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EX-31.2 - EXHIBIT 31.2 - China Housing & Land Development, Inc.v424491_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - China Housing & Land Development, Inc.v424491_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - China Housing & Land Development, Inc.v424491_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - China Housing & Land Development, Inc.v424491_ex32-1.htm
EX-99.1 - EXHIBIT 99.1 - China Housing & Land Development, Inc.v424491_ex99-1.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 September 30, 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

(Registrant’s telephone number, including area code)

 

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 ¨

(Do not check if a smaller reporting company)

  Smaller reporting company  x

 

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 November 13, 2015 was 7,017,869 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 22
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 48
       
Item 4.   Controls and Procedures 49
       
PART II.   OTHER INFORMATION 49
       
Item 1.   Legal Proceedings 49
       
Item 1A.   Risk Factors 50
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 51
       
Item 3.   Defaults Upon Senior Securities 51
       
Item 4.   Mining Safety Disclosures 51
       
Item 5.   Other Information 51
       
Item 6.   Exhibits 52
       
SIGNATURES     53
       

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   (Earning release reporting our results of operations for the third 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 September 30, 2015 and December 31, 2014

 

   September 30,
2015
   December 31,
2014
 
ASSETS          
Cash  $15,597,223   $33,223,127 
Cash - restricted   90,064,373    90,328,084 
Accounts receivable, net of allowance for doubtful accounts of  $566,147 and $579,926, respectively   11,019,825     33,041,324 
Other receivables, prepaid expenses and other assets   9,068,438    9,816,076 
Real estate held for development or sale   380,744,833    374,083,969 
Property and equipment, net   40,841,015    43,383,002 
Advance to suppliers   1,660,001    1,033,359 
Deposits on land use rights   15,104,788    16,136,415 
Intangible assets, net   8,515,134    23,561,951 
Goodwill   1,876,388    1,922,053 
Total assets  $574,492,018   $626,529,360 
           
LIABILITIES          
Accounts payable  $55,911,226   $75,845,987 
Advances from customers   51,303,106    35,172,506 
Accrued expenses   30,254,562    21,842,922 
Income taxes payable   22,850,472    24,280,260 
Other taxes payable   12,052,931    9,318,119 
Other payables   15,146,605    11,692,913 
Loans from employees   26,259,364    29,819,381 
Loans payable   265,310,223    293,660,575 
Deferred tax liability   10,107,864    14,395,327 
Total liabilities   489,196,353    516,027,990 
           
SHAREHOLDERS’ EQUITY          
Common stock: $0.001 par value, authorized 20,000,000 shares;          
Issued 7,017,869 and 6,960,369, respectively   7,018    6,960 
Additional paid in capital   52,587,192    52,511,350 
Statutory reserves   11,700,198    11,700,198 
Retained earnings   3,191,632    24,046,686 
Accumulated other comprehensive income   17,809,625    22,236,176 
Total shareholders’ equity   85,295,665    110,501,370 
           
Total liabilities and shareholders’ equity  $574,492,018   $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 Operations

For The Three and Nine Months Ended September 30, 2015 and 2014

 

   3 Months
September 30,
2015
   3 Months
September 30,
2014
   9 Months
September 30,
2015
   9 Months
September 30,
2014
 
REVENUES                    
Real estate sales  $14,396,324   $22,816,765   $67,116,774   $79,436,412 
Other income   5,305,985    4,893,589    12,628,790    14,383,616 
Total revenues   19,702,309    27,710,354    79,745,564    93,820,028 
                     
COST OF SALES                    
Cost of real estate sales   12,760,030    18,632,301    59,929,777    74,840,421 
Cost of other revenue   2,975,985    3,290,397    7,303,851    8,692,392 
Total cost of revenues   15,736,015    21,922,698    67,233,628    83,532,813 
                     
Gross margin   3,966,294    5,787,656    12,511,936    10,287,215 
                     
OPERATING EXPENSES                    
Selling, general, and administrative expenses   4,491,185    3,936,507    11,351,887    11,802,817 
Stock-based compensation   75,900    -    75,900    1,136,304 
Other expenses   34,464    6,460    47,966    20,480 
Financing expense   1,242,294    1,342,370    3,249,179    3,676,752 
Total operating expenses   5,843,843    5,285,337    14,724,932    16,636,353 
Write off of real estate held for development   -    -    7,345,105    - 
Intangible asset impairment   -    -    14,964,476    - 
                     
Loss from disposal of property and equipment   -    -    -    563,710 
Gain on extinguishment of loan   -    (2,071,672)   -    (2,071,672)
(Loss) Income before provision for income taxes   (1,877,549)   2,573,991    (24,522,577)   (4,841,176)
                     
(Recovery of) Provision for income taxes   (467,509)   414,147    106,954    559,605 
Recovery of deferred taxes   (11,020)   (11,270)   (3,774,476)   (33,802)
(Recovery of) Provision for income taxes   (478,529)   402,877    (3,667,522)   525,803 
                     
NET (LOSS) INCOME  $(1,399,020)  $2,171,114   $(20,855,055)  $(5,366,979)
                     
WEIGHTED AVERAGE SHARES OUTSTANDING                    
Basic   7,014,710    6,895,492    6,978,446    6,906,526 
                     
Diluted   7,014,710    6,895,492    6,978,446    6,906,526 
                     
NET (LOSS) EARNINGS PER SHARE                    
Basic  $(0.20)  $0.31   $(2.99)  $(0.78)
Diluted  $(0.20)  $0.31   $(2.99)  $(0.78)

 

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 and Nine Months Ended September 30, 2015 and 2014

 

   3 Months
September 30,
2015
   3 Months
September 30,
2014
   9 Months
September 30,
2015
   9 Months
September 30,
2014
 
                 
NET (LOSS) INCOME  $(1,399,020)  $2,171,114   $(20,855,055)  $(5,366,979)
                     
OTHER COMPREHENSIVE (LOSS) INCOME                    
(Loss) gain in foreign exchange   (5,066,925)   2,782,552    (4,426,551)   (3,215,708)
                     
COMPREHENSIVE (LOSS) INCOME  $(6,465,945)  $4,953,666   $(25,281,606)  $(8,582,687)

 

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 Nine Months Ended September 30, 2015 and 2014

 

   September 30,
2015
   September 30,
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss for the period  $(20,855,055)  $(5,366,979)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:          
Depreciation   1,689,130    1,836,084 
Stock-based compensation   75,900    1,136,304 
Loss on disposal of property and equipment   -    563,710 
Write off of property   7,345,105    - 
Amortization of intangible assets   165,458    17,944,433 
Recovery of deferred income taxes   (3,774,476)   (33,802)
Gain on extinguishment of loan   -    (2,071,672)
Intangible asset impairment   14,964,476    - 
(Increase) decrease in assets:          
Accounts receivable   21,610,367    4,313,651 
Other receivable, prepaid expense, and other assets   372,833    (4,783,591)
Real estate held for development or sale   (22,954,538)   (82,750,198)
Advances to suppliers   (684,657)   (822,202)
 Deposit on land use right   653,831    41,899,123 
Increase (decrease) in liabilities:          
Accounts payable   (18,386,830)   1,160,426 
Advances from customers   14,423,169    3,842,693 
Accrued expenses   9,054,617    (2,387,985)
Other payables   4,006,283    1,544,722 
Income and other taxes payable   1,628,051    3,537,296 
Net cash provided by (used in) operating activities   9,333,664    (20,437,987)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (249,410)   (9,006,050)
Proceeds from sale of property and equipment   -    4,615 
Proceeds from sale of short term investment   -    21,537,169 
Purchase of short term investment   -    (43,607,440)
Net cash used in investing activities   (249,410)   (31,071,706)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Change in restricted cash   (1,893,832)   2,826,336 
Loans from banks   1,612,071    49,943,480 
Loans from external parties   100,433,277    10,979,808 
Repayment on loans   (125,526,435)   (29,930,693)
Loans from employees, net   (294,765)   4,404,795 
Deferred financing cost   (499,566)   - 
Purchase of treasury stock   -    (634,648)
Net cash (used in) provided by financing activities   (26,169,250)   37,589,078 
           
DECREASE IN CASH   (17,084,996)   (13,920,615)
           
Effects on foreign currency exchange   (540,908)   (385,669)
           
CASH, beginning of period   33,223,127    21,320,071 
           
CASH, end of period  $15,597,223   $7,013,787 

 

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 September 30, 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   6,960,369   $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   6,960,369    6,960    52,511,350    11,700,198    23,568,139    22,850,341    110,636,988 
Net loss for the period   -    -    -    -    (18,977,487)   -    (18,977,487)
Foreign currency translation adjustment   -    -    -    -    -    26,209    26,209 
BALANCE,  June 30, 2015   6,960,369    6,960    52,511,350    11,700,198    4,590,652    22,876,550    91,685,710 
Stock-based compensation   57,500    58    75,842    -    -    -    75,900 
Net loss for the period   -    -    -    -    (1,399,020)   -    (1,399,020)
Foreign currency translation adjustment   -    -    -    -    -    (5,066,925)   (5,066,925)
BALANCE, September 30, 2015   7,017,869   $7,018   $52,587,192   $11,700,198   $3,191,632   $17,809,625   $85,295,665 

 

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 September 30, 2015, the Company’s interim condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2015 and September 30, 2014, and the Company’s interim condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and September 30, 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.

 

8 

 

 

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 interim condensed 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 has chosen to early adopt guidance in this section in the current quarter, and have retrospectively adjusted the presentation accordingly for the Company’s comparative interim condensed consolidated financial statements without effects.

 

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 interim condensed 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 interim condensed consolidated financial statements.

 

In August 2015, FASB issued ASU 2015- 14 “Revenue from Contracts with Customer (Topic 606): Deferral of the effective date”. The amendments in this Update defer the effective date of the Update 2014-09 for all entities by one year. For public business entities, certain not-for profit entities, and certain employee benefit plans, the effective date is changed to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently assessing the impact of the new standard on its interim condensed consolidated financial statements.

