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| CHLN > SEC Filings for CHLN > Form 10-Q on 12-Nov-2009 | All Recent SEC Filings |
12-Nov-2009
Quarterly Report
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Form 10-Q are not historical facts and are forward-looking statements, which can be identified by the use of terminology such as estimates, projects, plans, believes, expects, anticipates, intends, or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties, and other factors affecting our operations, market growth, services, products, and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events and conditions that may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation: our ability to attract and retain management to integrate and maintain technical information and management information systems; our ability to raise capital when needed and on acceptable terms and conditions; the intensity of competition; and general economic conditions.
All written and oral forward-looking statements made in connection with this Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates based on our own experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are inherently uncertain. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our 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.
Warrants and derivative liability
As of September 30, 2009, the Company has approximately $4.7 million of warrants liability and $3.8 million of fair value of embedded derivatives on the balance sheet, representing approximately 4.0% and 3.2% of the total liabilities, respectively.
We utilize the Cox-Rubinstein-Ross ("CRR") Binomial Lattice Model to estimate the fair values of warrants liability and embedded derivatives. The CRR model depends on the following assumptions: the Company's common stock price underlying the warrants; strike price; conversion price; expected life; expected volatility; risk free interest rate; and dividend rate. We used the CRR Binomial Lattice Model for the past 3 years and we do not expect any significant changes to assumptions except for the common share price and the expected volatility.
We estimate the fair value of warrants liability and embedded derivatives every quarter and recognize the change of fair value as gain or loss on our current quarter consolidated statement of income. The fair values of warrants liability and embedded derivatives have changed during the past few years according to the valuation models and the fair values are positively related to the market share price movement and the volatility.
During the three months ended September 30, 2009, our common stock price experienced large fluctuations with the price decreasing from $5.58 on July 1, 2009 to $3.85 on September 30, 2009. The decrease in stock price caused a decrease in fair value for warrants liability and embedded derivatives. As a result, we recognized approximately $3.04 million as a change in fair value of warrants and $2.70 million as a change in fair value of embedded derivatives, which are all non-cash gains.
The following table summarizes the fair value of warrant liability and embedded derivative as at various periods.
September 30, December 31,
2009 2008
Fair value of warrants liability $ 4,721,195 $ 1,117,143
Fair value of embedded derivatives $ 3,777,671 $ 760,398
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The following tables summarize all the warrants and conversion option outstanding and the assumptions used for their valuations as of December 31, 2008 and September 30, 2009.
Investor Warrants: 9/30/2009 12/31/2008 Strike price 6.07 6.07 Market price 3.85 1.29 Valuation date 9/30/2009 12/31/2008 Expiry date 2/28/2013 2/28/2013 Volatility 105.00 % 90.00 % Risk free rate 1.63 % 1.33 % Option value 2.30810 0.45822 # of warrants 1,437,467 1,437,467 Value 3,317,830 658,682 Investor Warrants: 5-7-2007 9/30/2009 12/31/2008 Strike price 4.50 4.50 Market price 3.85 1.29 Valuation date 9/30/2008 12/31/2008 Expiry date 5/9/2012 5/9/2012 Vlolatility 105.00 % 90.00 % Risk free rate 1.24 % 1.09 % Option value 0.55267 0.16402 # of warrants 2,539,416 2,731,382 Value 1,403,464 448,011 |
*Warrants
issued through
private
placement 12/31/2008 12/31/2008 12/31/2008 12/31/2008 12/31/2008 12/31/2008
Strike price 3.31 3.31 3.31 3.31 3.31 3.31
Market price 1.29 1.29 1.29 1.29 1.29 1.29
Valuation date 12/31/2008 12/31/2008 12/31/2008 12/31/2008 12/31/2008 12/31/2008
Expiry date 6/28/2009 7/7/2009 8/21/2009 6/28/2009 7/7/2009 8/21/2009
Volatility 90.00 % 90.00 % 90.00 % 90.00 % 90.00 % 90.00 %
Risk free rate 0.27 % 0.27 % 0.30 % 0.27 % 0.27 % 0.30 %
Option value 0.0372 0.04086 0.06394 0.0372 0.04086 0.06394
# of warrants 99,231 11,536 75,000 8,770 1,020 17,574
Value 3,692 471 4,796 326 42 1,124
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*During the third quarter of 2009, 81,921 warrants have been exercised, and the rest of 18,594 warrants have expired unexercised. As of September 30, 2009, there were no warrants issued through private placement outstanding.
