0.9% handling fee. This loan is secured by the land use right of Golden Bay B and guaranteed by Tsining and the president. The repayment terms are as follows: $4,839,490 (RMB30 million) due on August 3, 2016; $11,292,144 (RMB70 million) due on February 3, 2017.    16,131,634    - 
           
Shanghai XinYing Fund, LLC (“XinYing”)           
The loans bears interest at 9.6% per annum plus a consulting fee per quarter at $503,306 (RMB3 million). The effective interest rate is 23.65% (Note 18). The loan is secured by 100% ownership of Xinxing Construction’s shares, corporate guarantee from Tsining, Puhua, and the Company. The repayment terms of the loan are as follows: $2,419,745 (RMB15 million) due on June 1, 2015; $15,325,052 (RMB95 million) due on August 7, 2015.    17,744,798    17,728,782 
           
LUSO International Bank (2)          
The Company signed an agreement for a line of credit of $34 million with LUSO International Bank. The amount that can be withdrawn is limited to 100% of the restricted cash secured for the line of credit. The total amount is due on November 4, 2015, the Company has drawn $9,816,500 from the line and is 98% of $10,022,584 (RMB62 million) restricted cash secured. Annual interest rate is based on the twelve-month LIBOR rate plus 2.7%. The twelve-month LIBOR rate as of March 31, 2015 was 0.6609% (December 31, 2014 - 0.6044%).    9,816,500    9,816,500 
           
Shenzhen Qianhai Dinghui Equity Investment Fund Partnership (“Dinghui”)           
Originally due on August 7, 2014 and March 22, 2015, the loan’s repayment terms have been extended to as follows: $16,131,634 (RMB100 million) due on June 5, 2015, and $8,065,817 (RMB50 million) due on June 20, 2015. The loan has an annual interest rate of 24%, and is secured by the land use rights of head office, Golden Bay apartment, and Golden Bay A.   24,197,451    56,409,760 
           
Bank of Communications           
Annual interest rate is 120% of the People’s Bank of China prime rate (5.75%). The loan is secured by a portion of the Puhua Phase III project and land use right. The repayment schedule is as follows: December 20, 2015 - $12,905,307 (RMB80 million); and December 20, 2016 - $3,226,327 (RMB20 million).    16,131,634    24,175,611 
           
Bank of Communications           
Annual interest rate is 130% of the People’s Bank of China prime rate (5.75%). The loan is secured by a portion of the Puhua Phase IV project and land use right. The loan is due on June 3, 2017. The loan is also subject to certain repayment terms based on percentage of sales contracts signed over total estimated sales of Puhua Phase IV.   14,518,470    14,505,368 

 

14
 

  

Bank of Xi’an, Weilai Branch           
Annual interest rate is 130% of the People’s Bank of China prime rate (5.75%) The loan is secured by a portion of the Puhua Phase II project and land use rights. The loan was originally due on April 24, 2015 and was extended subsequent to period end (note 19). The loan is also subject to certain repayment requirements based on percentage of sales contracts signed over total estimated sales amounts of Puhua Phase II.   17,744,798    17,728,782 
           
Bank of Communications Offshore Branch (2)           
Due on March 17, 2016, annual interest is based on 6-month LIBOR rate plus 2.8% and the loan is also subject to a 0.7% financing fee, with an effective annual interest rate of 3.5%. The 6-month LIBOR rate on March 31, 2015 was 0.378% (December 31, 2014 - 0.3443%). The loan is specifically for the retirement of the $31 million Bank of China, Singapore Branch loan. The use of the fund is restricted by the bank until the fund is used to repay the intended loan.    22 ,500,000    22,500,000 
           
Total   $266,184,928   $293,660,575 

 

Except for the loans from Bank of China Macau Branch, LUSO International Bank (2) and Bank of Communications Offshore Branch (1), which were drawn to repay mandatorily redeemable non-controlling interest in Subsidiaries and the loans from LUSO International Bank (1) and Bank of Communications Offshore Branch (2) were used to repay the loans from Bank of the Singapore Branch, which were drawn to repay convertible debt, all other loans were drawn to directly finance construction projects and the interest paid was capitalized and allocated to various real estate construction projects or expensed if the interest costs did not meet the capitalization criteria.

 

The $36 million of restricted cash, corresponds to a $30 million loan from Bank of Communications Offshore Branch (1), the $32 million of restricted cash corresponds to a $31 million loan from Bank of China, Macau Branch, $10 million of restricted cash corresponds to a $9.82 million loan from LUSO International Bank (2) and $8 million of restricted cash corresponds to a $7.76 million loan from LUSO International Bank (1). These borrowings were incurred in Hong Kong to repay certain loans that were due, however the majority of the Company’s cash resided in mainland China and to wire funds from mainland China to Hong Kong is subject to foreign exchange restrictions imposed by the PRC government. Thus, in order for us to repay our Hong Kong and overseas counterparties, the Company had to utilize the special lending facilities provided by major PRC banks and foreign financial institutions (i.e., LUSO International Bank and Bank of China) to allow the Company to borrow outside of mainland China using cash we have in mainland China as guarantees. 

 

The loans payable balances were secured by certain of the Company’s real estate held for development or sale and land use rights with a carrying value of $195,494,485 on March 31, 2015 (December 31, 2014 - $398,636,841). No buildings or income producing properties and improvements were pledged as at March 31, 2015.The weighted average interest rate on loans payable as of March 31, 2015 was 9.25% (December 31, 2014 – 9.78%).

 

The loans from Bank of Xi’an, Weilai Branch, Construction Bank of China and Bank of Communications are subject to certain repayment terms based on certain percentage of units sold in Puhua Phase II, Park Plaza projects, Puhua Phase III and IV. Based on these repayment terms, Bank of Xi’an, Weilai Branch, Construction Bank of China and Bank of Communications can demand repayment of all remaining balances outstanding at any time.

 

The principal repayment requirements over the following 2 years are as follows:

 

Due in 1 year  $242,292,141 
1 – 2 years   23,892,787 
Total  $266,184,928 

 

15
 

  

Note 13 – Shareholders’ Equity

 

Common Stock

 

No shares were issued or retired during the first quarter of 2015.

 

The Company consolidated its issued and outstanding common stocks on a basis of one new common stock for every five common stocks subsequent to the period end (note 20). These interim condensed consolidated financial statements have been retrospectively restated, including loss per share, to account for the Company’s share consolidation.

 

Stock Options

 

On June 13, 2011, the Company granted 245,551 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 date of issuance, 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 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.

 

All of the options were vested by end of 2014, no compensation expense were recognized during the three months ended March 31, 2015 (March 31, 2014-$132,840).

 

Note 14 – Other Revenue

 

   For the three months ended 
   March 31,   March 31, 
   2015   2014 
Interest income  $836,813   $1,114,065 
Rental income   237,783    245,695 
Income from property management services   1,391,231    1,284,066 
External construction contracts   681,954    2,965,507 
Additional compensation received in connection with TangDu project   -    612,912 
Miscellaneous income   -    13,382 
Total  $3,147,781   $6,235,627 

 

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, Wayfast, Clever Advance, Gracemind, Treasure Asia and Xinxing Property are aggregated as All Other segment. The All Other segment includes revenue from property management services from Xinxing Property and all head office expenses. None of these companies have ever met any of the quantitative thresholds for determining reporting segments.

 

16
 

  

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 unaudited interim condensed consolidated financial statements during the three months ended March 31, 2015 and March 31, 2014 are as follows:

 

For the three months ended March 31, 2015:

 

   Real Estate           Adjustments       
   Development           and       
   and Sales   Construction   All Other   Eliminations     Consolidated 
Revenues from external customers  $20,674,496   $681,954   $1,391,231   $-   $22,747,681 
Intersegment revenues   -    3,875,059    -    (3,875,059)(1)   - 
Rental from external customers   237,783    -    -    -    237,783 
Miscellaneous income (mainly interest income)   835,142    -    1,671    -    836,813 
Total revenue  $21,747,421   $4,557,013   $1,392,902   $(3,875,059)  $23,822,277 
                          
Financing expense  $997,773   $48,465   $26,585   $-   $1,072,822 
Segment profit (loss) before taxes  $(697,972)  $(26,218)  $215,145   $45,078(1)  $(463,967)
Total assets  $573,181,223   $27,275,467   $89,691,498   $(96,217,892)(2)  $593,930,296 

 

For the three months ended March 31, 2014:

 

   Real Estate
Development
and Sales
   Construction   All Other   Adjustments
and
Elimination
   Consolidated 
Revenues from external customers  $15,806,784   $2,965,507   $1,284,066   $-   $20,056,357 
Intersegment revenues   -    4,394,865    -    (4,394,865)(1)   - 
Rental from external customers   223,720    21,975    -    -    245,695 
Other miscellaneous income                         
(mainly interest income)   1,736,816    -    3,543    -    1,740,359 
Total Revenue  $17,767,320   $7,382,347   $1,287,609   $(4,394,865)  $22,042,411 
Financing expense  $1,385,165   $6,690   $2,675   $-   $1,394,530 
Segment (loss) profit before taxes  $(557,137)  $5,698   $(47,050)  $(169,912 )(1)  $(768,401)
Total assets  $848,178,722   $81,485,867   $150,681,933   $(464,936,658)(2)  $615,409,864 

 

(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 eliminated upon consolidation.