 

9 

 

 

Foreign Exchange Rates Used:

 

   September 30,
2015
   December 31,
2014
   September 30,
2014
 
Period end RMB/U.S. Dollar exchange rate   6.3556    6.2046    6.1380 
Average RMB/U.S. Dollar exchange rate   6.3033    6.1620    6.1636 

 

Note 3 – Supplemental Disclosure of Cash Flow Information

 

Income taxes paid amounted to $1,185,252 and $803,028 for the nine months ended September 30, 2015 and 2014, respectively. Interest paid for the nine months ended September 30, 2015 and 2014 amounts to $18,454,740 and $23,836,394, respectively.  

 

Note 4 – Restricted Cash

 

The following summarizes the restricted cash held by the Company:

 

   September 30,
2015
   December 31,
2014
 
Banks’ security requirement in providing mortgages to home buyers  $2,772,433   $2,577,788 
Guaranteed deposits for loans with foreign banks (Note 12)   87,291,940    87,536,586 
Government regulatory fees   -    213,710 
   $90,064,373   $90,328,084 

 

Note 5 – Real Estate Held for Development or Sale

 

The following summarizes the components of real estate inventories as of September 30, 2015 and December 31, 2014:

 

   September 30,
2015
   December 31,
2014
 
Real estate projects completed and held for sale          
Junjing I  $1,572,217   $1,610,480 
Junjing II   79,348    81,277 
Gangwan   9,372    9,600 
Junjing III   789,370    802,364 
Park Plaza - Phase I   13,528,096    - 
Puhua Phase I   5,243,423    5,421,141 
Puhua Phase II – West Region and New Coastal Line   6,223,438    6,692,581 
Puhua Phase III   21,904,912    -
Real estate completed and held for sale   49,350,176    14,617,443 
           
Real estate projects held for development          
Puhua Phase II (East Region), IV and V (Puhua Phase II (East Region), III, IV and V as of December 31, 2014)   64,355,203    98,207,424 
Park Plaza- Phase II (Phase I and II as of December 31, 2014?)   44,675,743    59,308,044 
Golden Bay   172,981,845    150,562,541 
Ankang   30,075,257    29,784,510 
Golden Bay Apartment   19,194,868    14,529,266 
Other   111,741    7,074,741 
Real estate held for development   331,394,657    359,466,526 
           
Total real estate held for development or sale  $380,744,833   $374,083,969 

 

10 

 

 

The Company determines the carrying value of the real estate held for development or sale for impairment based on fair market value 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 held for development or sale deemed impaired would be recorded as adjustments to the cost of real estate sales. An impairment charge of $ Nil and $703,843 have been made and recorded in cost of real estate sales in the three and nine months interim condensed consolidated statement of operations ended September 30, 2015 (September 30, 2014 - $393,021 and $4,823,611).

 

During the second quarter of 2015, the Company was informed by the government that the land zoning of its Textile City project would no longer be for residential purposes. The project has not started and it has to be discontinued due to this change proposed by the government. The project with an aggregate cost of $7,345,105 which includes project acquisition cost and interest capitalized, was subsequently written off, and the amount is recorded as write off of real estate held for development in the interim condensed consolidated statement of operations (Note 9).

 

Note 6 – Accounts Receivable

 

Accounts receivable consist of the following as of September 30, 2015 and December 31, 2014:

 

   September 30,   December 31, 
   2015   2014 
Accounts receivable  $11,585,972   $33,621,250 
Allowance for doubtful accounts   (566,147)   (579,926)
Accounts receivable, net  $11,019,825   $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 September 30, 2015 and December 31, 2014:

 

   September 30,
2015
   December  31,
2014
 
Interest receivable (a)  $3,909,439   $3,954,195 
Other receivables (b)   4,039,051    4,063,747 
Allowance for doubtful receivables   (142,875)   (147,940)
Prepaid expenses   1,230,634    1,912,438 
Prepaid other tax expenses   32,189    33,636 
Other receivables, prepaid expenses and other assets, net  $9,068,438   $9,816,076 

 

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

                     

11 

 

 

Note 8 – Property and Equipment

 

Property and equipment consist of the following as of September 30, 2015 and December 31, 2014:

 

   September 30,
2015
   December  31,
2014
 
Income producing properties and improvements  $20,960,036   $21,469,734 
Buildings and improvements   28,222,183    28,808,632 
Electronic equipment   1,120,515    1,089,142 
Vehicles   775,713    794,591 
Computer software   307,741    323,578 
Office furniture   884,842    904,601 
Total   52,271,030    53,390,278 
Accumulated depreciation   (11,430,015)   (10,007,276)
Property and equipment, net  $40,841,015   $43,383,002 

 

Depreciation expense for the three months ended September 30, 2015 and 2014 amounted to $472,082 and $641,141, respectively. Depreciation expense for the nine months ended September 30, 2015 and 2014 amounted to $1,689,130 and $1,836,084, respectively. The depreciation expense was included in selling, general and administrative expense, real estate held for development or sale and cost of other revenue.

 

The Company decided to demolish certain sales center used for Park Plaza and wrote off the $563,710 carrying value of the sales center during the first quarter of fiscal 2014. The write down was recorded as a loss from disposal of property and equipment on the interim condensed consolidated statements of operations.

 

Note 9 – Intangible Assets

 

The intangible assets consisted of the following as of September 30, 2015 and December 31, 2014:

 

   September 30,
2015
   December 31,
2014
 
Development right acquired (a)  $-  $52,048,245 
Land use right acquired (b)   8,577,529    8,786,279 
Construction license acquired (c)   1,184,494    1,213,321 
    9,762,023    62,047,845 
Accumulated amortization   (1,246,889)   (38,485,894)
Intangible assets, net  $8,515,134   $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.

 

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. During the three and nine months ended September 30, 2015, $77,674 and $371,562 (September 30, 2014 - $80,336 and $374,363) of amortized development right capitalized in the Puhua project were expensed through cost of real estate sales, respectively.

 

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.

 

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.

 

12 

 

 

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 land use rights for the Golden Bay project and head office and Golden Bay Apartment, the remaining value of the intangible was dedicated for the Textile City project which the Company originally expected to acquire during the year. However, during the second quarter of 2015, the Company was informed that the zoning of Textile City would no longer be for residential purpose. The Company determined it will not purchase the Textile City land use right and it is not likely the Company will be able to obtain another land use right prior to the expiration of the development right. Hence, the remaining value of $14,964,476 has been written off and is recorded as intangible asset impairment on the interim condensed consolidated statements of operations. The related deferred tax liability of $3,741,119 has been recorded as a recovery of deferred taxes during the same quarter.

 

(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 and nine months ended September 30, 2015, the Company has recorded $54,662 and $165,458, respectively, of amortization expense on the land use rights (September 30, 2014 - $55,901 and $167,665). 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.

 

Note 10 – Accrued Expenses

 

   September 30,
2015
  

December 31, 

2014

 
Accrued expenses  $21,941,739   $18,625,788 
Accrued interest on loans   8,312,823    3,217,134 
Total  $30,254,562   $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 period, and are renewed upon maturity if not paid. These unsecured loans bear interest at 15% (December 31, 2014 – 15%) per annum and are available to all employees.

 

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

 

   September 30,
2015
  

December 31, 

2014

 
Chairman  $1,101,391   $1,063,649 
Chief financial officer   826,043    1,998,517 
Chief operating officer   1,434,955    1,228,121 
Total  $3,362,389   $4,290,287 

 

13 

 

 

Note 12 – Loans Payable  

 

    September 30,
2015
   

December 31, 

2014

Construction Bank of China              
Annual interest rate is 105% of People’s Bank of China prime rate (5.25%). The loan is secured by the Park Plaza Phase I project and its land use right. 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.   $ 13,059,349     $ 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 4.1143%. The 3-month LIBOR rate on September 30, 2015 was 0.3143% (December 31, 2014 - 0.2457%), secured by $31,468,311 (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 $37,740,364 (RMB240 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 total amount will be due on June 27, 2016. As of September 30, 2015, the Company has drawn $7,761,153 from the line of $8.0 million which is 98.6% of $7,867,078 (RMB50 million) restricted cash secured. Annual interest is based on the 12-month LIBOR rate plus 2.9%. The 12-month LIBOR rate on September 30, 2015 was 0.8251% (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, $1,573,416 (RMB10 million) due on November 4, 2015; $1,494,745 (RMB9.5 million) due on November 26, 2015; $550,695 (RMB3.5 million) due on December 30, 2015; $18,723,645 (RMB119 million) due on December 31, 2015; $7,867,078 (RMB50 million) due on January 9, 2016; $629,366 (RMB4 million) due on May 15, 2016; $125,873 (RMB0.8 million) due on June 16, 2016; $5,506,954 (RMB35 million) due on August 5, 2016; $11,800,617 (RMB75 million) due on August 6, 2016; $6,293,662 (RMB40 million) due on August 7, 2016; $29,391,403 (RMB186.8 million) of the loan has an annual interest rate of 15% and 20% on the remaining $25,174,649 (RMB160 million) of the loan. For the amount due on November 4, 2015, the company has repaid $157,342 (RMB 1.0 million). The extension for the remaining amount due on November 4, 2015 is still in negotiation as of the date hereof. Days Hotel can demand payment on the amount past due any time.     54,566,052       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 rights of Golden Bay A and Golden Bay B, and guaranteed by Tsining, Fangzhou and the Chairman. The repayment terms are as follows: $4,720,247 (RMB30 million) due on August 3, 2016; $9,125,810 (RMB 58 million) due on October 9, 2016; $314,683 (RMB 2 million) due on October 20, 2016; $11,013,909 (RMB70 million) due on February 3, 2017; $7,237,712 (RMB 46 million) due on April 9, 2017; $ 10,069,860 (RMB 64 million) due on April 20, 2017.

    42,482,220       -
               

 

14 

 

 

    September 30,
2015
   

December 31, 

2014

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 loan is due on August 7, 2015. The loan has been repaid during this quarter.