Conversion Option Valuation: 9/30/2008 12/31/2008
Strike price 5.57 5.57
Market price 3.85 1.29
Valuation date 9/30/2008 12/31/2008
Expiry date 2/28/2013 2/28/2013
Volatility 105.00 % 90.00 %
Risk free rate 1.59 % 1.31 %
Option value 2.33796 0.4706
Host Value - principal 9,000,000 9,000,000
Host Value - interest (1) 0 0
Shares issuable on conversion 1,615,799 1,615,799
Host Value - principal 3,777,670 760,398
Host Value - interest (1) 0 0
Option value - total 3,777,670 760,398
Derivative value 3,777,670 760,398
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Real estate held for development or sale, intangible asset and deposits on land use rights
As of November 10, 2009, our market capitalization is approximately $119.9 million.
We evaluate the recoverability of our real estate developments taking into account several factors including, but not limited to, our plans for future operations, prevailing market prices for similar properties and projected cash flows.
We review real estate projects, whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value to the estimated undiscounted future cash flows expected resulting from the use of the assets and their eventual disposition. If the total of the expected undiscounted cash flow is less than the carrying amount of the assets, we recognize an impairment loss based on the fair value of the assets.
Our significant judgments and estimates related to impairment include our determination if an event has occurred to warrant an impairment test. If a test is required, other significant judgments and estimates will include our expectations of future cash flows and the calculation of the fair value of the impaired assets.
When real estate costs are determined to be impaired, they are written down to their estimated net realizable value. The Company evaluates the carrying value for impairment based on the undiscounted future cash flows of the assets. Write-downs of real estate costs deemed impaired are recorded as adjustments to the cost basis. There has been no impairment on real estate inventories and no impairment loss has been recorded for the three and nine months ended September 30, 2009 and 2008.
The following summarizes the components of real estate inventories as at September 30, 2009 and December 31, 2008:
September 30, 2009 December 31, 2008
Finished projects $ 11,584,242 $ 10,181,827
Construction in progress 96,636,065 50,468,184
Total real estate held for development or sale $ 108,220,307 $ 60,650,011
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Intangible asset
The Company's intangible asset is related to the exclusive rights to develop 487 acres of land in the Baqiao area acquired in 2007. The Company believes that the cooperation agreement with Baqiao District Government will be extended after June 2011. Based on the prevailing market condition in Xi'an city we concluded that there is no impairment.
According to the agreement with Baqiao District Government, at the beginning of each year, the Company will prepare the annual work plan and have it approved by Baqiao District Government. The annual work plan will include the detailed projects that will be started during that year and the Baqiao District Government is responsible for the land clearance. Due to the delay of land clearance progress, certain scheduled projects have been postponed. The Baqiao District Government acknowledged the delay and informed us of their intention to extend the agreement. Currently, we still have 348 acres land undeveloped and $41.7 million in intangible assets. If there's any event that leads the Company to believe it's unlikely to extend the agreement, we will assess the impairment of the intangible asset and write off the intangible asset from our balance sheet.
As of September 30, 2009 and December 31, 2008, intangible asset consists of the following:
September 30, 2009 December 31, 2008
Intangible acquired $ 47,308,685 $ 47,334,342
Accumulated amortization (5,654,264) (1,290,682)
Intangible assets, net $ 41,654,421 $ 46,043,660
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The Company evaluates its intangible assets for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Based on the estimated future cash flows, the Company records a write-down for impairments, if appropriate. For the three and nine months ended September 30, 2009 and 2008, the Company has recorded $0 of impairment on this intangible asset.
