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EX-31.2 - China Housing & Land Development, Inc.v163958_ex31-2.htm
EX-32.1 - China Housing & Land Development, Inc.v163958_ex32-1.htm
EX-32.2 - China Housing & Land Development, Inc.v163958_ex32-2.htm
EX-31.1 - China Housing & Land Development, Inc.v163958_ex31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)

x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

p  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to _______________

000-51429
(Commission file number)

CHINA HOUSING & LAND DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
20-1334845
(State or other jurisdiction of
 incorporation or organization)
 
(IRS Employer Identification
No.)

6 Youyi Dong Lu, Han Yuan 4 Lou
Xi'An, Shaanxi Province
China 710054
(Address of principal executive offices)

86-029-8258-2632
(Issuer's telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨

Indicate by check mark whether the registrant 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  p 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 p No x

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 7, 2009, 30,893,757 shares of common stock.

EXPLANATORY NOTE

This Amendment No. 1 to our Quarterly Report on Form 10-Q initially filed with the Securities and Exchange Commission (the “Commission”) on May 7, 2009 is being filed in response to the Commission’s comment letter dated August 18, 2009. In addition, this Amendment No. 1 to our Quarterly Report on Form 10-Q is being filed to correct certain financial data and disclosure including Management's Discussion and Analysis of Financial Condition and Results of Operations and to restore our concolidated financial statements.

 
 

 
 
CHINA HOUSING & LAND DEVELOPMENT, INC.
Index

.
     
Page
Number
         
PART I
 
FINANCIAL INFORMATION
 
1
         
Item 1.
 
Financial Statements
 
1
         
   
Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008
 
1
   
Consolidated Statements of Income and Other Comprehensive Income for the three months ended March 31, 2009 and 2008 (unaudited)
 
2
   
Consolidated Statements of Cash Flows for three months ended March 31, 2009 and 2008 (unaudited)
 
3
         
   
Notes to Consolidated Financial Statements (unaudited)
 
5
         
Item 2.
 
Management's Discussion and Analysis or Plan of Operations
 
17
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
32
         
Item 4T.
 
Controls and Procedures
 
33
         
PART II.
 
OTHER INFORMATION
 
33
         
Item 1.
 
Legal Proceedings
 
33
         
Item 1A.
 
Risk Factors
 
33
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
41
         
Item 3.
 
Defaults Upon Senior Securities
 
41
         
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
41
         
Item 5.
 
Other Information
 
41
         
Item 6.
 
Exhibits
 
42
         
SIGNATURES
     
43
         
EX-31.1
 
(Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002)
   
         
EX-31.2
 
(Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002)
   
         
EX-32.1
 
(Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002)
   
         
EX-32.2
 
(Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002)
   
 
 
 

 
 
PART I. FINANCIAL INFORMATION

CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
As of March 31, 2009 and December 31, 2008
Unaudited

   
March 31,
   
December 31,
 
   
2009
   
2008
 
   
(Restated - Note2)
   
(Restated - Note 2)
 
ASSETS
           
Cash
  $ 10,598,200     $ 37,425,340  
Cash - restricted
    750,761       805,012  
Accounts receivable, net of allowance for doubtful accounts of $1,276,211 and $1,278,156, respectively
    4,001,440       813,122  
Other receivables and prepaid expenses, net
    1,108,985       446,497  
Notes receivable, net
    714,515       811,695  
Real estate held for development or sale
    108,706,852       60,650,011  
Property and equipment, net
    12,717,369       12,391,501  
Assets held for sale
    14,286,913       14,308,691  
Advances to suppliers
    476,098       704,275  
Deposits for land use rights
    28,566,252       47,333,287  
Intangible assets, net
    41,613,577       46,043,660  
Goodwill
    815,633       -  
Deferred financing costs
    583,636       622,118  
Total assets
    224,940,231       222,355,209  
                 