    -       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, which is over $9,775,631 (RMB62 million) restricted cash secured for the loan. Management plans to extend the loans subsequent to the third quarter of 2015. The extension is still in negotiation as of the date hereof. Annual interest rate is based on the 12-month LIBOR rate plus 2.7%. The 12-month LIBOR rate as of September 30, 2015 was 0.8251% (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: $15,734,156 (RMB100 million) due on June 5, 2015, and $7,867,078 (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. The loan has been repaid during the second quarter of 2015.     -       56,409,760
               
Bank of Communications              
Annual interest rate is 120% of the People’s Bank of China prime rate (6.00%). 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 - $9,440,493 (RMB60 million); and December 20, 2016 - $3,146,831 (RMB20 million).     12,587,325       24,175,611
               

Bank of Communications

Annual interest rate is 130% of the People’s Bank of China prime rate (6.50%). 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.

 

    12,587,325       14,505,368
               

Bank of Xi’an, Weilai Branch

Annual interest rate is 130% of the People’s Bank of China prime rate (6.50%). 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, the Company extended the loan with Bank of Xi’an to as follows: $4,720,247 (RMB30 million) due on September 30, 2015; $4,720,247 (RMB30 million) due on December 31, 2015, and $6,293,662 (RMB40 million) due on April 24, 2016. The loan has been repaid during this quarter.

    -       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 4.0064%. The 6-month LIBOR rate on September 30, 2015 was 0.5064% (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
               

 

15 

 

 

    September 30,
2015
   

December 31, 

2014

Bank of East Asia

Annual interest rate is 120% of the People’s Bank of China prime rate (6.00%). The loan is secured by one of the unit from Tsining’s income producing property, the rent receivable from the unit, and guaranteed by the Chairman. The repayment schedule is as follows: November 28, 2015 - $78,671 (RMB0.5 million); May 28, 2016 - $78,671 (RMB0.5 million); November 28, 2016 - $157,342 (RMB1.0 million); May 28, 2017 - $157,342 (RMB1.0 million); November 28, 2017 - $550,695 (RMB3.5 million); and May 28, 2018 - $550,695 (RMB3.5 million).

    1,573,415       -
               

HuaRong Asset Management Inc.

Annual interest rate is 14% for the first 12 months, and 11% for the remaining 18 months. Annual effective interest rate is 14.87% taking into consideration of the consulting fees of $6,030,000 associated with obtaining the loan. The loan is secured by a portion of the Puhua Phase II project and land use rights, certain inventory from Puhua Phase I as well as 100% shares of Xinxing Fangzhou Housing Development Co., Ltd. The loan is also guaranteed by the Chairman and COO of the Company. The repayment schedule of this loan is as follows: August 31, 2016 – $5,664,296 (RMB 36 million); February 28, 2017 – $5,664,296 (RMB 36 million); August 31, 2017 – $8,496,444 (RMB 54 million); February 28, 2018 – $8,496,444 (RMB 54 million).

    28,321,480       -

 

Total Deferred Financing Costs

    (944,596)        
Total Loan Payable   $   265,310,223     $ 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) 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.

 

Of the $90.1 million of restricted cash, $35.4 million of restricted cash, corresponds to a $30.0 million loan from Bank of Communications Offshore Branch (1), the $31.5 million corresponds to a $31.0 million loan from Bank of China, Macau Branch, $9.8 million corresponds to a $9.8 million loan from LUSO International Bank (2) and $7.9 million corresponds to a $7.8 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, Bank of Communications 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 $174,488,556 on September 30, 2015 (December 31, 2014 - $398,636,841). Other than the one unit from Tsining’s income producing property pledged for Bank of East Asia, no buildings or other income producing properties and improvements were pledged as of September 30, 2015.The weighted average interest rate on loans payable as of September 30, 2015 was 9.61% (December 31, 2014 – 9.78%).

 

16 

 

 

The loans from Construction Bank of China and Bank of Communications are subject to certain repayment terms based on certain percentage of units sold in Park Plaza projects, Puhua Phase III and IV. Based on these repayment terms, 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  $204,419,587 
1 – 2 years   61,835,232 
Total  $266,254,819 

 

Note 13 – Shareholders’ Equity

 

Common Stock

 

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 Company’s shares outstanding immediately prior to the Reverse Stock Split totaled 34,800,558, which were adjusted to 6,960,369 shares outstanding as a result of the Reverse Stock Split, compared with post-split of 6,960,369 shares (34,800,558 shares prior to the split) outstanding as of December 31, 2014. No fractional shares were issued in connection with the Stock 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. 224 shares resulted from rounding up of fractional shares in connection with this Reverse Stock Split. These interim condensed consolidated financial statements have been retrospectively restated, including loss per share, to account for the Company’s share consolidation.

 

During the second quarter of 2015, the Company issued 57,500 shares of Common Stock, with a value determined to be $75,900, to the Chairman, CFO, COO, and Directors of the Company to compensate for services provided. The shares were released during the third quarter, and accordingly $75,900 of compensation expense was recognized during the three and nine months ended September 30, 2015 (September 30, 2014 - $Nil and $894,240).

 

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 the end of 2014. No compensation expense resulted from stock options was recognized during the three and nine months ended September 30, 2015 (September 30, 2014 - $Nil and $242,064).

 

17 

 

 

Note 14 – Other Revenue

 

   For the three months ended   For the nine months ended 
   September 30,   September 30,   September 30,   September 30, 
   2015   2014   2015   2014 
Interest income  $811,184   $1,139,755   $2,463,756    3,343,305 
Rental income   204,943    228,573    648,490    714,865 
Income from property management services   1,254,010    889,648    4,110,496    3,272,697 
External construction contracts   2,017,705    2,428,694    4,350,452    5,839,748 
Additional compensation received in connection with TangDu project   -    -    -    612,912 
Miscellaneous income   1,018,143    206,919    1,055,596    600,089 
Total  $5,305,985   $4,893,589   $12,628,790   $14,383,616 

 

Note 15 – Segment Reporting

 

The Company has two reportable segments: Real Estate Development and Sales segment and the 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.

 

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 and nine months ended September 30, 2015 and September 30, 2014 are as follows:

 

For the three months ended September 30, 2015:

 

   Real Estate           Adjustments     
   Development           and     
   and Sales   Construction   All Other   Eliminations   Consolidated 
Revenues from external customers  $14,396,324   $2,017,702   $1,235,778   $-   $17,649,804 
Intersegment revenues   -    7,914,247    -    (7,914,247)   - 
                          
Rental from external customers   204,943    -    -    -    204,943 
Miscellaneous income   829,665    1,013,047    4,850    -    1,847,562 
Total revenue  $15,430,932   $10,944,996   $1,240,628   $(7,914,247)  $19,702,309 
                          
Financing expense  $1,112,414   $99,888   $29,992   $-   $1,242,294 
Segment profit (loss) before taxes  $(3,003,176)  $1,002,930   $227,868   $(105,171)  $(1,877,549)
Total assets  $581,229,229   $14,956,790   $73,728,623   $(95,422,624)  $574,492,018 

 

18 

 

 

For the nine months ended September 30, 2015:

 

   Real Estate           Adjustments     
   Development           and     
   and Sales   Construction   All Other   Eliminations   Consolidated 
Revenues from external customers  $67,116,774   $4,350,452   $4,092,264   $-   $75,559,490 
Intersegment revenues   -    23,232,254    -    (23,232,254)   - 
Rental from external customers   648,490    -    -    -    648,490 
Miscellaneous income (mainly interest income)   2,491,723    1,038,782    7,079    -    3,537,584 
Total revenue  $70,256,987   $28,621,488   $4,099,343   $(23,232,254)  $79,745,564 
                          
Financing expense  $2,978,618   $180,489   $90,072   $-   $3,249,179 
Segment profit (loss) before taxes  $(11,400,957)  $1,195,579   $(14,157,673)  $(159,526)  $(24,522,577)
Total assets  $581,229,229   $14,956,790   $73,728,623   $(95,422,624)  $574,492,018 

 

For the three months ended September 30, 2014:

 

   Real Estate           Adjustments     
   Development           and     
   and Sales   Construction   All Other   Eliminations   Consolidated 
Revenues from external customers  $22,816,765   $2,428,694   $1,087,728   $-   $26,333,187 
Intersegment revenues   -    7,808,601    -    (7,808,601)   - 
Rental from external customers   206,819    21,755    -    -    228,574 
Miscellaneous income (mainly interest income)   1,147,982    -    611    -    1,148,593 
Total revenue  $24,171,566   $10,259,050   $1,088,339   $(7,808,601)  $27,710,354 
                          
Financing expense  $1,322,147   $15,683   $4,540   $-   $1,342,370 
Segment profit (loss) before taxes  $2,152,336   $145,519   $343,583   $(67,447)  $2,573,991 
Total assets  $724,309,706   $96,880,152   $146,804,763   $(320,996,091)  $646,998,530 

 

For the nine months ended September 30, 2014:

 

   Real Estate
Development
and Sales
   Construction   All Other   Adjustments
and Eliminations
   Consolidated 
Revenues from external customers  $79,436,412   $5,839,749   $3,596,459   $-   $88,872,620 
Intersegment revenues   -    31,537,760    -    (31,537,760)   - 
Rental from external customers   649,617    65,249    -    -    714,866 
Miscellaneous income (Interest and Gain from Property and Equipment)   4,077,131    -    155,411    -    4,232,542 
Total revenue  $84,163,160   $37,442,758   $3,751,870   $(31,537,760)  $93,820,028 
Financing expense  $3,637,800   $28,130   $10,822   $-   $3,676,752 
Segment (loss) profit before taxes  $(5,393,911)  $709,913   $307,365   $(464,543)  $(4,841,176)
Total assets  $724,309,706   $96,880,152   $146,804,763   $(320,996,091)  $646,998,530 

 

(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.

 

19 

 

 

Note 16 –Earnings (Loss) per Share

 

Earnings (Loss) per share for the three and nine months ended September 30, 2015, and 2014 were determined by dividing net income (loss) for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding.

 

None of the options are exercisable because the performance conditions were not met. Therefore, the options have no dilutive effect on the earnings (loss) per share and are excluded from the determination of the diluted earnings per share calculation for three and nine months ended September 30, 2015, and 2014.