 

17
 

  

Note 16 – Loss per Share

 

Loss per share for the three months ended March 31, 2015, and 2014 were determined by dividing net loss for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding.

 

All outstanding options have anti-dilutive effects on the loss per share and were therefore excluded from the determination of three months ended March 31, 2015 and 2014 diluted earnings per share calculation.

 

Note 17 – Commitments and Contingencies

 

In connection with the loans borrowed from XinYing (Notes 12 and 19), the Company also signed a finance consulting agreement with XinYing whereby the Company is committed to pay consulting fees on a quarterly basis up to August 2015 for financing services provided.

 

Additionally, the Company had various commitments related to land use right acquisitions with unpaid balances of approximately $16.1 million. The balances are not due until the vendor removes the existing building on 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 2015.

 

All future payments required under the various agreements are summarized below:

 

   Payment due by period 
Commitments and      Less than                   After 
Contingencies  Total   1 year   1-2 years   2-3 years   3-4 years   4-5 years   5 years 
Consulting fees  $715,814   $715,814   $-   $-   $-   $-   $- 
Land use rights   16,131,634    16,131,634    -    -    -    -    - 
Total  16,847,448   16,847,448   $-   $-   $-   $-   $- 

 

The Company from time to time has to renew certain real estate development licenses in the normal course of business. Management believes the Company will be able to continuously renew these licenses.

 

Note 18 – Related Party Transactions

 

The spouse of one of the Company’s executive officers owns 37.83% of the common stock of Days Hotel. During the three months ended March 31, 2015, the Company incurred $16,828 March 31, 2014 - $10,001 in fees to Days Hotel. The fees incurred include meal and hotel rooms charges. As of March 31, 2015, the Company had $14,440 December 31, 2014 – $15,171 fees payable to Days Hotel.

 

18
 

  

The Company also has a $42,829,489 loan payable to Days Hotel as of March 31, 2015 (December 31, 2014 - $42,371,789) (Note 12). For the three months ended March 31, 2015, the Company incurred $2,987,791 (March 31, 2014 - $1,010,258) of interest expense to Days Hotel and capitalized the amounts in real estate held for development or sales. As of March 31, 2015, the Company also had $4,114,652 (December 31, 2014 - $1,571,477) interest payable to Days Hotel.

 

As of March 31, 2015, the Company also has a $17,744,798 (RMB110 million) (December 31, 2014 - $17,728,782) loan payable to XinYing (Note 12), in which an executive partner is the spouse of one of the Company’s executive officers. The Company incurred a total of $903,299 interest expense and finance consulting fees payable to XinYing during the three months ended March 31, 2015 (March 31, 2014 - $1,669,669) and capitalized the amount in real estate held for development or sales. As of March 31, 2015, the Company had $109,400 (December 31, 2014 - $52,004) in interest payable to XinYing.

 

Note 19 – Subsequent Event

 

Subsequent to the quarter end the Company received $27,423,778 (RMB 170 million) loans from Zhongyuan Trust, the loan matures on June 5, 2017, has an annual interest rate of 15.11%. The loan is secured with Golden Bay land use right A.

 

The Company repaid total of $3,048,879 (RMB 18.9 million) Days Hotel loans subsequent to the quarter end, and extended $18,874,012 (RMB 117 million) Days Hotel loans to December 31, 2015. The Company also repaid the $24,197,451 (RMB 150 million) Dinghui loan subsequent to the quarter end.

 

The Company also extended the loan with Bank of Xi’an to as follows: $6,452,654 (RMB 40 million) due on June 30, 2015; $4,839,490 (RMB 30 million) due on September 30, 2015; $4,839,490 (RMB 30 million) due on December 31, 2015, and $1,613,164 (RMB 10 million) due on April 24, 2016.

 

 

Note 20 – Reverse Stock Split

 

On April 22, 2015, China Housing & Land Development, Inc. (the “Company”) filed a Certificate of Change pursuant to Nevada Revised Statutes (“NRS”) Section 78.209 with the Secretary of State of Nevada to effect a reverse stock split of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and the proportional decrease of the Company’s authorized shares of Common Stock at a ratio of one-for-five (1-for-5) (the “Reverse Split”) from 100 million shares authorized to 20 million shares authorized. The Reverse Split was authorized by the Board of Directors of the Company pursuant to Section 78.207 of the NRS on April 3, 2015 and, pursuant to the Certificate of Change, became effective as of April 24, 2015.


The Company’s shares outstanding immediately prior to the Reverse Stock Split totaled 34,800,558, which were adjusted to 6,960,145 shares outstanding as a result of the Reverse Stock Split, compared with post-split of 6,960,145 shares (34,800,558 shares prior to the split) outstanding as of December 31, 2014. No fractional shares were issued in connection with the Second Reverse Stock Split. Stockholders who otherwise would have been entitled to receive a fractional share in connection with the Reverse Stock Split received one whole post–split share.

 

19
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 and 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, 2014. 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 2014 Annual Report.

 

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.

 

Our judgments and estimates related to impairment include our determination of whether an event has occurred that warrants an impairment test. If a test is required, we will also have to make certain judgments and estimations concerning our expectations of future cash flows and the calculation of the fair value of the impaired assets.

 

The Company evaluates the carrying value of real estate held for development or sale for impairment based on real estate market price and expected cash flow on the Company’s real estate assets. Any excess of cost over fair market value is recorded as impairment. Write-downs of real estate costs deemed impaired would be recorded as adjustments to the cost of real estate sales.

  

20
 

 

The following table summarizes the components of real estate inventories as of March 31, 2015 and December 31, 2014:

 

   March 31,
2015
   December 31,
2014
 
Real estate projects completed and held for sale          
Junjing I  $1,611,935   $1,610,480 
Junjing II  81,352   81,277 
Gangwan   9,608    9,600 
Junjing III   796,249    802,364 
Puhua Phase I   5,126,370    6,608,809 
Puhua Phase II – West Region and New Coastal Line   6,474,980    5,504,913 
Real estate completed and held for sale   14,100,494    14,617,443 
           
Real estate projects held for development          
Puhua Phase II (East Region), III, IV and V   93,771,573    98,207,424 
Park Plaza   56,917,930    59,308,044 
Golden Bay   158,481,214    150,562,541 
Jiyuan   29,296,886    29,784,510 
Golden Bay Apartment   16,212,442    14,529,266 
Other   7,320,897    7,074,741 
Real estate held for development   362,000,942    359,466,526 
           
Total real estate held for development or sale  $376,101,436   $374,083,969 

 

Intangible assets

 

The intangible assets consisted of the following at March 31, 2015 and December 31, 2014:

 

   March 31,
2015
   December 31,
2014
 
Development right acquired (a)  $52,095,265   $52,048,246 
Land use right acquired (b)   8,794,216    8,786,279 
Construction license acquired (c)   1,214,417    1,213,321 
    62,103,898    62,047,845 
Accumulated amortization   (38,390,603)   (38,485,894)
Intangible assets, net  $23,713,295   $23,561,951 

 

(a) The development right for 487 acres of land in Baqiao Park was obtained from the acquisition of New Land in fiscal 2007. The intangible asset has a finite life. The development right will expire on June 30, 2016.

 

The Company acquired the land use right for the remaining parcel of Golden Bay project and recorded amortization of $12,553,872 during the first quarter of 2014 and capitalized this amount in the real estate held for development or sale. The Company acquired the land use right for the Company’s head office and certain future resident project and recorded amortization of $5,222,987 during the second quarter of 2014. $2,121,055 was capitalized in the Company’s buildings and improvements and $3,101,932 in the real estate held for development or sale.

 

21
 

 

The $12,553,872 amortization recorded in the first quarter of 2014 was calculated by multiplying the $33,092,754 remaining carrying value of the development right immediately before this amortization by 37.94%, the percentage of profit expected to be realized from acquiring the land use right through the utilization of the development right over the total expected profit from acquiring land use rights through the utilization of the development right.