LIABILITIES
               
Accounts payable
  $ 9,627,775     $ 10,525,158  
Advances from customers
    10,561,379       9,264,385  
Accrued expenses
    3,869,126       3,539,842  
Accrued security registration expenses
    1,213,483       613,483  
Payables for acquisition of businesses
    9,428,054       8,429,889  
Income and other taxes payable
    8,821,074       7,532,730  
Other payables
    4,208,434       5,183,251  
Loans from employees
    1,666,203       1,517,039  
Loans payable
    34,392,425       35,617,442  
Deferred tax liability
    11,493,395       11,510,915  
Warrants liability
    949,904       1,117,143  
Fair value of embedded derivatives
    636,360       760,398  
Convertible debt
    13,903,756       13,621,934  
Total liabilities
    110,771,368       109,233,609  
                 
SHAREHOLDERS' EQUITY
               
Common stock: $.001 par value, authorized 100,000,000 shares issued and outstanding 30,893,757 and 30,893,757, respectively
    30,894       30,894  
Additional paid-in capital
    31,390,750       31,390,750  
Statutory reserves
    3,696,038       3,541,226  
Retained earnings
    39,594,298       38,651,579  
Accumulated other comprehensive income
    10,034,668       10,397,801  
Total China Housing & Land Development, Inc. shareholders’ equity
    85,106,648       84,012,250  
                 
Non-controlling interest
    29,062,215       29,109,350  
Total shareholders' equity
    114,168,863       113,121,600  
                 
Total liabilities and shareholders' equity
  $ 224,940,231     $ 222,355,209  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
1

 
 
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Other Comprehensive Income
For The Three Months Ended March 31, 2009 and 2008
Unaudited

   
3 Months,
   
         3 Months,         
 
  
 
March 31,
   
March 31,
 
  
 
2009
   
2008
 
   
(Restated - Note 2)
       
REVENUES
           
Sale of properties
  $ 12,925,869     $ 4,182,149  
Other income
    918,814       564,488  
                 
Total revenues
    13,844,683       4,746,637  
                 
COSTS AND EXPENSES
               
Cost of properties and land
    9,498,215       2,367,112  
Selling, general, and administrative expenses
    1,408,824       1,148,601  
Security registration expenses
    600,000       -  
Other expenses
    39,796       15,910  
Interest expense
    338,078       439,673  
Accretion expense on convertible debt
    281,822       171,683  
Change in fair value of embedded derivatives
    (124,038 )     284,511  
Change in fair value of warrants
    (167,239 )     (9,489 )
                 
Total costs and expenses
    11,875,458       4,418,001  
                 
Income before provision for income taxes
    1,969,225       328,636  
                 
Provision for income taxes
    713,641       280,951  
NET INCOME
    1,255,584       47,685  
                 
Net loss in subsidiaries attributable to noncontrolling interest
    47,135       -  
                 
Net income attributable to China Housing & Land Development, Inc.
    1,302,719       47,685  
                 
(Loss) gain on foreign exchange
    (363,133 )     3,047,864  
                 
COMPREHENSIVE INCOME
  $ 939,586     $ 3,095,549  
                 
NET INCOME (LOSS) PER SHARE
               
Basic
  $ 0.04     $ 0.00  
                 
Diluted
  $ 0.04     $ (0.01 )
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
Basic
    30,893,757       30,142,565  
                 
Diluted
    30,893,757       30,298,090  

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

 
2

 
 
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 2009 and 2008
(Unaudited)

   
March 31,
   
         March 31,         
 
  
 
2009
   
2008
 
    
(Restated - Note 2)
   
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,255,584     $ 47,685  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Depreciation
    154,088       93,821  
(Gain) loss on disposal of fixed assets and inventory
    (16,945 )     86  
Amortization of deferred financing costs
    38,482       28,458  
Change in fair value of warrants
    (167,239 )     (9,489 )
Change in fair value of embedded derivatives
    (124,038 )     284,511  
Accretion expense on convertible debt
    281,822       171,683  
Non-cash proceeds from sale of properties
    (15,835 )     (2,851,908 )
(Increase) decrease in assets:
               
Accounts receivable
    (3,107,443 )     (141,670 )
Real estate held for development or sale
    (36,452,495 )     (670,715 )
Advances to suppliers
    227,051       (298,253 )
Refund (deposit) for land use rights
    11,372,462       (1,147,224 )
Other receivables and prepaid expenses
    643,186       (12,024 )
Increase (decrease) in liabilities:
               