 

Note 17 – Commitments and Contingencies

 

The Company entered into a land purchase agreement, where the total consideration for the land is $5,398,287. The Company has paid $4,090,880 by the end of the third quarter of 2015 as deposit for land use right and is obliged to pay the remaining amount $1,307,407 within the next 3 months.

 

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

 

   Payment due by period 
Commitments and Contingencies  Total   Less than 1 year   1-2 years   2-3 years   3-4 years   4-5 years   After 5 years 
Land use rights-projects  $1,307,407   $1,307,407   $-   $-   $-   $-   $- 
Total  $1,307,407   $1,307,407   $-   $-   $-   $-   $- 

 

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 on commercially reasonable terms.

 

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 and nine months ended September 30, 2015, the Company incurred $19,446 and $66,181, respectively (September 30, 2014 - $39,284 and $164,816) in fees to Days Hotel. The fees incurred include meal and hotel rooms charges. As of September 30, 2015, the Company had $402 (December 31, 2014 – $15,171) in fees payable to Days Hotel.

 

The Company also has $54,566,052 of loans payable to Days Hotel as of September 30, 2015 (December 31, 2014 - $42,371,788) (Note 12). For the three and nine months ended September 30, 2015, the Company incurred $2,088,775 and $6,248,554, respectively (September 30, 2014 - $928,872 and $3,010,449) of interest expense to Days Hotel and capitalized the amounts in real estate held for development or sale. As of September 30, 2015, the Company also had $5,082,291 (December 31, 2014 - $1,511,447) interest payable to Days Hotel.

 

During the third quarter of 2015, the Company has repaid the XinYing loan (Note 12), in which an executive partner is the spouse of one of the Company’s executive officers. The Company incurred a total of $235,448 and $2,040,448 interest expense and finance consulting fees payable to XinYing during the three and nine months ended September 30, 2015 (September 30, 2014 - $666,069 and $3,675,247) and capitalized the amount in real estate held for development or sales.

 

During the third quarter of 2015, the Company had deposits of $1,161,086 from the Chairman and $986,983 from the CFO for future sale of Golden Bay Apartments.

 

20 

 

 

 

Note 19 – Subsequent Event

 

Subsequent to quarter end, the Company repaid the loan of Construction Bank of China of $2,045,440 (RMB13 million).

 

Note 20 – Effect of Change in Estimates

 

The Company monitors market conditions and reviews its estimated sales and costs and revises its sales and costs forecasts on a regular basis. Due to the recent real estate market conditions in China, the Company decided to revise and lower the selling price of certain projects to attract new buyers. The estimated costs are also revised to reflect the most updated information. These are treated as a change in estimate.

 

For the three months ended September 30, 2015, real estate development projects with gross profits recognized as of June 30, 2015 had changes in their estimated gross profit margins. As a result of these changes in gross profit, net income for the three months ended September 30, 2015 decreased by $875,396 or a decrease of $0.12 for both basic and diluted earnings per share. During the three months ended September 30, 2014, real estate development projects with gross profits recognized as at September 30, 2014 had no changes in their estimated gross profit margins. Therefore, there are no changes in gross profit, net income, basic and diluted earnings per share for the three months ended September 30, 2014.

 

During the nine months ended September 30, 2015, real estate development projects with gross profits recognized as of December 31, 2014 had changes in their estimated gross profit margins. As a result of these changes in gross profit, net income for the nine months ended September 30, 2015 decreased by $439,845 or a decrease of $0.06 for both basic and diluted earnings per share for the nine months ended September 30, 2015. During the nine months ended September 30, 2014, real estate development projects with gross profits recognized for the year ended December 31, 2013 had changes in their estimated gross profit margins. As a result of these changes in gross profit, net income for the nine months ended September 30, 2014 decreased by $5,031,001 or a decrease $0.73 for basic and diluted earnings per share for the nine months ended September 30, 2014.

 

Note 21 –Reclassification

 

Certain amounts in comparative financial statements have been reclassified to conform to current presentation.

 

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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 for projects under development deemed impaired would be recorded as adjustments to the cost of real estate sales.

 

22 

 

 

The following table summarizes the components of real estate inventories as of September 30, 2015 and December 31, 2014:

 

   September 30,
2015
   December 31,
2014
 
Real estate projects completed and held for sale          
Junjing I  $1,572,217   $1,610,480 
Junjing II   79,348    81,277 
Gangwan   9,372    9,600 
Junjing III   789,370    802,364 
Park Plaza - Phase I (completed in Q2, 2015)   13,528,096    - 
Puhua Phase I   5,243,423    6,608,809 
Puhua Phase II – West Region and New Coastal Line   6,223,438    5,504,913 
Puhua Phase III (completed in Q2, 2015)   21,904,912    -
Real estate completed and held for sale   49,350,176    14,617,443 
           
Real estate projects held for development          
Puhua Phase II (East Region), IV and V (Puhua Phase II (East Region),III, IV and V as of December 31, 2014)   64,355,203    98,207,424 
Park Plaza- Phase II (Phase I and II as of December 31, 2014)   44,675,743    59,308,044 
Golden Bay   172,981,845    150,562,541 
Ankang   30,075,257    29,784,510 
Golden Bay Apartment   19,194,868    14,529,266 
Other   111,741    7,074,741 
Real estate held for development   331,394,657    359,466,526 
           
Total real estate held for development or sale  $380,744,833   $374,083,969 

Intangible assets

 

The intangible assets consisted of the following at September 30, 2015 and December 31, 2014:

 

   September 30,
2015
   December 31,
2014
 
Development right acquired (a)  $-  $52,048,245 
Land use right acquired (b)   8,577,529    8,786,279 
Construction license acquired (c)   1,184,494    1,213,321 
    9,762,023    62,047,845 
Accumulated amortization   (1,246,889)   (38,485,894)
Intangible assets, net  $8,515,134   $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.

 

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. During the three and nine months ended September 30, 2015, $77,674 and $371,562 (September 30, 2014 - $80,336 and $374,363) of amortized development right capitalized in the Puhua project were expensed through cost of real estate sales, respectively.

 

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.

 

23 

 

 

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 land use rights for the Golden Bay project and head office and Golden Bay Apartment, the remaining value of the intangible was dedicated for the Textile City project which the Company originally expected to acquire during the year. However, during the second quarter of 2015, the Company was informed that the zoning of Textile City would no longer be for residential purpose. The Company determined it will not purchase the Textile City land use right and it is not likely the Company will be able to obtain another land use right prior to the expiration of the development right. Hence, the remaining value of $14,964,476 has been written off and is recorded as intangible asset impairment on the interim condensed consolidated statements of loss. The related deferred tax liability of $3,741,119 has been recorded as a recovery of deferred taxes during the second quarter of 2015.

 

(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 and nine months ended September 30, 2015, the Company has recorded $54,662 and $164,577, respectively, of amortization expense on the land use rights (September 30, 2014 - $55,901 and $167,665). 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.

 

Deposits on land use rights

 

   September 30,
2015
   December 31,
2014
 
Deposits on land use rights  $15,104,788   $16,136,415 

 

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

 

As previously disclosed by the Company in a Form 8-K filed on May 22, 2015, the Company received a letter from Xi’an Baqiao New Development Zone Management Council on May 18, 2015 informing us of the Rezoning.

 

In light of the Rezoning, the Board retained consultants to analyze and advise on the feasibility of continuing to develop the Textile City land use right in compliance with the terms imposed under the Rezoning. Following a presentation by such consultants and due consideration of all relevant factors, the Board ultimately determined that the Textile City land use right is inconsistent with the Company’s future development strategy. On June 29, 2015, the Board formally adopted resolutions directing the Company to terminate the development of the Textile City land and to seek to mitigate its damages by pursuing a return of the deposits that were previously paid in connection with securing the Textile City land use right. As of the third quarter of 2015, the Company received 30% of the original deposit. The Company will continue to request refund on the deposit, and the timing of remaining portion is uncertain.

 

24 

 

 

Property, plant and equipment

 

The total rental income (cash inflow) from leasing the Tsining Junjing commercial retail property was $0.2 million (RMB1.3 million) during the third quarter of 2015 which is approximately the same as 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 third quarter of 2015, it will take the Company approximately 12 years to recover $9.76 million (RMB62 million) carrying value of the asset. There was no cash outflow in connection with the maintenance and repair of the property. During the third quarter of 2015, the amortization of this property is RMB0.6 million (non-cash item).

 

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.

 

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.

 

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 third quarter of 2015, China’s GDP growth rate was 6.9%, 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 2.6% in the first nine months of 2015 as compared to 12.5% 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. The industry concentration ratio further increased. The increasing gap between cities of different sizes is becoming more pronounced and competition among second-tier and third-tier cities is becoming more intense.

 

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 tightening, the turnover rate has declined, and the collection of receivables for real estate enterprises has dropped continuously. The dependence on the self-financing has significantly increased. 2015 is the peak of repaying the trust for the real estate enterprises, combined with the rising of the international financing costs, and investor risk tolerance has dropped, due to slow market sales, resulting in relatively heavy capital pressure on real estate enterprises. 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.

 

25 

 

 

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 one hand, the real estate enterprises adopt an intense price competition strategy resulting in an increasingly higher discount rate, but on the other hand the construction costs have increased continuously. In light of the difficulty in obtaining financing , the Company’s high debt ratio and its large inventory, the Company 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 September 30, 2015, we had $15,597,223 of cash, compared to $33,223,127 as of December 31, 2014, a decrease of $17,625,904.