The Company amortized the intangible asset based on the percentage of the profit margin realized over the total expected profit margin to be realized from the 487 acre land in the Baqiao project. During fiscal 2007, the Company sold 18.5 acres of land and the related profit margin realized on that sale represented 2.4% of the total estimated profit margin on the whole 487 acre project, as a result, the Company amortized $1,157,758 (2.4%) of the total intangible asset during fiscal 2007. This method is intended to match the pattern of amortization with the income-generating capacity of the intangible asset. For the year ended December 31, 2008, the Company has recorded $0 of amortization on this intangible asset?Amortization expense for the three months ended September 30, 2009 and 2008 amounted to $0. Amortization expense for the nine months ended September 30, 2009 and 2008 amounted to $4,360,003 and $0, respectively. The amortization expense was capitalized and included in the real estate construction in progress.
Management re-evaluated the expected profit margin from the 487 acres of land as at September 30, 2009 and recalculated the intangible amortization related to the 2008 land sales based on the new estimate. As a result, management found the difference resulting from the change of estimate was not material. Therefore no adjustment was made in the three and nine months ended September 30, 2009 due to the change of accounting estimate of total profit margin on the 487 acres of land.
Deposits on land use rights
September 30, 2009 December 31, 2008
Deposits on land use rights 28,432,993 47,333,287
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The Company conducts regular reviews of the deposits on land use right. After review and assessment, the Company concluded that there was no significant decrease in the market price and therefore no impairment write-down was required. According to E House (China) Real Estate Research Institute the average residential sale price in Xi'an city was stable in the fiscal quarter ended September 30, 2009. The average sale price increased to 4,962 RMB per square meter (approximately US$ 726 per square meter) from 4,642 RMB in the second quarter 2009, representing about 7% year-on-year growth.
Material trends and uncertainties that may impact continuing operations
Changes in national and regional economic conditions, as well as in areas where we conduct our operations and where prospective purchasers of our homes live, may result in more caution on the part of homebuyers resulting in fewer home purchases. According to data from the Xi'an Bureau of Statistics, Xi'an city's real estate transaction volume (in terms of sq. meter signed) decreased about 30% in 2008 compared to 2007. All our projects are currently in Xi'an city, the downturn of the real estate market in Xi'an caused a decline in operating revenues in 2008. In 2009, the market has improved and transaction volume has increased compared to same period of 2008. During the third quarter of 2009, our revenue increased approximately 204% over same period of 2008.
Virtually all purchasers of our homes finance their acquisitions through lenders providing mortgage financing. A substantial increase in mortgage interest rates or unavailability of mortgage financing would adversely affect the ability of prospective homebuyers to obtain the financing they need in order to purchase our homes, as well as the ability of prospective move-up homebuyers to sell their current homes. For example, if mortgage financing became less available, demand for our homes could decline. A reduction in demand could also have an adverse effect on the pricing of our homes because we (and our competitors) may reduce prices in an effort to compete for home buyers. A reduction in pricing could result in a decline in revenues and margins. We do not expect any substantial change in current mortgage policy or the prevailing mortgage rate in the near future.
The real estate development industry is capital intensive, requiring significant up-front expenditures to acquire land and begin development. Accordingly, we incur substantial indebtedness to finance our homebuilding and land development activities. Although we believe that internally generated funds and current borrowing capacity will be sufficient to fund our capital and other expenditures (including land acquisition, development and construction activities), the amounts available from such sources may not be adequate to meet our needs. If such sources are not sufficient, we would seek additional capital in the form of debt or equity financing from a variety of potential sources, including bank financing and/or securities offerings. The availability of borrowed funds, to be utilized for land acquisition, development and construction, may be greatly reduced, and the lending community may require larger amounts of equity to be invested by borrowers in a project in connection with new loans. Failure to obtain sufficient capital to fund planned capital and other expenditures could have a material adverse effect on our business.
In addition, regulatory requirements could force us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to statutes and rules regulating, among other things, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations such as building permit allocation ordinances and impact and other fees and taxes, which may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from government agencies to grant the necessary licenses, permits and approvals could have an adverse effect on our operations.