Accounts payable
    (892,860 )     (503,618 )
Advances from customers
    1,182,958       444,062  
Accrued expenses
    198,281       337,253  
Other payables
    (2,127,062 )     239,699  
Income and other taxes payable
    1,148,392       459,799  
Accrued security registration expenses
    600,000       -  
Net cash used in operating activities
    (25,801,611 )     (3,527,844 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Change in restricted cash
    53,002       (188 )
Purchase of property and equipment
    (63,224 )     (313,056 )
Notes receivable collected
    111,737       67,613  
Cash acquired in business combination
    519,309       -  
Proceed from sale of property and equipment
    193,098       14  
Net cash provided by (used in) investing activities
    813,922       (245,617 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net proceeds from issuance of convertible debt
    -       19,230,370  
Loans payable
    (1,170,292 )     -  
Payments on loans payable
    -       -  
Loans to or repayments from employees, net
    151,407       (316,093 )
Repayment of payables for acquisition of businesses
    (753,416 )     (2,961,307 )
Proceeds from issuance of common stock and warrants
    -       8,415  
Net cash (used in) provided by financing activities
    (1,772,301 )     15,961,385  
                 
(DECREASE)/INCREASE IN CASH
    (26,759,990 )     12,187,924  
                 
Effects on foreign currency exchange
    (67,150 )     (35,750 )
                 
CASH, beginning of period
    37,425,340       379,633  
                 
CASH, end of period
  $ 10,598,200     $ 2,351,015  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
 
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders' Equity
As of March 31, 2009 and December 31, 2008
(Unaudited)
 
                                 
Accumulated
             
  
             
Additional
               
other
             
  
 
Common Stock
   
paid-in
   
Statutory
   
Retained
   
comprehensive
   
Noncontrolling
       
  
 
Shares
   
Par Value
   
capital
   
reserves
   
earnings
   
income
   
Interest
   
Totals
 
                           
(Restated - Note 2)
               
(Restated - Note 2)
 
BALANCE, December 31, 2008
    30,893,757     $ 30,894     $ 31,390,750     $ 3,541,226     $ 38,651,579     $ 10,397,801     $ 29,109,350     $ 113,121,600  
Net Income
                                    1,302,719               (47,135 )     1,255,584  
Adjustment to statutory reserve
                            154,812                               154,812  
Foreign currency translation adjustment
                                            (363,133 )             (363,133 )
                                                                 
BALANCE, March 31, 2009
    30,893,757     $ 30,894     $ 31,390,750     $ 3,696,038     $ 39,954,298     $ 10,034,668     $ 29,062,215     $ 114,168,863  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(Unaudited)

Note 1 — Organization and Basis of Presentation

China Housing & Land Development, Inc. (the “Company”) is a Nevada corporation, incorporated on July 6, 2004 under the name Pacific Northwest Productions Inc. (“Pacific”). On May 6, 2006, the Company changed its name to China Housing & Land Development, Inc.

The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Xi'an Tsining Housing Development Company Inc. ("Tsining"), Xi'an New Land Development Co. ("New Land"), Xi'an Hao Tai Housing Development Company Inc. ("Hao Tai"), Manstate Assets Management Limited (“Manstate”), Xi’an Xinxing Property Management Co., Ltd. (“Xinxing Property”) (see Note 2), Puhua (Xi’an) Real Estate Development Co., Ltd (75% interest) (“Puhua”) and Success Hill Investments Limited (60% interest) (“Success Hill”) (collectively, the "Subsidiaries"). All inter-company accounts and transactions have been eliminated on consolidation. The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair statement of the Company's consolidated financial position as at March 31, 2009, results of operations and cash flows for the periods ended March 31, 2009 and 2008. These adjustments consist of normal recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year.

The unaudited interim condensed consolidated financial statements are based on accounting principles that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 Annual Report”); except as disclosed below and 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 2008 Annual Report.

Accounting principles recently adopted

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)") which revised SFAS No. 141, "Business Combinations." SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquirer and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. The adoption on January 1, 2009 of this standard did not have a material impact on the Company’s consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements." (“SFAS No.160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The adoption on January 1, 2009 of this standard resulted in changes to our presentation for noncontrolling interests and did not have a material impact on the Company’s results of operations and financial condition.
 