 

The current real estate market situation in Xi’an is not yet clear. Based on data from the first six months of 2015, according to E-House (China), Xi’an’s transaction volume was 6.25 million square meters, representing a 15.8% decrease as compared to the second half of year 2014. The major challenge facing Xi’an’s real estate market is “three large and one low,” which means “large supplies in commercial housing, affordable housing and land” and “low income.” With respect to "low income," although per capita disposable income in Xi'an ranks 13th among first-tier and second-tier cities, the income of younger citizens is low. During the last three years, the commercial residential housing supply reached 42 million square meters, but the transaction volume was only 32 million square meters during the same period, resulting in a sizable increase in market inventory. The demand gap in Xi’an’s commercial residential housing is negative 62.28 million square meters which makes Xi’an relatively unique among second-tier cities as a city with a large demand deficit. It will take up to 20 months to sell the current supply, indicating high inventory pressure. A great deal of affordable housing has been built in recent years and the transaction volume in such affordable housing has been almost the same as that of the commercial housing. Xi’an recently lowered the affordable housing access threshold and now only allows single individuals who are more than 22 years old to buy affordable housing. This policy has made selling affordable housing more difficult. The excess supply of land has placed heavy pressure on the Xi’an real estate market. Xi’an’s administrative area is over 100,000 square kilometers while the built up area only occupies four percent of the administrative area, making the land supply seem infinite. For instance, the planned construction area in 2020 in Xi Xian New District is over half of the current built up area of Xi’an City. The permanent residents to registered population ratio is 1.07, ranking 24th among the 33 second-tier cities, and Xi’an’s ability to absorb new population is relatively average compared to other second-tier cities. Under Xi’an’s current real estate market conditions, the effective demand for housing is low.

 

26 

 

 

The heavy pressure on the Xi’an real estate market is unlikely to lessen in the near future, and there is relatively high market risk for developers like the Company. The market remains weak and deteriorating, with rigorous conflicts between supply and demand that deepened industrial crisis. Accordingly, we expect that the real estate market downturn will continue for the foreseeable future. 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. In addition, the Company is also facing a huge challenge in obtaining financing, similar to the 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.

 

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:

 

27 

 

 

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.

 

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. 

 

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Our Property Projects

 

We provide three fundamental types of real estate developments:

 

  High-rise apartment buildings, typically 19 to 33 stories, usually constructed of steel-reinforced concrete, that are completed within approximately 24 months of securing all required permits.
  Mid-rise apartment buildings, typically 7 to 18 stories, usually constructed of steel-reinforced concrete, that are completed within approximately 12 to 18 months of securing all required permits.
  Low-rise apartment buildings and villas, typically 2 to 6 stories, often constructed of steel-reinforced concrete, that are completed within approximately 12 months of securing all required permits.

 

Our projects can be classified into one of four stages of development:

 

  Projects in planning, which include projects for which we have purchased the development and or land use rights for parcels of land as part of our project development pipeline. The completion of projects on these sites is subject to adequate financing, approval of permits, receipt of licenses and certain market conditions;
  Projects in process, which include developments where we have typically secured the development and land use rights, and where the site planning, architecture, engineering and infrastructure work is in progress;
  Projects under construction, where the building construction has started but has not yet been completed; and
  Completed projects with units available for sale, where the construction has been finished and most of the units in the buildings have been sold or leased.

 

Projects Under Construction

 

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 September 30,2015
(m2)
 
Park Plaza II  Apartment & Commercial
  Q2/2015 – Q3/2017  Q2/2016   10,000    66,155    - 
Puhua Phase Two-East Region  Multi-Family residential & Commercial
  Q2/2010 – Q3/2015  Q2/2010   24,059    119,311    52,943 
Puhua Phase Four  Multi-Family residential & Commercial
  Q1/2014 – Q4/2017  Q2/2014   27,800    147,775    50,340 
Golden Bay A  Multi-Family residential & Commercial
  Q2/2014 – Q4/2018  Q4/2015   49,374    163,343    - 
Ankang Project  Multi-Family residential & Commercial  Q2/2012 – Q2/2019  Q4/2012   74,820    295,770    85,091 
Golden Bay Apartment  Office building
& apartment
  Q1/2010 – Q2/2016  Q2/2016   13,459    16,564    - 

 

Project
Name
  Total
Number of
Units (a)
   Number of
Units Sold by
September 30, 2015 (a)
  

 

Estimated
Revenue
($ millions)

   Contracted
Revenue by
September 30,2015
($ millions)
   Recognized
Revenue by
September 30,2015
($ millions)
 
Park Plaza II   247    -    -    -    - 
Puhua Phase Two
-East Region
   650    322    118    52    50 
Puhua Phase Four   1,172    506    159    49    23 
Golden Bay A   373    -    -    -    - 
Ankang Project I   932    789    92    53    52 
Golden Bay Apartment   24    -    -    -    - 

 

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

 

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

 

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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 has started in the second quarter of 2015, and we expect to begin accepting pre-sale purchase agreements in the second quarter of 2016.

 

Puhua Project: The Puhua Project located within the Baqiao project covers 79 acres, with a total GFA of 800,000 square meters. The project is divided into five phases 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 $118 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 of 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 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.

 

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 fourth quarter of 2015, but the timing is uncertain, will be adjusted according to the market condition. 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 2016.

 

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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

 

Baqiao New Development Zone: On March 9, 2007, we entered into a Share Transfer Agreement with the shareholders of Xi’an New Land Development Co., Ltd. (“New Land”), under which the Company acquired 32,000,000 shares of New Land, constituting 100% equity ownership of New Land. This acquisition gave the Company the exclusive right to develop and sell 487 acres of land in a newly designated satellite city of Xi’an (the “Baqiao Project”).

 

Xi’an has designated the Baqiao District as a major resettlement zone where the city expects 900,000 middle-to-upper income inhabitants to settle. The Xi’an local government intends to create a thriving commercial and residential zone similar to Pudong, Shanghai, which has provided many new economic opportunities and significant amounts of housing for Shanghai’s growing population.

 

The Xi’an Municipal Government plans investments of 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.

 

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.

 

As previously disclosed by Company in a Form 8-K filed on May 22, 2015, the Company received a letter from Xi’an Baqiao New Development Zone Management Council on May 18, 2015 informing us of the Rezoning.

 

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In light of the Rezoning, the Board retained consultants to analyze and advise on the feasibility of continuing to develop the Textile City land use right in compliance with the terms imposed under the Rezoning. Following a presentation by such consultants and due consideration of all relevant factors, the Board ultimately determined that the Textile City land use right is inconsistent with the Company’s future development strategy. On June 29, 2015, the Board formally adopted resolutions directing the Company to terminate the development of the Textile City land and to seek to mitigate its damages by pursuing a return of the deposits that were previously paid in connection with securing the Textile City land use right. While the Company will exercise all reasonable efforts to seek a return of such deposits, there can be no assurance the Company will be successful in obtaining a return of all or any part of the deposits previously paid to secure the land use right.

 

After selling 31 acres, placing 79 acres in the Puhua project and 34.6 acres in the Golden Bay project, and 5.6 acres for headquarter building and Golden Bay Apartment projects approximately 337 acres remain available for the Company to develop in the Baqiao area.

 

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.

 

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 September 30,2015(a) 
                       
Puhua Phase Three  Multi-Family residential & Commercial  Q2/2015   30,600    129,049    744    680 
Park Plaza I  Multi-Family residential & Commercial  Q2/2015   33,339    105,859    702    677 
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    802 
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    1,214 
JunJing I  Multi-Family Residential & Commercial  Q3/2006   55,588    167,931    1,671    1,670 

 

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

 

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. As of September 30, 2015, we have recognized $83 million in revenue.

 

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 105,859 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. As of September 30, 2015, we have recognized $109 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 September 30, 2015, we have recognized $111 million in revenue.

 

Puhua Phase One: Puhua Phase One is one of Puhua’s five phases and was completed in the fourth quarter of 2012. As of September 30, 2015, we have recognized $111 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 September 30, 2015, we have recognized $53 million in revenue.

 

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.

 

33 

 

 

CONSOLIDATED OPERATING RESULTS

 

Three Months Ended September 30, 2015 Compared With Three Months Ended September 30, 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 September 30, 2015, most of our revenues came from the Park Plaza, Puhua Phase Three and Four, and Ankang Project.

 

Revenues by project:  Three Months Ended September 30, 2015   Three Months Ended September 30, 2014 
US$          
Project Under Construction          
Puhua Phase Two – East Region  $4,853,831   $2,226,757 
Puhua Phase Four   4,985,823    2,851,066 
Ankang Project   1,502,796    4,241,380 
Projects Completed          
Puhua Phase Three   2,159,590    5,176,650 
Park Plaza Phase One   838,241    8,126,813 
Puhua Phase Two – West Region and NCL   (671)   304,026 
JunJingIII   54,019    (131,198)
Puhua Phase One   2,695    21,271 
JunJingII   -    - 
JunJingI   -    - 
Revenues from the Sale of Properties  $14,396,324    22,816,765 

 

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The following table summarizes details of our most significant projects:

 

Revenues by project:  Three Months Ended September 30, 2015   Three Months Ended September 30, 2014 
US$          
Project Under Construction          
Puhua Phase Two – East Region contract sales  $3,417,690   $1,916,575 
Revenue  $4,853,831   $2,226,757 
Total gross floor area (GFA) available for sale   119,311    119,311 
GFA sold during the period   3,748    1,877 
Remaining GFA available for sale   66,368    87,230 
Percentage of completion   91.4%   81.6%
Percentage GFA sold during the period   3.1%   1.6%
Percentage GFA sold to date   44.4%   26.9%
Average sales price per GFA  $912   $1,021 
           
Puhua Phase Three contract sales  $2,159,590   $4,573,451 
Revenue  $2,159,590   $5,176,650 
Total gross floor area (GFA) available for sale   129,049    129,049 
GFA sold during the period   1,616    3,639 
Remaining GFA available for sale   36,025    55,457 
Percentage of completion   100.00%   83.1%
Percentage GFA sold during the period   1.25%   2.8%
Percentage GFA sold to date   72.08%   57.0%
Average sales price per GFA  $1,336   $1,257 
           
Park Plaza-Phase I contract sales  $838,241   $6,150,233 
Revenue  $838,241   $8,126,813 
Total gross floor area (GFA) available for sale   105,859    107,060 
GFA sold during the period   801    4,285 
Remaining GFA available for sale   21,047    40,404 
Percentage of completion   100.00%   98.9%
Percentage GFA sold during the period   0.76%   4.0%
Percentage GFA sold to date   80.12%   62.3%
Average sales price per GFA  $1,046   $1,435 
           
Ankang Project-Phase I contract sales  $942,882   $2,559,384 
Revenue  $1,502,796   $4,241,380 
Total gross floor area (GFA) available for sale   124,919    124,919 
GFA sold during the period   1,583    3,828 
Remaining GFA available for sale   39,828    53,142 
Percentage of completion   89.21%   62.6%
Percentage GFA sold during the period   1.27%   3.1%
Percentage GFA sold to date   68.12%   57.5%
Average sales price per GFA  $595   $669 
           
Puhua Phase Four contract sales  $5,949,120   $7,772,451 
Revenue  $4,985,823   $2,851,066 
Total gross floor area (GFA) available for sale *   147,775    147,775 
GFA sold during the period   6,248    7,868 
Remaining GFA available for sale   97,435    127,570 
Percentage of completion   34.21%   26.3%
Percentage GFA sold during the period   4.23%   5.3%
Percentage GFA sold to date   34.07%   13.7%
Average sales price per GFA   952    988 

 

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

 

35 

 

 

Revenues from projects under construction

 

Revenues from projects under construction totaled $11.34 million for the three months ended September 30, 2015 compared to $22.6 million during the same period of 2014. The decrease is mainly due to that the price competition which brings a relatively significant impact on the rigid demand. The revenues decreases compared to the same period of last year, especially in Ankang real estate market, due to the real estate markets deteriorates under the influence of real estate market conflicts between affordable housing market and commercial housing market. The revenues in the third quarter dropped by 50%.