 

The $5,222,987 amortization recorded in the second quarter of 2014 was calculated by multiplying the $20,977,221 remaining carrying value of the development right immediately before this amortization by 24.90%, the percentage of profit expected to be realized from acquiring the land use right through the utilization of the development right over the total expected profit from acquiring land use rights through the utilization of the development right.

 

Upon the acquisition of Puhua’s land use right in 2009, the Company recorded $4,665,592 of amortization on the development right and capitalized the amount in the real estate held for development or sale. The capitalized amortization amount is expensed as part of the cost of real estate sales as Puhua recognizes its real estate sales revenues under the percentage of completion method.

 

(b) The land use right was acquired through the acquisition of Suodi. The land use right certificate will expire in November 2048. The Company amortizes the land use right over 39 years starting from the date of acquisition. For the three months ended March 31, 2015, the Company has recorded $55,252 of amortization expense on the land use rights (March 31, 2014 - $56,467). The amortization was included in selling, general and administrative expenses. For the next five years, the Company will amortize approximately $220,000 annually on the land use right.
   
(c) The construction license was acquired through the 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 it will be able to continuously renew the license in future years. The license is subject to renewal on January 1, 2016.

 

No impairment write-down was recognized for March 31, 2015 and 2014 on the intangible assets.

 

Deposits on land use rights

 

   March 31,
2015
   December 31,
2014
 
Deposits on land use rights  $16,131,634   $16,136,415 

 

The deposits on land use rights are for the land in Baqiao area and Textile City.

 

The Company conducts regular reviews of its deposits on land use rights. After review and assessment, the Company concluded that there were no significant decreases in market prices and therefore no impairment write-downs were required.

 

Property, plant and equipment

 

The total rental income (cash inflow) from leasing the Tsining Junjing commercial retail property was $0.2 million (RMB1.4 million) during the first quarter of 2015 which is slightly more than the $0.2 million (RMB1.3 million) in rental income of the same period of 2014. Based on $0.2 million (RMB1.4 million) of net cash receipts in the first quarter of 2015, it will take the Company approximately 11 years to recover $9.84 million (RMB61 million) carrying value of the asset. There was no cash outflow in connection with the maintenance and repair of the property. During the first quarter of 2015, the amortization of this property is RMB0.6 million (non-cash item).

 

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We believe the property can be sold with reasonable effort. Many potential customers have shown interest in buying this property. However, we have signed lease agreements with several parties and the longest term amongst these agreements does not expire until 2022. We may not be able to sell the property before the expiration date of the lease agreements. In addition, the Company currently uses this property as collateral for loans outstanding and due to the nature of our operation, we will likely use this property as collateral again in the future.

 

We assess whenever events or changes in circumstances indicate that the carrying amount of this property may not 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 asset and its eventual disposition. If the total of the expected undiscounted cash flow is less than the carrying amount of the asset, we recognize an impairment loss based on the fair value of the asset. 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 asset.

 

During the fourth quarter of 2012, we sold 7,367 square meters of Junjing I commercial property for $14.9 million (RMB94.3 million). The carrying value of the sold property was only $8.5 million (RMB52.8 million). Therefore, we concluded that there was no impairment for the commercial property. The remaining commercial property has a GFA of 2,275 square meters, with a carrying value of $1.6 million (RMB10 million). The market selling price of properties like the Tsining Junjing I commercial retail property was much higher than its cost when we reclassified it from inventory to fixed assets. Thus, our assessment does not show any impairment to the carrying value of the property.

 

Material trends and uncertainties that may impact continuing operations

 

Changes in national and regional economic conditions, as well as local economic conditions where we conduct our operations and where prospective purchasers of our homes live, may result in the exercise of greater caution on the part of homebuyers and consequently result in fewer home purchases. According to the report of China Index Research Institute, the average residential sale price in 100 cities was still falling in the first quarter of 2015 and fell 0.18% during the first quarter of 2015.

 

In recent years, China’s GDP growth rate has slowed down, with the year 2014 dropping to the lowest level in the last 20 years. Given the lack of economic growth motivation, China’s economy has slowed down from an annual average growth rate of nearly 10% for the last decade to the current “new normal trend” of 7%-7.5%. In the first quarter of 2015, China’s GDP growth rate was 7%, the overall macro economy has not yet stabilized, exhibiting a further risk of overall economic stagnation. In the meantime, the growth rate of development and investment in real estate has slumped significantly as the growth rate was only 8.5% in the first quarter of 2015 as compared to 16.8% in the same period of 2014, with a strong likelihood of further decline. The new construction area of real estate has declined downward almost to 2008 levels and the market transaction volume in all tiers of cities in China has declined noticeably under huge market pressure and an increasingly more competitive environment.

 

As negatively affected by the government’s tight regulatory policy in recent years, the financing environment for real estate development enterprises in China has significantly worsened over time. The funds of real estate enterprises are tightened, the turnover rate has declined, and the collection of receivables for real estate enterprises has dropped continuously. The dependence on the self-financing significantly improved. The asset liability ratio of real estate enterprise is high in the first quarter of 2015, short-term solvency is close to the 2008 levels. 2015 is the peak of repaying the trust for the real estate enterprises, combined with the rising of the international financing costs, and the investor risk tolerance has dropped due to slow market sales, resulting in relatively heavy capital pressure on real estate enterprises pressure. The government has broadened the money supply by using tools such as rate cuts and reserve ratio cuts. However, the government also encourages more funds to flow to the real economy by way of “window guidance,”, and encouraging more funds to flow to the stock markets. In addition, the consistent tightening of credit policies on the real estate industry nationwide has resulted in credit sources flowing to large enterprises, the internal liquidity shortage for small and medium real estate enterprises is still large, making it difficult for small and medium real estate enterprises to survive.

 

23
 

 

The weak performance of the real estate market is mainly the result of an imbalance of market supply and demand, besides government policy and financing factors. In recent years, the real estate market supply has remained at a high level, with no increase in the market transaction volume. The imbalance between supply and demand has been broadened continuously with a record high inventory level, reflecting a drop of the supply and demand ratio of the overall market. Meanwhile, the labor force representing the major demand of the housing market has declined, resulting in a consistently weak demand. Under the pressure of cash flow and inventory reduction, the real estate enterprises have to lower prices to encourage sales, and hence create an increasingly higher discount rate and face a significant drop in profits.

 

On the one hand, the real estate enterprises adopt the intense price competition strategy resulting in an increasingly higher discount rate, but on the other hand the construction cost has increased continuously. In light of the financing difficulty, high debt ratio and high inventory level of the Company, real estate enterprises will continue to strengthen its promotion efforts, stick to the policy of “cash is of paramount importance,” in order to expand sales and mitigate risks.

 

In addition, regulatory requirements could cause 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 other fees and taxes, which may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from governmental agencies to grant us necessary licenses, permits and approvals could have an adverse effect on our operations.

 

As of March 31, 2015, we had $8,260,186 of cash, compared to $33,223,127 as of December 31, 2014, a decrease of $24,962,941.

 

The real estate market situation of Xi’an in 2015 is not clear yet. Based on the data of the first quarter of 2015, the real estate market has cooled down, according to E-House (China), Xi’an’s transaction volume was 2.38 million square meters, representing a 14% decrease as compared to that of 2014 the market remains weak and deteriorating, with rigorous conflicts between supply and demand that deepened industrial crisis. With the ongoing development of new projects and continuous low sales, coupled with the successive maturity of rigid debts and certain mandatory contributions required by the government, the Company is facing a heavy cash flow pressure in 2015. Accordingly, we expect that the real estate market downturn will continue for the foreseeable future. In addition, the Company is facing also faces a huge challenge of the financing difficulty faced by small and medium real estate enterprises. In 2015, the Company will strengthen its financing efforts, endeavor to obtain more financing, and try all kinds of possibilities to ensure its proper operation and vigorous development.

 

BUSINESS

 

Our Company

 

We are a residential developer with a focus on second-tier and third-tier cities in western China. We are dedicated to providing quality, 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 gross domestic product (“GDP”) growth and the middle classes’ corresponding increase in purchasing power.

 

24
 

 

We commenced our operations in Xi’an in 1999 and have been considered an established private residential developer in the region. We have experienced solid growth in the past 15 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 architectural firms from the United States, Canada and Europe that have introduced advanced “eco-friendly” and “green” technologies into our projects.