 
5

 

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure requirements of FASB Statement 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") to require qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit risk-related contingent features in derivative agreements. The adoption on January 1, 2009 of this standard did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued SFAS No. 142-3 "Determination of the Useful Life of Intangible Assets" ("SFAS No. 142-3"). This guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for SFAS No. 142's entity-specific factors. The adoption on January 1, 2009 of this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. The adoption on January 1, 2009 of this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." (“FSP APB 14-1)”. FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. Such separate accounting also requires accretion of the resulting discount on the liability component of the debt to result in interest expense equal to an issuer’s nonconvertible debt borrowing rate. In addition, the FSP provides for certain changes related to the measurement and accounting related to derecognition, modification, or exchange. The adoption on January 1, 2009 of this standard did not have a material impact on the Company’s consolidated financial statements.

In September 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing income per share under the two-class method pursuant to SFAS No. 128, "Earnings per Share." This guidance establishes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption on January 1, 2009 of this standard did not have a material impact on the Company’s consolidated financial statements.

 
6

 

Recent accounting pronouncements

In April 2009, the FASB issued SFAS No. 107-1 and APB 28-1, “Interim Disclosure about Fair Value of Financial Instruments” (“SFAS No. 107-1and APB 28-1”). SFAS No. 107-1 and APB 28-1 requires interim disclosures regarding the fair values of financial instruments that are within the scope of SFAS No. 107, “Disclosures about the Fair Value of Financial Instruments.” (“SFAS No. 107”). Additionally, SFAS No. 107-1 and APB 28-1 requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes of the methods and significant assumptions from prior periods. SFAS No. 107-1 and APB 28-1 does not change the accounting treatment for these financial instruments and is effective for the Company beginning in the second quarter of the year 2009. The Company is currently evaluating the impact of the adoption of SFAS No. 107-1 and APB 28-1.

In April 2009, the FASB issued SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (“SFAS No.152-2 and SFAS No.124-2”) which provides operational guidance for determining other-than-temporary impairments (“OTTI”) for debt securities. SFAS No.152-2 and SFAS No.124-2 are effective for interim and annual periods ending after June 15, 2009 and will be adopted by the Company beginning in the third quarter of 2009. The Company is currently evaluating the impact of the adoption of SFAS No.152-2 and SFAS No.124-2.

In April 2009, the FASB issued SFAS No. 157-4, “Determining Fair Value when Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“SFAS No. 157-4”). SFAS No. 157-4 provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset/liability has significantly decreased. SFAS No. 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. In addition, SFAS No. 157-4 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. SFAS No. 157-4 is effective for us beginning in the second quarter of the year 2009. The Company is currently evaluating the impact of the adoption of SFAS No. 157-4.

Foreign exchange rates used

   
March 31,
2009
   
December 31,
2008
   
March 31,
2008
 
Period end RMB/U.S. Dollar exchange rate
    6.8329       6.8225       7.1590  
Average RMB/U.S. Dollar exchange rate
    6.8359       6.9483       7.0120  

New accounting policies related to acquisition

On January 1, 2009, the Company acquired Xinxing Property (See Note 3). Xinxing property provides property management services. The revenues of the property management services are recognized when the services are provided.

Depreciation of Xinxing Property’s income producing properties improvements is computed using the straight-line method over the estimated useful lives of 10 years.

Reclassification

Certain reclassifications have been made to the prior year’s financial statements to conform to the 2009 presentation. The effects of the reclassifications were not material to the Company’s consolidated financial statements.

 
7

 

Note 2 Restatement of Security Registration Expenses
 
Pursuant to the agreement with the investors of the 5% Senior Secured Convertible Debt (Note 13), the Company was required to pay the investors certain late registration payments (“Late Payments”) if the Company failed to file a Registration Statement within 60 days after the closing date of the 5% Senior Secured Convertible Debt. The Company commenced negotiations with the holders of the 5% Senior Secured Convertible Debt to waive the Late Payments in December 2008, as both parties believed that the registration statement would become effective within a short period of time. However, as the registration statement has not become effective as of September 2009, the investors of the 5% Senior Secured Convertible Debt have decided to claim the Late Payments. Because the Company failed to accrue the Late Payments, the Company has restated the 2008 year end, 2009 quarter one and 2009 quarter two consolidated financial statements to accrue the corresponding expenses.
 