 

Puhua Project: The Puhua Project located within the Baqiao project covers 79 acres, with a total GFA of 800 thousand square meters. The project is divided into five phases for development, 278,168 square meters have completed, 396,165 square meters are under construction, and 117,237 square meters are under planning. The entire project began in 2008, and is expected to end in 2018. For the three months ended September 30, 2015, we secured $11.5 million in contract sales and recognized $12.0 million revenue.

 

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 $118 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. For the three months ended September 30, 2015, we secured $3.4 million contract sales and recognized $4.8 million revenue.

 

Puhua Phase Four: The Puhua Phase Four project covers 27,800 square meters with a total GFA of 144,073 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. There was $5.9 million in contract sales and we recognized $5.0 million for the three months ended September 30, 2015 based on the percentage of completion method.

 

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. There was $0.9 million in contract sales and we recognized $1.5 million for the three months ended September 30, 2015 based on the percentage of completion method.

 

Revenues from projects completed

 

The revenue from completed projects totaled $3.0 million for the three months ended September 30, 2015 compared to $0.2 million during the same period of 2014. Revenues from projects completed in the third quarter of 2015 were higher than those during the period of 2014. The increase is due to the completion of Puhua Phase Three and Park Plaza I projects which are recognized as completed projects.

 

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. The contract revenue for Puhua Phase Three was $2.2 million and we recognized $2.2 million for the three months ended September 30, 2015.

 

36 

 

 

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 105,859 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. The contract revenue was $0.8 million and we recognized $0.8 million for the three months ended September 30, 2015 based on the percentage of completion method.

 

Other income

 

Other income includes property management fees, rental income, revenues from the disposal of fixed assets as well as construction income. We recognized $5,305,985 in other income for the three months ended September 30, 2015, compared with $4,893,589 in the same period of 2014. The 8.43% increase is detailed in the following table:

 

 

   For the three months ended 
   September 30,   September 30, 
   2015   2014 
Interest income  $811,184   $1,139,755 
Rental income   204,943    228,573 
Income from property management services   1,254,010    889,648 
External construction contracts   2,017,705    2,428,694 
Miscellaneous income   1,018,143    206,919 
 Total  $5,305,985   $4,893,589 

 

Cost of properties and land

 

The cost of real estate sales and land for the three months ended September 30, 2015 decreased 31.5 percent to $12,760,030 compared with $18,632,301 in the same period of 2014. The main reason for this decrease is the decrease in real estate sales.

 

Gross profit and profit margin

 

Gross profit for the three months ended September 30, 2015 was $3,966,294, representing a 31.5 percent decrease from $5,787,656 in the same period of 2014. The gross profit margin for the three months ended September 30, 2015 was 20.1 percent compared with 20.9 percent in the same period of 2014.

 

The intense real estate market competition in Xi’an as a whole has resulted in a heavy pressure on real estate enterprises. According to a report by China Real Estate Information Corporation (“CRIC”), in September of 2015, the new supply area of Xi’an real estate reached 1.34 million square meters, however the sale area was less than 1 million square meters, dropped by 49.4% month on month, at the end of the third quarter of 2015, the inventory of Xi’an real estate reached a high level of 37.5 million square meters and consequently, the supply and demand relationship has deteriorated continuously. In an environment of increased competition and slower sales, real estate companies have promoted sales at the expense of several gross margins. Combined with the continual rise in land costs and the adjustment of the real estate prices, the costs of real estate developers continue to rise and profit margins are contracting. Under these challenges, the Company sticks to the strategy that “cash is of paramount importance”. In the third quarter of 2015, the Company increased its promotion efforts to sell the residential housing, but the sales are not satisfactory to the Company. As a result, the gross profit decreased by 31.5% compared to the third quarter of 2014.

 

37 

 

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2015 increased to $4,491,185 compared with $3,936,508 in the same period of 2014. SG&A accounted for 22.8 percent of total revenue in the third quarter of 2015 compared to 14.2 percent for the same period in 2014. The increase in SG&A is due to that the Company increased its promotion efforts in the third quarter of 2015.

 

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 was 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 September 30, 2015 option based compensation expense of $Nil (September 30, 2014 - $ Nil) was recognized in the interim condensed consolidated statements of income.

 

During the second quarter of 2015, the Company announced the issuance of 57,500 shares of Common Stock to the Chairman, CFO, COO, and Directors of the company to compensate services provided. These shares were issued during the third quarter of 2015.

 

Other expenses

 

Other expenses mainly consists of late delivery settlements, maintenance costs and some miscellaneous income. Other expenses in the three months ended September 30, 2015 was $34,464 compared with $6,460 in the same period of 2014. For the three months ended September 30, 2015, the miscellaneous expenses were from Tsining, Xinxing Construction and JiYuan.

 

Financing expense

 

Financing expense in the three months ended September 30, 2015 decreased to $1,242,294 from $1,342,370 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 in the financial expense is due to the repayment of a few loans.

 

Provision for (recovery of) income taxes

 

The $467,509 recovery of income taxes for the three months ended September 30, 2015 was recorded, comparing to $414,147 provision for income taxes for the three months ended September 30, 2014, which is primarily due to decreased operating income in the third quarter of 2015 compared with that in the third quarter of 2014.

 

Recovery of deferred taxes

 

The $11,020 recovery of deferred taxes for the three months ended September 30, 2015 was consistent to $11,270 for the three months ended September 30, 2014.

 

Net loss

 

Net loss for the three months ended September 30, 2015 is $1,399,020 compared to an income of $2,171,114 in the same period of 2014. This is due to decrease in revenue, 2014 Q3 had a gain on extinguishment of a loan for $2 million.

 

38 

 

 

Basic and diluted (loss) earnings per share

 

Both the basic loss per share and diluted loss per share were $0.20 in the three months ended September 30, 2015, compared to an earnings per share of $0.31 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) earnings 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 7,014,710 (35,073,550 shares prior to the split), in the three months ended September 30, 2015 and 6,895,492 (34,477,458 shares prior to the split) in the same period of 2014. The increase of common shares was due to additional shares issued to company directors in 2015.

 

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 September 30, 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 loss on foreign exchange translation in the three months ended September 30, 2015 was $5,066,925, compared with a gain of $2,782,552 in the same period of 2014.

 

Nine Months Ended September 30, 2015 Compared With Nine Months Ended September 30, 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 nine months ended September 30, 2015, most of our revenues came from the Park Plaza, Puhua Phase Two – East Region, Puhua Phase Three and Four, and Ankang Project.

 

Revenues by project:  Nine Months Ended September 30, 2015   Nine Months Ended September 30, 2014 
US$          
Project Under Construction          
Puhua Phase Two – East Region  $17,386,462   $10,989,548 
Puhua Phase Four   15,825,526    6,336,175 
Ankang Project   6,034,896    16,897,418 
Projects Completed          
Puhua Phase Three   15,524,169    14,312,190 
Park Plaza Phase One   11,622,533    28,614,578 
Puhua Phase Two – West Region and NCL   508,821    863,451 
JunJingIII   273,727    575,563 
Puhua Phase One   (59,360)   414,180 
JunJingII   -    - 
JunJingI   -    433,310 
Revenues from the Sale of Properties  $67,116,774    79,436,413 

 

39 

 

 

The following table summarizes details of our most significant projects:

 

Revenues by project:  Nine Months Ended September 30, 2015   Nine Months Ended September 30, 2014 
US$          
Project Under Construction          
Puhua Phase Two – East Region contract sales  $14,943,055   $9,784,418 
Revenue  $17,386,462   $10,989,548 
Total gross floor area (GFA) available for sale   119,311    119,311 
GFA sold during the period   16,758    8,267 
Remaining GFA available for sale   66,368    87,230 
Percentage of completion   91.4%   81.6%
Percentage GFA sold during the period   14.0%   6.9%
Percentage GFA sold to date   44.4%   26.9%
Average sales price per GFA  $892   $1,184 
           
Puhua Phase Three contract sales  $13,089,826   $7,919,563 
Revenue  $15,524,169   $14,312,190 
Total gross floor area (GFA) available for sale   129,049    129,049 
GFA sold during the period   12,265    7,443 
Remaining GFA available for sale   36,025    55,457 
Percentage of completion   100.0%   83.1%
Percentage GFA sold during the period   9.5%   5.8%
Percentage GFA sold to date   72.1%   57.0%
Average sales price per GFA  $1,067   $1,064 
           