 

As our focus is primarily on the demand from first-time home buyers and first time up-graders in western China, the majority of our apartments range in size from 70 square meters to 120 square meters; such sizes are 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 primarily from the local government, open-market auctions, and through acquisition of old factories from the government. We do not depend on a single method of land acquisition, which enables us to acquire land at reasonable costs and generally enables us to generate profitable returns 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 long term demand for real estate from China’s emerging middle class. Provided that market fundamentals remain stable, we seek to continue our growth 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 Second-tier and Third-tier Cities. We believe our proven business model and expertise can be replicated in other second-tier and third-tier cities, especially in western China. For example, in 2011, we entered into the Ankang city market for a residential project. Furthermore, we have identified certain other cities that possess attractive replication dynamics.

 

Continue to Focus on the Middle Market. Since China’s 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 this middle class demand.

 

25
 

 

Our Competitive Strengths

 

We believe we have the following competitive strengths that will enable us to compete effectively and to capitalize on the growth opportunities in our market:

 

Established history in the market

 

We are an established private residential real estate developer 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 deep local project experience and long-term relationships with the central and local governments, we have been able to acquire significant land assets, thereby providing a strong pipeline of potential future business and revenue over the next three to five years.

 

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 competitive market rates. We are primarily focused on capitalizing on rising demand for properties from China’s emerging middle class, which has growing 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 well 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. As a result, we have developed extensive core competencies that are 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. 

 

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.

 

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Projects Under Construction

 

Project
Name
  Type of
Projects
  Actual or
Estimated
Construction
Period
  Actual or
Estimated Pre-sale
Commencement
Date
  Total Site
Area
(m)
   Total
Gross
Floor Area
(m)
   Sold GFA
by March
31,2015
(m2)
 
Park Plaza I  Multi-Family residential & Commercial  Q1/2012 - Q2/2015  Q1/2013   33,339    106,003    77,608 
                         
Park Plaza II  Apartment & Commercial  Q2/2015 – Q3/2017  Q4/2015   10,000    66,155    - 
                         
Puhua Phase Two-East Region  Multi-Family residential & Commercial  Q2/2010 – Q3/2015  Q2/2010   24,059    119,311    38,403 
                         
Puhua Phase Three  Multi-Family residential & Commercial  Q2/2012 – Q2/2015  Q1/2013   30,600    129,049    86,744 
                         
Puhua Phase Four  Multi-Family residential & Commercial  Q1/2014 – Q4/2017  Q2/2014   27,800    147,775    31,687 
                         
Golden Bay A  Multi-Family residential & Commercial  Q2/2014 – Q4/2018  Q2/2015   49,374    163,343    - 
                         
Ankang Project  Multi-Family residential & Commercial  Q2/2012 – Q2/2019  Q4/2012   74,820    295,770    81,882 
                         
Golden Bay Apartment  Office building & apartment  Q1/2010 – Q2/2016  Q2/2015   13,459    16,564    - 

 

27
 

 

Project
Name
  Total
Number of
Units (a)
   Number of
Units Sold by
March
31,2015 (a)
   Estimated
Revenue
($ millions)
   Contracted
Revenue by
March
31,2015
($ millions)
   Recognized
Revenue by
March
31,2015
($ millions)
 
                     
Park Plaza I   702    653    123    101    101 
                          
Park Plaza II   247    -    -    -    - 
                          
Puhua Phase Two
-East Region
   650    243    117    40    34 
                          
Puhua Phase Three   744    646    109    76    73 
                          
Puhua Phase Four   1,172    315    160    31    11 
                          
Golden Bay A   373    -    -    -    - 
                          
Ankang Project I   932    773    92    52    49 
                          
Golden Bay Apartment   24    -    -    -    - 

 

a. The number of units here only includes residential units and commercial part, but excludes parking lots.

 

*Estimated revenue is calculated based on our reasonable estimates and may vary with market changes.

 

Park Plaza I: 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 March 2011, the Company officially acquired land use rights for Park Plaza. The Company intends to develop a large mid–to-upper income residential and commercial project on this site, with a gross floor area of 106,003 square meters. The three-year construction of Park Plaza started in the first quarter 2012. We started to recognize revenue from this project in the first quarter of 2013.

 

Park Plaza II: The Company intends to develop an apartment and commercial project on this site, with a gross floor area of 66,155 square meters. Construction will start in the second quarter of 2015, and we expect to begin accepting pre-sale purchase agreements in the fourth quarter of 2015.

 

Puhua Project: The Puhua Project is located within the Baqiao project covers 79 acres, with a total GFA of 800,000 square meters. The project is divided into five phase for development. 278,168 square meters have been completed, with 396,165 square meters under construction, and 117,237 square meters under planning. The entire project began in 2008 and is expected to end in 2018.

 

Puhua Phase Two–East Region: East Region consists of eight residential buildings and three commercial buildings. Total estimated revenue of Puhua Phase Two–East Region is $117 million. Total GFA of the project is expected to reach 119,311 square meters. Construction of Puhua Phase Two–East Region started in the second quarter 2010, and we have started revenue recognition since the second quarter 2010. Puhua Phase Two–West Region was completed in the fourth quarter of 2012 and New Coast Line was completed in the fourth quarter of 2013.

 

Puhua Phase Three: The Puhua Phase Three project covers 30,600 square meters with a total GFA of 129,049 square meters. We started pre-sale of Puhua Phase Three during the first quarter of 2013 and started recognizing revenues based on the percentage of completion method.

 

Puhua Phase Four: The Puhua Phase Four project covers 27,800 square meters with a total GFA of 147,775 square meters. We started pre-sale of Puhua Phase Four during the second quarter of 2014 and started recognizing revenues based on the percentage of completion method.

 

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Golden Bay A: The Golden Bay A project is located within the Baqiao project, with a total GFA of 163,343 square meters. The Golden Bay A project will consist of cottage, western-style house, high-rise residential as well as a commercial area. Construction has started in the second quarter of 2014, and we expect to begin accepting pre-sale purchase agreements in the second quarter of 2015. The Company has obtained the land use right from the government in November 2013.

 

Ankang Project: The Ankang project is located in Ankang city, which is approximately 260 kilometers south of Xi’an in China’s Shaanxi Province. The project consists of residential buildings and a commercial area. Construction started in the second quarter of 2012, and pre-sales started in the fourth quarter of 2012. Total GFA of the project is expected to reach 295,770 square meters. The project is divided into three phases for development; currently phase I is being constructed and is on sale.

 

Golden Bay Apartment: The Golden Bay Apartment project is located within the Baqiao project, with a total GFA of 16,564 square meters. The project is under construction, and we expect to begin accepting pre-sale purchase agreements in the second quarter of 2015.

 

Projects under planning and in process

 

Project Name  Type of Projects  Estimated
Construction
Period
  Estimated
Pre-sale
Commencement
  Total Site Area
(m2)
  

Total GFA

(m2)

   Total Number
of Units
 
                      
Baqiao New Development Zone  Land Development  2009-2020  N/A    N/A     N/A    N/A 
                         
Golden Bay B  Multi-Family residential &Commercial  Q3/2016 – Q3/2019  Q1/2017   45,451    166,165    N/A 
                         
Puhua Phase Five  Multi-Family residential& Commercial  Q1/2016– Q4/2018  Q2/2016   40,300    117,237     N/A 
                         
Textile City  Multi-Family residential & Commercial  Q1/2016 – Q4/2020  Q2/2016   120,192    630,000     N/A 

 

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.

 

29
 

 

The Xi’an Municipal Government plans investments of RMB50 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 enhance the natural environment adjacent to CHLN’s Baqiao Project.

 

Through our New Land subsidiary, we sold 31 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. As of December 31, 2012, the Company has bought out Prax Capital’s investment.

 

In December 2010, we signed a preliminary contract with the government disclosing our intention to acquire an additional 29.7 acre tract of land at Textile City. The Company has not yet acquired the land use rights because the government is clearing the land and otherwise making the land sellable. It is common practice in China for the government to clear all the existing buildings and move all existing residences prior to selling a tract of land. However, because we signed the preliminary land acquisition agreement with the government, the Company has first priority to purchase the land. We estimate that we may obtain the land use rights for this tract of land by the end of 2015.

 

In November 2013, the Company acquired the land of Golden Bay A projects, which were 17.5 acres.

 

In January 2014, the Company acquired the land of Golden Bay B projects, which were 17.1 acres.

 

In March 2014, the Company acquired the land of headquarter building and Golden Bay Apartment projects, which were 5.6 acres.

 

After selling 31 acres, placing 79 acres in the Puhua project and 34.6 acres in the Golden Bay project and setting aside 29.7 acres for Textile City, and 5.6 acres for headquarter building and Golden Bay Apartment projects approximately 307 acres remain available for the Company to develop in the Baqiao area. The Company has a $16 million deposit on land use rights as of March 31, 2015. The Company intends to utilize this deposit to offset the actual acquisition price of the land use rights of the 29.7 acres for Textile City.