The restatement had the following impact on the Company’s previously reported results of operations for the three months ended March 31, 2009:
 
   
Three Months
 
   
Ended
 
   
31-Mar
 
   
2009
 
       
Security registration expenses as previously reported
  $ -  
Adjustment to accrue security registration expenses
    600,000  
         
Security registration expenses as restated
  $ 600,000  
         
Net income as previously reported
  $ 1,855,584  
Adjustment to accrue security registration expenses
    (600,000 )
         
Net income as restated
  $ 1,255,584  
         
Basic and diluted earnings per share
       
As previously reported
  $ 0.06  
As restated
  $ 0.04  
 

 
   
March 31,
   
December 31,
 
   
2009
   
2008
 
             
Accrued security registration expenses as previously reported
  $ -     $ -  
Adjustment to accrue security registration expenses
    1,213,483       613,483  
                 
Accrued security registration expenses as restated
  $ 1,213,483     $ 613,483  
                 
Retained earnings as previously reported
          $ 39,265,062  
Cumulative effect of the adjustment to accrue security registration expenses
            (613,483 )
                 
Retained earnings as restated
          $ 38,651,579  
 
Prior to the restatement, the Company did not accrue the Late Payments. After the restatement, the Company has presented the Late Payments as security registration expenses.
 
Note 3 — Acquisition
 
On January 20, 2009, the Company signed equity purchase agreement with the shareholders of Xi’an Xinxing Property Management Co., Ltd. (“Xinxing Property”) and acquired 100% ownership of Xinxing Property for a purchase price of RMB 12 million (approximately $1.76 million). Xinxing Property provides property management services to residence and commercial projects. The acquisition strengthens the Company’s ability to improve the value to customers during the after-sale phase of real estate development business. The synergies and benefit gained are reflected in the value of goodwill recorded.
 
According to the purchase agreement, the operational control of Xinxing Property passed to the Company effective January 1, 2009, and, accordingly, the results of Xinxing Property’s operation have been included in the Company’s Consolidated Statement of Income and Other Comprehensive Income from that date. This acquisition is not considered material to the Company, and therefore, pro-forma information for the comparative period has not been presented.

The total purchase price included (1) an initial cash payment of RMB 2.0 million (approximately $0.3 million), payable upon signing of the purchase agreement, (2) cash payment of RMB 3.6 million,(approximately $0.5 million), on March 30, 2009, (3) an additional cash payment of RMB 3.6 million,(approximately $0.5 million), on June 30, 2009 and (4) a final cash payment of RMB 2.8 million,(approximately $0.4 million), on September 30, 2009. If the Company does not make payments after 45 days of signing the agreement, a 1% penalty per month will be calculated based on the payable amount. If the payment is delayed for more than 3 months, the original shareholders of Xinxing Property have the right to cancel the deal. As of March 31, 2009, the remaining balance under the agreement amounted to $1,756,209 (see note 9).

The acquisition was accounted for using the purchase method in accordance with SFAS No. 141(R). The purchase price was allocated to the identifiable assets and liabilities assumed based on their estimated fair values. The purchase price allocation is not considered final as of the date of this report as the Company is still reviewing all of the underlying assumptions and calculation used in the allocation. However, The Company believes the final purchase price allocation will not be materially different than presented below.

Purchase Price
 
$
1,758,886
 
Value assigned to assets and liabilities:
       
Assets:
       
Cash
 
$
519,309
 
Accounts receivable
   
81,769
 
Other Receivable/Prepaid expenses and other assets
   
1,313,754
 
Property and equipment, net
   
612,796
 
Liabilities:
       
Accounts payable
   
11,907
 
Advance from customers
   
2,381
 
Accrued expenses
   
120,188
 
Income tax and other taxes payable
   
151,143
 
Other payables
   
1,299,999
 
Total net assets
   
942,010
 
Goodwill as at January 1, 2009
 
$
816,876
 
Foreign exchange translation adjustment
 
$
(1,243
)
Goodwill as at March 31, 2009
 
$
815,633
 

Note 4 — Supplemental Disclosure of Cash Flow Information

Income taxes paid amounted to $0 for both three months ended March 31, 2009 and 2008. Interest paid for three months ended March 31, 2009 and 2008 amounted to $1,091,235 and $377,145 respectively.