Park Plaza-Phase I contract sales  $11,528,841   $22,112,788 
Revenue  $11,622,533   $28,614,578 
Total gross floor area (GFA) available for sale*   105,859    107,060 
GFA sold during the period   11,923    20,131 
Remaining GFA available for sale   21,047    40,404 
Percentage of completion   100.0%   98.9%
Percentage GFA sold during the period   11.3%   18.8%
Percentage GFA sold to date   80.1%   62.3%
Average sales price per GFA  $967   $1,098 
           
Ankang Project-Phase I contract sales  $4,538,062   $13,261,021 
Revenue  $6,034,896   $16,897,418 
Total gross floor area (GFA) available for sale   124,919    124,919 
GFA sold during the period   7,969    19,284 
Remaining GFA available for sale   39,828    53,142 
Percentage of completion   89.2%   62.6%
Percentage GFA sold during the period   6.4%   15.4%
Percentage GFA sold to date   68.1%   57.5%
Average sales price per GFA  $569   $688 
           
Puhua Phase Four contract sales  $26,209,540   $19,935,137 
Revenue  $15,825,526   $6,336,175 
Total gross floor area (GFA) available for sale   147,775    147,775 
GFA sold during the period   26,772    20,205 
Remaining GFA available for sale   97,435    127,570 
Percentage of completion   34.2%   26.3%
Percentage GFA sold during the period   18.1%   13.7%
Percentage GFA sold to date   34.1%   13.7%
Average sales price per GFA   979    987 

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

 

40 

 

 

Revenues from projects under construction

 

Revenues from projects under construction totaled $39.2 million for the nine months ended September 30, 2015 compared to $77.1 million during the same period of 2014. The decrease is mainly due to price competition which brings a relatively significant impact on the rigid demand. The revenues decreases compared to the same period of last year, especially in Ankang real estate market, due to the real estate markets deteriorates under the influence of real estate market conflicts between affordable housing market and commercial housing market. The revenues for nine months ended September 30, 2015 dropped by 49.2%. Another reason of decrease was due to 2 projects completed in 2015.

 

Puhua Project: The Puhua Project located within the Baqiao project covers 79 acres, with a total GFA of 800 thousand square meters. The project is divided into five phases for development, 278,168 square meters have been completed, 396,165 square meters are under construction, and 117,237 square meters are under planning. The entire project began in 2008, and is expected to end in 2018. For the nine months ended September 30, 2015, we secured $54.7 million in contract sales and recognized $49.2 million revenue.

 

Puhua Phase Two-East Region: The East Region consists of eight residential buildings and three commercial buildings. The total estimated revenue of Puhua Phase Two-East Region is $118 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 of 2010, and we have recognized revenue since the second quarter of 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. For the nine months ended September 30, 2015, we secured $14.9 million contract sales and recognized $17.4 million in revenue.

 

Puhua Phase Four: The Puhua Phase Four project covers 27,800 square meters with a total GFA of 144,073 square meters. We started pre-sales of Puhua Phase Four during the second quarter of 2014 and started recognizing revenues based on the percentage of completion method. There was $26.2 million in contract sales and we recognized $15.8 million in revenue for the nine months ended September 30, 2015 based on the percentage of completion method.

 

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. There was $4.5 million in contract sales and we recognized $6.0 million for the nine months ended September 30, 2015 based on the percentage of completion method.

 

Revenues from projects completed

 

The revenue from completed projects totaled $27.9 million for the nine months ended September 30, 2015 compared to $2.3 million during the same period of 2014. Revenues from projects completed in the first nine months of 2015 were higher than those during the same period in 2014.The increase is due to the completion of Puhua Phase Three and Park Plaza projects.

 

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. The contract revenue for Puhua Phase Three was $13.1 million and we recognized $15.5 million for the nine months ended September 30, 2015.

 

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 105,859 square meters. The three-year construction of Park Plaza started in the first quarter of 2012. We started to recognize revenue from this project in the first quarter of 2013. The contract revenue was $11.5 million and we recognized $11.6 million for the nine months ended September 30, 2015 based on the percentage of completion method.

 

41 

 

 

Other income

 

Other income includes property management fees, rental income, revenues from the disposal of fixed assets as well as construction income. We recognized $12,628,790 in other income for the nine months ended September 30, 2015, compared with $14,383,616 in the same period of 2014. The 12.2% decrease is detailed in the following table:

 

   For the nine months ended 
   September 30,   September 30, 
   2015   2014 
Interest income  $2,463,756   $3,343,305 
Rental income   648,490    714,865 
Income from property management services   4,110,496    3,272,697 
External construction contracts   4,350,452    5,839,748 
Additional compensation received in connection with TangDu project   -    612,912 
Miscellaneous income   1,055,596    600,089 
 Total  $12,628,790   $14,383,616 

 

Cost of properties and land

 

The cost of real estate sales and land for the nine months ended September 30, 2015 decreased 19.9 percent to $59,929,777 compared with $74,840,421 in the same period of 2014. The main reason for this decrease is the decrease in units sold and decrease in availability of units.

 

Gross profit and profit margin

 

Gross profit for the nine months ended September 30, 2015 was $12,511,936, representing a 21.6 percent increase from $10,287,215 in the same period of 2014. The gross profit margin for the nine months ended September 30, 2015 was 15.7 percent compared with 11.0 percent in the same period of 2014. The increase is due to that the Company sold mainly the residential housing in Puhua Phase Two-East Region and Puhua Phase IV and the sales of parking lots accounted for a small proportion.

 

The intense real estate market competition in Xi’an as a whole has resulted in a heavy pressure on real estate enterprises. According to a report by CRIC, in September, the new supply area of Xi’an real estate reached 1.34 million square meters, however the sale area is less than 1 million square meters, dropped by 49.4%, at the end of the third quarter of 2015, the inventory of Xi’an real estate reached a high level of 37.5 million square meters and consequently, the supply and demand relationship has deteriorated continuously. In an environment of increased competition and slower sales, real estate companies have promoted sales at the expense of several gross margins. Combined with the continual rise in land costs and the adjustment of the real estate prices, the costs of real estate developers continue to rise and profit margins are contracting. Under these challenges, the Company sticks to the strategy that “cash is of paramount importance”. In the first nine months of 2015, the Company increased its promotion efforts to sell the residential housing in Puhua Phase Two-East Region and New Coastal Line and the sales of parking lots accounted for a small proportion. As a result, the gross profit increased compared to the same period of 2014.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) for the nine months ended September 30, 2015 decreased to $11,351,887 compared with $11,802,817 in the same period of 2014. SG&A accounted for 14.3 percent of total revenue in the nine months ended September 30, 2015 compared to 12.6 percent for the same period in 2014. The SG&A in the first nine months of 2015 were almost the same as those during the period of 2014.

 

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 nine months ended September 30, 2015 option based compensation expense of $Nil (September 30, 2014 - $1,136,304) was recognized in the interim condensed consolidated statements of income.

 

During the second quarter of 2015, the Company announced the issuance of 57,500 shares of Common Stock to the Chairman, CFO, COO, and Directors of the company to compensate services provided. These shares were issued during the third quarter of 2015.

 

42 

 

 

Other expenses

 

Other expenses mainly consists of late delivery settlements, maintenance costs and some miscellaneous income. Other expenses in the nine months ended September 30, 2015 was $47,966 compared with $20,480 in the same period of 2014. For the nine months ended September 30, 2015, the miscellaneous expenses were from Tsining, Xinxing Construction and JiYuan.

 

Financing expense

 

Financing expense in the nine months ended September 30, 2015 decreased to $3,249,179 from $3,676,752 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 in the financial expense is due to the repayment of a few loans.

 

Provision for income taxes

 

The $106,954 provision for income taxes for the nine months ended September 30, 2015 decreased from $559,605 for the nine months ended September 30, 2014, which is primarily due to the impairments of stock inventory and intangible assets of Textile City.

 

Recovery of deferred taxes

 

The $3,774,476 recovery of deferred taxes for the nine months ended September 30, 2015 increased from $33,802 in the same period of 2014, of which $3,740,674 of the increase is due to the write off of the intangible asset.

 

Net loss

 

Net loss for the nine months ended September 30, 2015 is $20,855,055 compared to a loss of $5,366,979 in the same period of 2014. The increase in net loss is due to the impairments of stock inventory and intangible assets of Textile City.

 

Basic and diluted loss per share

 

Both the basic loss per share and diluted loss per share were $2.99 in the nine months ended September 30, 2015, compared to $0.78 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 consolidation 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 6,978,446 (34,892,230 shares prior to the split,) in the nine months ended September 30, 2015 and 6,906,526 (34,532,629 shares prior to the split) in the same period of 2014. The increase of common shares was due to additional shares issued to company directors in 2014.

 

43 

 

 

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 nine months ended September 30, 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 the foreign exchange. The loss on foreign exchange translation in the nine months ended September 30, 2015 was $4,426,551, compared with a loss of $ 3,215,708 in the same period of 2014.

 

Cash flow discussion

 

There was a net cash outflow of $17,084,996 during the nine months ended September 30, 2015 compared to a net cash outflow of $13,920,615 during the same period of 2014. The increase in the cash outflow is due to the repayment of a few loans.

 

Operating activity cash inflow was $9,333,664 in the nine months ended September 30, 2015, compared to operating cash outflow of $20,437,987 in the same period of 2014. The change in operating cash flow in the first nine months of 2015 was mainly due to that the Company sold the inventory and did not acquire new land in the first nine months of 2015. Also, more receivables and advances from customers were collected, which is offset by payments to Accounts Payable.

 

There was a cash outflow of $249,410 for investing activities for the nine months ended September 30, 2015, compared to investing cash outflow of $31,071,706 for the same period of 2014. The decrease was due to the fact that there was no short-term or long-term investments made in 2015.

 

There was a cash outflow of $26,169,250 for financing activities for the nine months ended September 30, 2015 compared with $37,589,078 of financing cash inflow in the same period of 2014 due to the fact that more funds were borrowed under loans entered into in 2014, and that many loans became due during the first nine months of 2015 requiring the Company to make repayment on such loans.

 

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 16% as of September 30, 2015 and 46% as of September 30, 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 September 30, 2015 was $291.6 million compared with $323.5 million on December 31, 2014. Net debt outstanding (total debt less cash and restricted cash) as of September 30, 2015 was $185.9 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 68.5 percent on September 30, 2015 and 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 increased slightly as of September 30, 2015 compared with December 31, 2014.