 

However, the actual acquisition price for these land use rights will be determined at the time of the actual land use right acquisition through negotiations with the government. The Company will also determine the time of acquisition of actual land use rights based on the supply and demand of the land and real estate market and its cash flow situation. In the meantime, the Company will pay for any additional amount in excess of the $16 million deposit according to the final bidding price.

 

Pursuant to an exclusive development right agreement, the government is obligated to sell the land to the Company.

 

Golden Bay B: The Golden Bay B project is located within the Baqiao Project, with a total GFA of 166,165 square meters. The Golden Bay project will consist of residential buildings as well as a commercial area. Construction will start in the third quarter of 2016, and we expect to begin accepting pre-sale purchase agreements in the first quarter of 2017. The Company has obtained the land use right from the government in January 2014. Total land contract price was $33 million (RMB205 million).

 

Puhua Phase Five: Puhua Phase Five covers 40,300 square meters with a total GFA of 117,237 square meters. Construction started in the first quarter of 2016, and we expect to begin accepting pre-sale purchase agreements in the second quarter of 2016.

 

30
 

 

Textile City: The Textile City project is located within the Baqiao New Development Zone. The project consists of residential buildings and a commercial area. The land will be obtained by the end of 2015 and construction is expected to start in the first quarter of 2016, and the entire project will take five years.

 

Major Completed Projects with Units Available for Sale

 

 Project Name  Type of Projects  Completion
Date
  Total Site
Area(m)
   Total
GFA(m)
   Total Number
of Units(a)
   Number of Unit
Sold by March
31,2015(a)
 
                           
Puhua Phase Two-West Region and New Coastal Line  Multi-Family residential & Commercial  Q4/2013   29,093    141,031    905    900 
                           
Puhua Phase One  Multi-Family residential & Commercial  Q4/2012   47,600    137,137    850    804 
                           
JunJing III  Multi-Family residential & Commercial  Q4/2012   8,094    52,220    531    531 
                           
JunJing II  Multi-Family residential & Commercial  Q4/2009   39,524    142,214    1,215    1,211 
                           
JunJing I  Multi-Family residential & Commercial  Q3/2006   55,588    167,931    1,671    1,670 

 

a. The number of units here only includes residential units and commercial part and excludes parking lots.

 

Puhua Phase One: Puhua Phase One is one of Puhua’s five phases and was completed in the fourth quarter of 2012. As of March 31, 2015, we have recognized $114 million in revenue.

 

Puhua Phase TwoWest Region and New Coastal Line: Puhua Phase Two–West Region consists of four buildings. The region was completed in the fourth quarter of 2012 and New Coastal Line was completed in the fourth quarter of 2013. As of March 31, 2015, we have recognized $112 million in revenue.

 

Junjing III: Junjing III is located near our Junjing II project and the city expressway. It has a GFA of about 52,220 square meters. The project consists of three high rise buildings, each 28 to 30 stories high. The project is targeted at 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 project was completed in the fourth quarter of 2012. As of March 31, 2015, we have recognized $53 million in revenue.

 

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Junjing II: We started the construction of Junjing II 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 $100.8 million.

 

Junjing I: 369 North Jinhua Road, Xi’an is the first “German” style residential and 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 I is also a commercial venture that houses small businesses serving the needs of Junjing I residents and surrounding residential communities. The project was completed in September 2006.

 

CONSOLIDATED OPERATING RESULTS

 

Three Months Ended March 31, 2015 Compared With Three Months Ended March 31, 2014

 

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 New Development Zone. For the three months ended March 31, 2015, most of our revenues came from the Park Plaza, Puhua Phase Three and Four, and Ankang Project.

 

  

Three Months

Ended

March 31, 2015

  

Three Months

Ended

March 31, 2014

 
Revenues by project:          
US$          
Project Under Construction          
Puhua Phase Two – East Region  $1,761,938   $1,872,393 
Puhua Phase Three   5,892,806    2,663,265 
Puhua Phase Four   3,588,069    - 
Park Plaza   5,339,926    4,984,679 
Ankang Project   3,138,004    5,269,189 
Projects Completed         
Puhua Phase Two – West Region and NCL   345,935    (56,642)
JunJingIII   64,143    396,809 
Puhua Phase One   543,674    677,091 
JunJingII   -    - 
JunJingI   -    - 
Other Projects   -    - 
Revenues from the Sale of Properties  $20,674,496    15,806,784 

 

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The following table summarizes details of our most significant projects:

 

  

Three Months

Ended

March 31, 2015

  

Three Months

Ended

March 31, 2014

 
Revenues by project:          
US$          
Project Under Construction          
Puhua Phase Two – East Region contract sales  $1,893,300   $1,919,787 
Revenue  $1,761,938   $1,872,393 
Total gross floor area (GFA) available for sale   119,311    119,311 
GFA sold during the period   2,218    1,515 
Remaining GFA available for sale   80,908    93,982 
Percentage of completion   87.4%   72.8%
Percentage GFA sold during the period   1.9%   1.3%
Percentage GFA sold to date   32.2%   21.2%
Average sales price per GFA  $854   $1,267 
           
Puhua Phase Three contract sales  $5,767,268   $1,963,774 
Revenue  $5,892,806   $2,663,265 
Total gross floor area (GFA) available for sale   129,049    129,049 
GFA sold during the period   5,986    1,788 
Remaining GFA available for sale   42,305    60,508 
Percentage of completion   96.25%   67.5%
Percentage GFA sold during the period   4.6%   1.4%
Percentage GFA sold to date   67.2%   53.1%
Average sales price per GFA  $963   $1,098 
           
Park Plaza-Phase I contract sales  $5,006,835   $3,937,986 
Revenue  $5,339,926   $4,984,679 
Total gross floor area (GFA) available for sale   106,003    107,060 
GFA sold during the period   4,575    2,811 
Remaining GFA available for sale   25,928    53,806 
Percentage of completion   99.9%   87.1%
Percentage GFA sold during the period   4.3%   2.6%
Percentage GFA sold to date   73.2%   49.7%
Average sales price per GFA  $1,094   $1,401 
           
Ankang Project-Phase I contract sales  $2,604,805   $5,184,245 
Revenue  $3,138,004   $5,269,189 
Total gross floor area (GFA) available for sale   124,919    124,919 
GFA sold during the period   4,761    7,860 
Remaining GFA available for sale   43,036    64,566 
Percentage of completion   92.46%   46.6%
Percentage GFA sold during the period   3.8%   6.3%
Percentage GFA sold to date   65.5%   48.3%
Average sales price per GFA  $547   $660 
           
Puhua Phase Four contract sales  $7,927,819   $- 
Revenue  $3,588,069   $- 
Total gross floor area (GFA) available for sale *   147,775    147,775 
GFA sold during the period   8,119    - 
Remaining GFA available for sale   116,088    147,775 
Percentage of completion   34.5%   - 
Percentage GFA sold during the period   5.5%   - 
Percentage GFA sold to date   21.4%   - 
Average sales price per GFA   976    - 

*Difference in total GFA available for sale is due to addition of a new building and or modification to floor plans.

 

33
 

 

Revenues from projects under construction

 

Revenues from projects under construction totaled $19.7 million for the three months ended March 31, 2015 compared to $14.8 million during the same period of 2014. The increase is due to more buildings up for sales during the first quarter of 2015 compare to the same period of 2014.

 

Puhua Project: The Puhua Project is located within the Baqiao project covers 79 acres, with a total GFA of 800 thousand square meters. The project is divided into five phase for development, 278,168 square meters have completed, 396,165 square meters is under construction, and 117,237 square meters is under planning. The entire project began in 2008, and is expected to end in 2018.

 

Puhua Phase Two–East Region: East Region consists of eight residential buildings and three commercial buildings. Total estimated revenue of Puhua Phase Two–East Region is $117 million. Total GFA of the project is expected to reach 119,311 square meters. Construction of Puhua Phase Two-East Region started in the second quarter 2010, and we have started revenue recognition since the second quarter 2010. Puhua Phase Two–West Region was completed in the fourth quarter of 2012 and New Coast Line was completed in the fourth quarter of 2013.

 

34
 

 

Puhua Phase Three: The Puhua Phase Three project covers 30,600 square meters with a total GFA of 129,049 square meters. We have started pre-sale of Puhua Phase Three during the first quarter of 2013 and started recognizing revenues based on the percentage of completion method.

 

Puhua Phase Four: The Puhua Phase Four project covers 27,800 square meters with a total GFA of 147,775 square meters. We have started pre-sale of Puhua Phase Four during the second quarter of 2014 and started recognizing revenues based on the percentage of completion method.