As of September 30, 2009, we had $19,089,130 of cash and cash equivalents, compared to $37,425,340 as of December 31, 2008, a decrease of $18,336,210. However, cash and cash equivalents had an increase of $8,955,530 since June 30, 2009.
The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements for the year 2009. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of land for the development of future projects, through cash provided by operations and additional funds raised by future financings. Upon acquiring land for future development, we intend to raise funds to develop our projects by obtaining mortgage financing mainly from local banking institutions with which we have done business in the past. We believe that our relationships with these banks are in good standing and that our real estate will secure the loans needed. We believe that adequate cash will be available to fund our operations.
BUSINESS
The Company is a leading developer of residential and commercial properties in northwest China. The Company is based in Xi'an, the capital city of China's Shaanxi province. Since 1992, the Company has been engaged in the acquisition, development, management and sales of residential and commercial real estate properties and land through its subsidiaries in China.
The Company is the first and only Chinese real estate development company traded on NASDAQ.
By leveraging its background and capabilities, the Company has been able to capitalize on the supply of available land to develop residential and commercial properties, further increase its brand recognition, and outperform its competitors in the development of medium sized residential and commercial real estate projects in greater Xi'an.
The Company is the leading non-government middle-and-upper income residential real estate development company in Xi'an.
Our Property Projects
We provide three fundamental types of real estate development products:
? 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 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, in 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, permits, licensing and certain market conditions;
? Projects in process, which include developments where we have typically secured the development and land use rights, and where the site planning, architecture, engineering and infrastructure work is in progress;
? Projects under construction, where the building construction has started but has not yet been completed; and
? Completed projects with units available for sale, where the construction has been finished and most of the units in the buildings have been sold or leased.
Projects under construction
Actual or
Actual or Estimated Pre- Sold GFA by
Estimated sale Total Site September 30,
Type of Construction Commencement Area Total GFA 2009
Project name Projects Period Date (m2) (m2) (m2)
JunJing II Multi-Family Q3/2007
Phase One residential & - Q3/2009 Q2/2008 39,524 136,012 111,463
Commercial
JunJing II Multi-Family Q2/2009
Phase Two residential & - Q2/2011 Q2/2009 29,800 112,556 26,062
Commercial
Multi-Family Q2/2009
Puhua Project residential & - Q3/2014 Q4/2009 192,582 610,000 -
Commercial
Contract Recognized
Number of Revenue by Revenue by
Total Units sold by Estimated September 30, September 30,
Number of September 30, Revenue 2009 2009
Project name Units 2009 ($ millions) ($ millions) ($ millions)
JunJing II 1,182 1,077 95.6 68.5 66.5
Phase One
JunJing II 1,015 244 94.1 19.1 9.8
Phase Two
Puhua Project 5,000 - 700.0 - -
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JunJing II: JunJing II is located at 38 East Hujiamiao, Xi'an, with a total gross floor area ("GFA") of approximately 248,568 square meters. It is the first Canadian style residential community with "green and energy-saving" characteristics in Xi'an and has won the "National Energy Saving Project" award. The project is divided into 2 phases, namely JunJing II Phase One and JunJing II Phase Two. We started the construction of JunJing II Phase One in the third quarter of 2007 and started the pre-sale campaign in the second quarter of 2008.
As of September 30, 2009, our customers of JunJing II Phase One have signed pre-sale purchase agreements for apartments with purchase prices totaling $68.5 million, of which we have recognized $66.5 million in revenues, based on the percentage of completion method of accounting.
The construction of Phase Two commenced in the second quarter of 2009 and pre-sales started within the same quarter. As of September 30, 2009, the contract revenue for Phase Two was $ 19.1 million, of which we have recognized $ 9.8 million in revenues. Revenue will continue to be recognized as construction advances.
For JunJing II and Puhua projects, approximately $8.7 million of pre-sale payments were booked as advances from customers and will be recognized as revenues as construction advances.
Puhua: The Puhua project, the Company's 79 acre joint venture located in the Baqiao project, has a total land area of 192,582 square meters and an . . .
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