 

44 

 

 

Liquidity and capital resources

 

The Company entered into a land purchase agreement, where the total consideration for the land is $5,398,287. The Company has paid $4,090,880 by the end of the third quarter of 2015 as deposit for land use right and is obliged to pay the remaining amount $1,307,407 within the next 3 months.

 

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

 

   Payment due by period 
Commitments and Contingencies  Total   Less than 1 year   1-2 years   2-3 years   3-4 years   4-5 years   After 5 years 
Land use rights-projects  $1,307,407   $1,307,407   $-   $-   $-   $-   $- 
Total  $1,307,407   $1,307,407   $-   $-   $-   $-   $- 

 

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

 

    September 30,
2015
   

December 31, 

2014

Construction Bank of China              
Annual interest rate is 105% of People’s Bank of China prime rate (5.25%). The loan is secured by the Park Plaza Phase I project and its land use right. 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.   $ 13,059,349     $ 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 4.1143%. The 3-month LIBOR rate on September 30, 2015 was 0.3143% (December 31, 2014 - 0.2457%), secured by $31,468,311 (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 $37,740,364 (RMB240 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 total amount will be due on June 27, 2016. As of September 30, 2015, the Company has drawn $7,761,153 from the line of $8.0 million which is 98.6% of $7,867,078 (RMB50 million) restricted cash secured. Annual interest is based on the 12-month LIBOR rate plus 2.9%. The 12-month LIBOR rate on September 30, 2015 was 0.8251% (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, $1,573,416 (RMB10 million) due on November 4, 2015; $1,494,745 (RMB9.5 million) due on November 26, 2015; $550,695 (RMB3.5 million) due on December 30, 2015; $18,723,645 (RMB119 million) due on December 31, 2015; $7,867,078 (RMB50 million) due on January 9, 2016; $629,366 (RMB4 million) due on May 15, 2016; $125,873 (RMB0.8 million) due on June 16, 2016; $5,506,954 (RMB35 million) due on August 5, 2016; $11,800,617 (RMB75 million) due on August 6, 2016; $6,293,662 (RMB40 million) due on August 7, 2016, $29,391,403 (RMB186.8 million) of the loan has an annual interest rate of 15% and 20% on the remaining $25,174,649 (RMB160 million) of the loan. For the amount due on November 4, 2015, the company has repaid $157,342 (RMB 1.0 million). The extension for the remaining amount due on November 4, 2015 is still in negotiation as of the date hereof. Days Hotel can demand payment on the amount past due any time.     54,566,052       42,371,788
               

 

45 

 

 

    September 30,
2015
   

December 31, 

2014

Zhongyuan Trust

Annual interest rate is 15.11%, including a 0.9% handling fee. This loan is secured by the land use rights of Golden Bay A and Golden Bay B, and guaranteed by Tsining, Fangzhou and the Chairman. The repayment terms are as follows: $4,720,247 (RMB30 million) due on August 3, 2016; $9,125,810 (RMB 58 million) due on October 9, 2016; $314,683 (RMB 2 million) due on October 20, 2016; $11,013,909 (RMB70 million) due on February 3, 2017; $7,237,712 (RMB 46 million) due on April 9, 2017; $ 10,069,860 (RMB 64 million) due on April 20, 2017.

    42,482,220       -
               

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%. The loan is secured by 100% ownership of Xinxing Construction’s shares, corporate guarantee from Tsining, Puhua, and the Company. The loan is due on August 7, 2015. The loan has been repaid during this quarter.

    -       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, which is over $9,775,631 (RMB62 million) restricted cash secured for the loan. Management plans to extend the loans subsequent to the third quarter of 2015. The extension is still in negotiation as of the date hereof. Annual interest rate is based on the 12-month LIBOR rate plus 2.7%. The 12-month LIBOR rate as of September 30, 2015 was 0.8251% (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: $15,734,156 (RMB100 million) due on June 5, 2015, and $7,867,078 (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. The loan has been repaid during the second quarter of 2015.     -       56,409,760
               
Bank of Communications              
Annual interest rate is 120% of the People’s Bank of China prime rate (6.00%). 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 - $9,440,493 (RMB60 million); and December 20, 2016 - $3,146,831 (RMB20 million).     12,587,325       24,175,611
               

Bank of Communications

Annual interest rate is 130% of the People’s Bank of China prime rate (6.50%). 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.

 

    12,587,325       14,505,368
               

 

46 

 

 

    September 30,
2015
   

December 31, 

2014

Bank of Xi’an, Weilai Branch

Annual interest rate is 130% of the People’s Bank of China prime rate (6.50%). 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, the Company extended the loan with Bank of Xi’an to as follows: $4,720,247 (RMB30 million) due on September 30, 2015; $4,720,247 (RMB30 million) due on December 31, 2015, and $6,293,662 (RMB40 million) due on April 24, 2016. The loan has been repaid during this quarter.

    -       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 4.0064%. The 6-month LIBOR rate on September 30, 2015 was 0.5064% (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
               

Bank of East Asia

Annual interest rate is 120% of the People’s Bank of China prime rate (6.00%). The loan is secured by one of the unit from Tsining’s income producing property, the rent receivable from the unit, and guaranteed by the Chairman. The repayment schedule is as follows: November 28, 2015 - $78,671 (RMB0.5 million); May 28, 2016 - $78,671 (RMB0.5 million); November 28, 2016 - $157,342 (RMB1.0 million); May 28, 2017 - $157,342 (RMB1.0 million); November 28, 2017 - $550,695 (RMB3.5 million); and May 28, 2018 - $550,695 (RMB3.5 million).

    1,573,415       -
               

HuaRong Asset Management Inc.

Annual interest rate is 14% for the first 12 months, and 11% for the remaining 18 months. Annual effective interest rate is 14.87% taking into consideration of the consulting fees of $6,030,000 associated with obtaining the loan. The loan is secured by a portion of the Puhua Phase II project and land use rights, certain inventory from Puhua Phase I as well as 100% shares of Xinxing Fangzhou Housing Development Co., Ltd. The loan is also guaranteed by the Chairman and COO of the Company. The repayment schedule of this loan is as follows: August 31, 2016 – $5,664,296 (RMB 36 million); February 28, 2017 – $5,664,296 (RMB 36 million); August 31, 2017 – $8,496,444 (RMB 54 million); February 28, 2018 – $8,496,444 (RMB 54 million).

    28,321,480       -

 

Total Deferred Financing Costs

    (944,596)        
Total Loan Payable   $   265,310,223     $ 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) 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.

 

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Of the $90.1 million of restricted cash, $35.4 million of restricted cash, corresponds to a $30.0 million loan from Bank of Communications Offshore Branch (1), the $31.5 million corresponds to a $31.0 million loan from Bank of China, Macau Branch, $9.8 million corresponds to a $9.8 million loan from LUSO International Bank (2) and $7.9 million corresponds to a $7.8 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, Bank of Communications 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 $174,488,556 on September 30, 2015 (December 31, 2014 - $398,636,841). Other than the one unit from Tsining’s income producing property pledged for Bank of East Asia, no buildings or other income producing properties and improvements were pledged as of September 30, 2015.The weighted average interest rate on loans payable as of September 30, 2015 was 9.61% (December 31, 2014 – 9.78%).

 

The loans from Construction Bank of China and Bank of Communications are subject to certain repayment terms based on certain percentage of units sold inPark Plaza projects, Puhua Phase III and IV. Based on these repayment terms, 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  $204,419,587 
1 – 2 years   61,835,232 
Total  $266,254,819 

 

Liquidity Expectation

 

According to a report by CRIC, in September, the new supply area of Xi’an real estate reached 1.34 million square meters, however the sale area is less than 1 million square meters, dropped by 49.4%, at the end of the third quarter of 2015, the inventory of Xi’an real estate reached a high level of 37.5 million square meters and consequently, the supply and demand relationship has deteriorated continuously. The intense real estate market competition in Xi’an as a whole has resulted in a heavy pressure to the Company’s future sales and gross profit. There is also relatively high market risk. However, the consistent tightening 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 are flowing 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 stick to the strategy that “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 $381 million at the end of September 30, 2015, may change due to market fluctuations. Currently, it is valued at our cost, which is significantly below the market value.

 

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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.

 

(b) Changes in Internal Control over Financial Reporting.

 

During the quarter ended September 30, 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”).

 

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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.

 

On June 16, 2015, Plaintiffs filed a Second Amended Derivative Complaint, which again is purportedly brought on behalf of CHLN and names as defendants two CHLN directors, Pingji Lu and Jing Lu. This complaint asserts the same claims and seeks the same relief as the prior complaint. CHLN filed a motion to dismiss the Second Amended Derivative Complaint on July 9, 2015. A hearing on CHLN’s motion to dismiss has been set for August 19, 2015. After argument, the Court issued an order, entered on September 10, 2015, granting CHLN’s motion to dismiss in full, and again granting Plaintiffs leave to amend the complaint.

 

On September 25, 2015, Plaintiffs filed a Third Amended Derivative Complaint, which again is purportedly brought on behalf of CHLN and names as defendants Pingji Lu and Jing Lu. This complaint asserts the same claims and seeks the same relief as the prior two complaints. CHLN has filed another motion to dismiss the Third Amended Complaint.

 

CHLN believes the allegations that have been asserted in this litigation are without merit and CHLN intends to defend against them vigorously.

 

Item 1A. Risk Factors.

 

We amend the risk factor 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.

 

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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 November 16, 2015, we issued an earnings release reporting our results of operations for the third 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
     
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 on November 16, 2015, reporting our results of operations for the third 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 duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  China Housing & Land Development, Inc.  
       
November 16, 2015 By: /s/ Pingji Lu  
    Pingji Lu  
    Chief Executive Officer  
    (Principal Executive Officer)  
       
       
November 16, 2015 By: /s/ Fang Nie  
    Fang Nie  
    Chief Financial Officer  
    (Principal Financial and Accounting Officer)  

 

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