 

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 March 2011, the Company officially acquired land use rights for Park Plaza. The Company intends to develop a large mid-to-upper income residential and commercial project on this site, with a gross floor area of 106,003 square meters. The three-year construction of Park Plaza started in the first quarter 2012. We started to recognize revenue from this project in the first quarter of 2013.

 

Ankang Project: The Ankang project is located in Ankang city, which is approximately 260 kilometers south of Xi’an in China’s Shaanxi Province. The project consists of residential buildings and a commercial area. Construction started in the second quarter of 2012, and pre-sales started in the fourth quarter of 2012. Total GFA of the project is expected to reach 295,770 square meters. The project is divided into three phases for development; currently phase I is being constructed and is on sale.

 

Revenues from projects completed

 

The revenue from completed projects totaled $953,752 for the three months ended March 31, 2015 compared to $1,017,258 during the same period of 2014. Revenues from projects completed in the first quarter of 2015 were almost the same as those during the period of 2014.

 

Other income

 

Other income includes property management fees, rental income, revenues from the disposal of fixed assets as well as construction income. We recognized $3,147,781 in other income for the three months ended March 31, 2015, compared with $6,235,627 in the same period of 2014. The 49.5% decrease is detailed in the following table:

 

   For the three months ended 
   March 31,   March 31, 
   2015   2014 
Interest income  $836,813   $1,114,065 
Rental income   237,783    245,695 
Income from property management services   1,391,231    1,284,066 
External construction contracts   681,954    2,965,507 
Additional compensation received in connection with TangDu project   -    612,912 
Miscellaneous income   -    13,382 
Total  $3,147,781   $6,235,627 

 

Cost of properties and land

 

The cost of real estate sales and land for the three months ended March 31, 2015 increased 43.3 percent to $18,224,596 compared with $12,716,886 in the same period of 2014. The main reason for this increase is the increase in sales of housing and the increased price of construction cost.

 

35
 

 

Gross profit and profit margin

 

Gross profit for the three months ended March 31, 2015 was $3,865,049, representing a 27.3 percent decrease from $5,316,068 in the same period of 2014. The gross profit margin for the three months ended March 31, 2015 was 16.2 percent compared with 24.1 percent in the same period of 2014.

 

The intense real estate market competition in Xi’an as a whole has resulted in a big pressure on real estate enterprises. According to a report by E-house, at the end of the first quarter of 2015, the inventory of Xi’an commercial residential buildings has increased 6 million square meters, reached a historically high level of 36,00 million square meters, need 29 months to digest the stock market, and consequently, the supply and demand relationship has deteriorated continuously. In the market environment of sales slowdown and competition increased, the real estate companies have promoted sales at the expense of several gross margin. Combined with the continuing rise of the cost of land and the adjustment of the real estate prices, the cost of real estate developers continue to rise, profit margins are being squeezed. Under these challenges, the Company sticks to the strategy of “cash is of paramount importance”. In the first quarter of 2015, the Company increased its promotion efforts, adjusted the sales types, offered special promotions on housing and also offered promotion on the parking lots to collect cash, still ultimately resulting in a 27% decrease in the gross profit compared with the same period of 2014.

 

Revisions in estimated gross profit margins related to revenue recognized under the percentage of completion method are made in the period in which circumstances requiring the revisions become known. The Company did not make any revisions in estimated gross profit margins during the first quarter of 2015, so there was no change to gross profit and earnings per share during this period as a result of changes in estimates.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2015 decreased to $3,249,989 compared with $3,989,482 in the same period of 2014. SG&A accounted for 13.6 percent of total revenue in the first quarter of 2015 compared to 18.1 percent for the same period in 2014. The Company laid off employees at the end of 2014 and controlled the expenses, resulting in the decline in the SG&A.

 

Stock-based compensation

 

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 is determined by the fair value of the common stock on the grant date.

 

Options expire on the earlier of ten years from the date of issuance, 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 of the Company, options granted vest 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.

 

Compensation expense is recognized over the vesting period. All options have vested by end of 2014. During the three months ended March 31, 2015 compensation expense of $Nil (March 31, 2014 - $132,840) was recognized in the interim condensed consolidated statements of income.

 

36
 

 

Other (income) expenses

 

Other expenses mainly consists of late delivery settlements, maintenance costs and some miscellaneous income. Other expenses in the three months ended March 31, 2015 was $6,204 compared with $3,907 in the same period of 2014. This amount was primarily miscellaneous expense from projects in Jiyuan and Xinxing Construction.

 

Financing expense

 

Financing expense in the three months ended March 31, 2015 decreased to $ 1,072,822 from $1,394,530 in the same period of 2014. Currently most of the Company’s loans are for development purpose which has been capitalized. The financial expense primarily mainly includes the interest paid for the USD loans. The decrease of the financial expense is due to the repayment of a few loans.

 

Provision for income taxes

 

The $25,720 provision for income taxes for the three months ended March 31, 2015 increased from $17,036 for the three months ended March 31, 2014, which is primarily due to increased operating income in the first quarter of 2015 compared with that in the first quarter of 2014.

 

Net loss

 

Net loss for the three months ended March 31, 2015 is $478,547 compared to a loss of $774,053 in the same period of 2014. The decrease in net loss is due to increase in revenue.

 

Basic and diluted loss per share

 

Both the basic loss per share and diluted loss per share were $(0.01) in the three months ended March 31, 2015, compared to $(0.02) in the same period of 2014. The number of shares outstanding did not change significantly from year to year.

 

Common shares used to calculate basic and diluted EPS

 

On April 22, 2015, the Company filed a Certificate of Change pursuant to Nevada Revised Statutes (“NRS”) Section 78.209 with the Secretary of State of Nevada to effect a reverse stock split of the Company's common stock, par value $0.001 per share (the “Common Stock”), and the proportional decrease of the Company's authorized shares of Common Stock at a ratio of one-for-five (1-for-5) (the “Reverse Split”) from 100 million shares authorized to 20 million shares authorized. The Reverse Split was authorized by the Board of Directors of the Company pursuant to Section 78.207 of the NRS on April 3, 2015 and, pursuant to the Certificate of Change, became effective as of April 24, 2015.

 

The interim condensed consolidated financial statements have been retrospectively restated, including loss per share, to account for the Company’s share consolidation.

 

The weighted average shares outstanding used to calculate the basic earnings per share and diluted earnings per share was 6,960,145 (34,800,558 shares prior to the split), in the three months ended March 31, 2015 and 6,903,632 (34,518,158 shares prior to the split) in the same period of 2014. The decrease of common shares was due to additional shares issued to Company directors in 2014.

 

Foreign exchange

 

The Company operates in China and the functional currency is the RMB but our 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, 2015 and the same period of 2014, when translating the operating results and financial positions at different exchange rates, created the accrued gain (loss) on foreign exchange. The gain on foreign exchange translation in the three months ended March 31, 2015 was $614,165, compared with a loss of $6,511,663 in the same period of 2014.

 

Cash flow discussion

 

There was a net cash outflow of $24,808,002 during the three months ended March 31, 2015 compared to a net cash inflow of $5,893,284cash outflow during the same period of 2014. The increase in the cash outflow is due to the repayment of a few loans.

 

37
 

 

Operating activity cash inflow was $ 1,711,345 in the three months ended March 31, 2015, compared to operating cash outflow of $30,614,240 in the same period of 2014. The change in operating cash flow in the first quarter of 2015 was mainly due to the increase of real estate sales revenue.

 

There was a cash outflow of $ 140,072 for investing activities for the three months ended March 31, 2015, compared to investing cash outflow of $382,635 for the same period of 2014.

 

There was a cash outflow of $26,379,275 or financing activities for the three months ended March 31, 2015 compared with $25,103,591 of financing cash inflow in the same period of 2014 due to repayment several loans during the first quarter of 2015.

 

The U.S. holding company may require operational funding, from time to time, to pay various professional fees, such as directors' compensation, etc. The current PRC government’s control on convertibility of RMB to U.S. dollars does not apply to paying for the operating expenses so long as the Company can present valid invoices and/or agreements to the Administration for Foreign Exchange.

 

Our PRC subsidiaries have never declared or paid dividends or made other equity distributions to the U.S. holding company.

 

The ratio of receivables to sales was 98% as of March 31, 2015 and 186% as of March 31, 2014. The decrease was due to the acceleration in cash collection.

 

Debt leverage

 

Total debt consists of loans from employees and loans payable to lenders.

 

Total debt outstanding as of March 31, 2015 was $296.4 million compared with $323.5 million on December 31, 2014. Net debt outstanding (total debt less cash and restricted cash) as of March 31, 2015was $198.5 million compared with $199.9 million on December 31, 2014. The Company’s net debt as a percentage of total capital (net debt plus shareholders’ equity) was 64.2 percent on March 31, 2015and 64.4 percent on December 31, 2014, which mainly resulted from additional debt financing for the next 12 months. Consequently, the ratio of net debt as a percentage of total capital slightly decreased as of March 31, 2015 compared with December 31, 2014.

 

Liquidity and capital resources

  

In connection with the loans borrowed from XinYing, the Company also signed a finance consulting agreement with XinYing whereby the Company is committed to pay consulting fees on a quarterly basis up to July 2015 for financing services provided.

 

Additionally, the Company had various commitments related to land use right acquisitions with unpaid balances of approximately $16.1 million. The balances are not due until the vendor removes the existing building on 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 2015.

 

38
 

 

All future payments required under the various agreements are summarized below:

 

   Payment due by period 
Commitments and     Less than                   After  
Contingencies  Total   1 year   1-2 years   2-3 years   3-4 years   4-5 years   5 years 
Consulting fees   715,814    715,814    -    -    -    -    - 
Land use rights   16,131,634    16,131,634    -    -    -    -    - 
Total  $  16,847,448   $  16,847,448   $-   $-   $-   $-   $- 

 

The Company from time to time has to renew certain real estate development licenses in the normal course of business. Management believes the Company will be able to continuously renew these licenses.

 

Loans payable

 

   March 31,
2015
  

December 31, 

2014

 
         
Construction Bank of China          
Annual interest rate is 105% of People’s Bank of China prime rate (5.75%). The loan is secured by the Park Plaza Phase I project and land use right. The repayment schedule is as follows: the loan is due on May 29, 2016. The loan is also subject to certain repayment requirements based on percentage of sales contracts signed over total estimated sales amount of Park Plaza Phase I.  $15,809,001   $19,662,831 
           
Bank of China, Macau Branch          
Originally due on December 16, 2013 and extended to December 16, 2015, annual interest rate is based on 3-month LIBOR rate plus 2.5%, and the loan is also subject to a 1.3% handling fee making effective interest rate 4.06%. The 3-month LIBOR rate on March 31, 2015 was 0.2604% (December 31, 2014 - 0.2457%), secured by $32,263,268 (RMB200 million) of restricted cash.   31,000,000    31,000,000 
           
Bank of Communications Offshore Branch (Loan 1)          
Due on November 13, 2015, annual interest rate is 2.9%, secured by $36,296,177 (RMB225 million) of restricted cash and it is also subject to a 0.3% handling fee. The effective interest rate is 3.2%.   30,000,000    30,000,000 
           
LUSO International Bank (1)          
The Company signed an agreement for a line of credit of $8 million with LUSO International Bank. The amount that can be withdrawn is limited to 97% of the restricted cash secured for the line of credit. The total amount will be due on June 27, 2016. As of March 31, 2015, the Company has drawn $7,761,153 from the line of $9.7 million which is 96% of $ 8,065,817 (RMB50 million) restricted cash secured. Annual interest is based on the 12-month LIBOR rate plus 2.9%. The 12-month LIBOR rate on March 31, 2015 was 0.6609% (December 31, 2014 - 0.6044%).   7,761,153    7,761,153 
           
Xi’an Xinxing Days Hotel & Suites Co., Ltd. (“Days Hotel”)          
There are several loans from Days Hotel, including: $161,316 (RMB1 million) due on April 1, 2015; $419,422 (RMB2.6 million) due on April 19, 2015; $1,129,214 (RMB7 million) due on April 26, 2015; $20,793,678 (RMB128.9 million) due on April 30, 2015; $806,582 (RMB5 million) due on May 13, 2015; $8,065,817 (RMB50 million) due on June 13, 2015; $1,613,163 (RMB10 million) due on November 4, 2015; $1,774,480 (RMB11 million) due on November 26, 2015; $8,065,817 (RMB50 million) due on January 9, 2016. $4,291,014 (RMB26.6 million) of the loan has an annual interest rate of 15%; $38,538,474 (RMB238.9 million) of the loan has an annual interest rate of 20%. The loans due in April and May 2015 were either repaid or extended subsequent to the period end. The loans due in April and May 2015 were either repaid or extended subsequent to the period end.   42,829,489    42,371,788 
           
Zhongyuan Trust          
Annual interest rate is 15.11%, including a 0.9% handling fee. This loan is secured by the land use right of Golden Bay B and guaranteed by Tsining and the president. The repayment terms are as follows: $4,839,490 (RMB30 million) due on August 3, 2016; $11,292,144 (RMB70 million) due on February 3, 2017.   16,131,634    - 
           
Shanghai XinYing Fund, LLC (“XinYing”)          
The loan bears interest at 9.6% per annum plus a consulting fee per quarter at $503,306 (RMB3 million). The effective interest rate is 23.65% (Note 18). The loan is secured by 100% ownership of Xinxing Construction’s shares, corporate guarantee from Tsining, Puhua, and the Company. The repayment terms of the loan are as follows: $2,419,745 (RMB15 million) due on June 1, 2015; $15,325,052 (RMB95 million) due on August 7, 2015.   17,744,798    17,728,782 
           
LUSO International Bank (2)
The Company signed an agreement for a line of credit of $34 million with LUSO International Bank. The amount that can be withdrawn is limited to 100% of the restricted cash secured for the line of credit. The total amount is due on November 4, 2015, the Company has drawn $9,816,500 from the line and is 98% of $10,022,584 (RMB62 million) restricted cash secured. Annual interest rate is based on the twelve-month LIBOR rate plus 2.7%. The twelve-month LIBOR rate as of March 31, 2015 was 0.6609% (December 31, 2014 - 0.6044%).
   9,816,500    9,816,500 
           
Shenzhen Qianhai Dinghui Equity Investment Fund Partnership (“Dinghui”)
          
Originally due on August 7, 2014 and March 22, 2015, the loan’s repayment terms have been extended as follows: $16,131,634 (RMB100 million) due on June 5, 2015, and $8,065,817 (RMB50 million) due on June 20, 2015. The loan has an annual interest rate of 24%, and is secured by the land use rights of head office; Golden Bay apartment, and Golden Bay A.    24,197,451    56,409,760 
           
Bank of Communications          
Annual interest rate is 120% of the People’s Bank of China prime rate (5.75%). The loan is secured by a portion of the Puhua Phase III project and land use right. The repayment schedule is as follows: December 20, 2015 - $12,905,307 (RMB80 million); and December 20, 2016 - $3,226,327 (RMB20 million).   16,131,634    24,175,611 
           
Bank of Communications
Annual interest rate is 130% of the People’s Bank of China prime rate (5.75%). The loan is secured by a portion of the Puhua Phase IV project and land use right. The loan is due on June 3, 2017. The loan is also subject to certain repayment terms based on percentage of sales contracts signed over total estimated sales of Puhua Phase IV.
   14,518,470    14,505,368 
           
Bank of Xi’an, Weilai Branch
Annual interest rate is 130% of the People’s Bank of China prime rate (5.75%) The loan is secured by a portion of the Puhua Phase II project and land use rights. The loan was originally due on April 24, 2015 and was extended subsequent to period end. The loan is also subject to certain repayment requirements based on percentage of sales contracts signed over total estimated sales amounts of Puhua Phase II.
   17,744,798    17,728,782 
           
Bank of Communications Offshore Branch (2)          
Due on March 17, 2016, annual interest is based on 6-month LIBOR rate plus 2.8% and the loan is also subject to a 0.7% financing fee, with an effective annual interest rate of 3.5%. The 6-month LIBOR rate on March 31, 2015 was 0.378% (December 31, 2014 - 0.3443%). The loan is specifically for the retirement of the $31 million Bank of China, Singapore Branch loan. The use of the fund is restricted by the bank until the fund is used to repay the intended loan.   22 ,500,000    22,500,000 
           
Total  $266,184,928   $293,660,575 

 

39
 

 

Except for the loans from Bank of China Macau Branch, LUSO International Bank(2) and Bank of Communications Offshore Branch (1), which were drawn to repay mandatorily redeemable non-controlling interest in Subsidiaries and the loans from LUSO International Bank (1) and Bank of Communications Offshore Branch (2) which were used to repay the loans from Bank of the Singapore Branch, which were drawn to repay convertible debt, all other loans were drawn to directly finance construction projects and the interest paid was capitalized and allocated to various real estate construction projects or expensed if the interest costs did not meet the capitalization criteria.

 

The $36 million of restricted cash, corresponds to a $30 million loan from Bank of Communications Offshore Branch(1), the $32 million of restricted cash corresponds to a $31 million loan from Bank of China, Macau Branch, $10 million of restricted cash corresponds to a $9.82 million loan from LUSO International Bank (2) and $8 million of restricted cash corresponds to a $7.76 million loan from LUSO International Bank (1). These borrowings were incurred in Hong Kong to repay certain loans that were due, however the majority of the Company’s cash resided in mainland China and to wire funds from mainland China to Hong Kong is subject to foreign exchange restrictions imposed by the PRC government. Thus, in order for us to repay our Hong Kong and overseas counterparties, the Company had to utilize the special lending facilities provided by major PRC banks and foreign financial institutions (i.e., LUSO International Bank and Bank of China) to allow the Company to borrow outside of mainland China using cash we have in mainland China as guarantees. 

 

The loans payable balances were secured by certain of the Company’s real estate held for development or sale and land use rights with a carrying value of $195,494,485 on March 31, 2015 (December 31, 2014 - $398,636,841). No buildings or income producing properties and improvements were pledged as at March 31, 2015.The weighted average interest rate on loans payable as of March 31, 2015 was 9.25% (December 31, 2014 – 9.78%).

 

The loans from Bank of Xi’an, Weilai Branch, Construction Bank of China and Bank of Communications are subject to certain repayment terms based on certain percentage of units sold in Puhua Phase II, Park Plaza projects, Puhua Phase III and IV. Based on these repayment terms, Bank of Xi’an, Weilai Branch, Construction Bank of China and Bank of Communications can demand repayment of all remaining balances outstanding at any time.

 

40
 

 

The principal repayment requirements over the following 2 years are as follows:

  

Due in 1 year  $242,292,141 
1 – 2 years   23,892,787 
Total  266,184,928 

 

Liquidity Expectation

 

At the end of the first quarter 2015, the inventory of Xi’an commercial residential buildings has increased 6 million square meters, reached a historically high level of 3,600 million square meters. It will need 29 months to digest the stock market, and consequently, the supply and demand relationship has deteriorated continuously. However, the consistent tighting of credit policies on the real estate industry nationwide has resulted in a relatively poor credit environment, with more funds flowing to the real economy. Moreover, given that more funds would flow to the stock markets, it is hard for real estate enterprises to obtain financing. In the meantime, credit sources have flown to large enterprises, making it more difficult for small and medium real estate enterprises to raise funds, creating a huge challenge for the Company. In 2015, the Company will sticks to the strategy of “cash is of paramount importance”, increase sales promotion, control investment, strengthen its financing efforts, endeavor to obtain more financing, and try all kinds of possibilities to ensure its proper operation and vigorous development.

 

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 development and sales value, approximately $376 million at the end of March 31, 2015, 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 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 were effective.

 

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(b) Changes in Internal Control over Financial Reporting.

 

During the quarter ended March 31, 2015, 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

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Other than as disclosed below, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on business, financial condition or operating results.

 

Pope Litigation

 

CHLN and certain of its directors have been named as defendants in a lawsuit filed in the District Court for Clark County, Nevada, originally captioned Pope Asset Management, LLC v. China Housing & Land Development, Inc., Case. A-14-711495-B (filed on December 23, 2014). The plaintiffs in the case are Pope Asset Management, LLC and Pope Investments II, LLC (collectively, “Plaintiffs”).

 

The original lawsuit alleged that CHLN negligently or intentionally misrepresented to its shareholders information regarding various real estate development transactions and ongoing projects. The lawsuit also asserted claims against the directors of CHLN for breach of fiduciary duty and civil conspiracy in connection with purported transactions involving CHLN. The original complaint sought economic and special damages, costs, interest, and attorneys’ fees, as well as the appointment of a receiver. None of the individual defendants were served with the original complaint, and none of them have appeared in the action.

 

On December 30, 2014, Plaintiffs filed a motion for a preliminary injunction and appointment of a receiver. That motion was fully briefed. On January 29, 2015, the Court continued any hearing on Plaintiffs’ motion for a preliminary injunction and appointment of a receiver, and no hearing date on that motion has been set.

 

On January 20, 2015, CHLN moved to dismiss the claims asserted against it. That motion was fully briefed and argument was heard on February 18, 2015. In addition, on January 28, 2015, Plaintiffs filed a motion for leave to serve the individual defendants by publication. That motion was fully briefed and argument on that motion also was heard on February 18, 2015. On March 4, 2015, the Court granted CHLN’s motion to dismiss in part, dismissing Plaintiffs’ claims for a self-styled derivative action, negligent misrepresentation, and fraud/intentional misrepresentation, but declining to dismiss the claim for appointment of a receiver. The Court granted Plaintiffs leave to amend its complaint. The Court also denied Plaintiffs’ motion for leave to serve the individual defendants by publication.

 

On March 20, 2015, Plaintiffs filed an amended derivative complaint purportedly brought on behalf of CHLN, which names as defendants two CHLN directors, Pingji Lu and Jing Lu. The amended complaint asserted a claim for breach of fiduciary duty and for civil conspiracy against the individual defendants based on the same core allegations in the original complaint. The amended complaint also asserted a claim for appointment of a receiver for nominal defendant CHLN. The amended complaint sought an order declaring that making a demand on the Company’s Board would have been futile; declaring that the individual defendants breached their fiduciary duties; awarding a judgment against the individual defendants; ordering the disgorgement of all profits, benefits and other compensation obtained by the individual defendants as a result of their alleged fiduciary breaches; and awarding Plaintiffs their costs and fees in connection with the action. CHLN moved to dismiss the complaint. On May 6, 2015, the Court issued a ruling granting the motion to dismiss in full, and granting Plaintiffs leave to amend the complaint.

 

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CHLN believes the allegations that have been asserted in this litigation are without merit and, if a further amended complaint is filed, CHLN intends to defend against it vigorously.

 

Item 1A.Risk Factors.

 

We amend the risk factors which reads “Our Securities may be delisted” previously disclosed in our Form 10-K, as amended, for the year ended December 31, 2014, as follows:

 

The price of our Common Stock may again fall below the $1.00 minimum bid price requirement imposed by NASDAQ.

 

On December 22, 2014, we received a letter from the Staff of the Listing Qualifications Department of NASDAQ indicating that for the last 30 consecutive business days, the closing bid price of the Company’s common stock had been below $1.00 per share, the minimum closing bid price required by the continued listing requirements of NASDAQ, as set forth in Listing Rule 5550(a)(2). The notice did not otherwise impact the Company’s listing on NASDAQ at the time.

 

In accordance with Listing Rule 5810(c)(3)(A), the Company was granted 180 calendar days, or until June 22, 2015, to regain compliance with the Rule (the “Compliance Period”). To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days, during the Compliance Period.

 

If the Company did not regain compliance with the rule by June 22, 2015, NASDAQ would have provided written notification to the Company that its common stock might be delisted. However, the Company would have qualified for an additional 180 calendar day period from June 22, 2015 to regain compliance, if, at the end of the Compliance Period, the Company met the continued listing requirement for market value of publicly held shares and all other initial listing standards for The NASDAQ Capital Market, with the exception of the bid price requirement, and provided written notice to NASDAQ of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.

 

On April 24, 2015, we completed a one-for-five reverse stock split of the Company’s common stock and successfully regained compliance with NASDAQ listing requirements. There is no assurance, however, that the Company’s stock price will continue to meet NASDAQ listing requirements or that the reverse stock split will not result in greater long term volatility in the price of our common stock. To the extent that the Company’s stock price does not meet the $1.00 minimum requirement, the Company may need to consider other alternative strategies or transactions to maintain its listing or otherwise. Delisting from The NASDAQ Capital Market might have a negative impact upon the level of trading activity in our common stock and might cause a decrease in the value and an increase in the volatility of our stock price. Failing to stay listed on The NASDAQ Capital Market would also make it more difficult for the Company to raise additional capital and for investors to sell their shares of our common stock.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mining Safety Disclosures

Not applicable.

 

Item 5. Other Information

 

On May 14, 2015, we issued an earnings release reporting our results of operations for the first quarter of 2015. A copy of that earnings release is furnished herewith as Exhibit 99. This information shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

 

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Item 6. Exhibits

 

(a) Exhibits

 

Exhibit      
Number     Description of Exhibit
     
3.1   Certificate of Change pursuant to NRS 78.209, filed with the Nevada Secretary of State on April 22, 2015 (incorporated by reference to Exhibit 3.1 of Form 8-K filed on April 24, 2015).
     
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)
     
99.1*   Press release issued May 14, 2015 reporting our results of operations for the first quarter of 2015

 

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 

 

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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 14, 2015 By: /s/ Pingji Lu
    Pingji Lu
    Chief Executive Officer
    (Principal Executive Officer)
     
     
May 14, 2015 By: /s/ Fang Nie
    Fang Nie
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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