 
8

 

Note 5 — Other Receivables and Prepaid Expenses

Other receivables and prepaid expenses of the following at March 31, 2009 and December 31, 2008:

   
March 31,
2009
   
December 31,
2008
 
             
Other receivables
  $ 1,323,875     $ 916,886  
Allowance for bad debts
    (328,416 )     (473,058 )
Prepaid expenses
    113,526       2,669  
                 
Total
  $ 1,108,985     $ 446,497  

Note 6 – Real Estate Held for Development or Sale

The following summarizes the components of real estate inventories at March 31, 2009 and 2008:

   
March 31,
2009
   
December 31,
2008
 
  
           
Finished projects
  $ 9,199,897     $ 10,181,827  
Construction in progress
    99,506,955       50,468,184  
                 
Total
  $ 108,706,852     $ 60,650,011  

Interest on debt incurred by the Company for the three months ended March 31, 2009 was $1,197,857 (March 31, 2008 - $803,031). Of this interest, the Company capitalized $859,779 in construction in progress during the three months ended March 31, 2009 (2008 - $370,975).

 
9

 

Note 7 — Property and Equipment

Property and equipment consisted of the following at March 31, 2009 and December 31, 2008:

   
March 31,
2009
   
December 31,
2008
 
Head office buildings and improvements
  $ 3,229,705     $ 3,234,628  
Income producing properties and improvements
    10,543,012       10,055,310  
Electronic equipment
    406,122       228,422  
Vehicles
    72,173       71,140  
Office furniture
    284,176       183,399  
Computer software
    120,988       91,272  
Total
    14,656,176       13,874,711  
Accumulated depreciation
    (1,938,807 )     (1,483,210 )
Property and equipment, net
  $ 12,717,369     $ 12,391,501  

Depreciation expense for the three months ended March 31, 2009 and 2008 amounted to $154,088 and $93,821. The depreciation expense was included in the selling, general, and administrative expenses and other income.

Note 8 — Intangible Asset

Intangible asset consists of the following at March 31, 2009 and December 31, 2008:

   
March 31,
2009
   
December 31,
2008
 
             
Intangible asset held
  $ 47,262,297     $ 47,334,342  
Accumulated amortization
    (5,648,720 )     (1,290,682 )
                 
Intangible asset held, net
  $ 41,613,577     $ 46,043,660  

Amortization for the three months ended March 31, 2009 and 2008 amounted to $4, 360,003 and $0, respectively. Amortization was capitalized in the real estate construction in progress.

Note 9 — Accrued Expenses

   
March 31,
2009
   
December 31,
2008
 
Accrued expenses
  $ 964,654     $ 855,270  
Accrued interest
    2,904,472       2,684,572  
Total
  $ 3,869,126     $ 3,539,842  

 
10

 
 
Note 10 – Payables for Acquisition of Businesses

     
March 31,
2009
   
December 31,
2008
 
Payable to original shareholders of New Land
(i)
  $ 7,671,845     $ 8,429,889  
Payable to original shareholders of Xinxing Property
(ii)
    1,756,209       -  
Total
    $ 9,428,054     $ 8,429,889  
 
(i)
The payable to the original shareholders of New Land bears10% interest had an original maturity of January 30, 2009. New Land’s original shareholders have agreed to extend the loan to December 31, 2009.

(ii)
On January 20, 2009, the Company completed the acquisition of Xinxing Property (See Note 3). The total purchase price for the acquisition was RMB 12 million, (approximately $1.76 million). The total purchase price included 1) an initial cash payment of RMB 2.0 million,(approximately $0.3 million), payable upon signing of the purchase agreement, 2) an additional cash payment of RMB 3.6 million (approximately $0.5 million), on March 30, 2009, 3) an additional cash payment of RMB 3.6 million (approximately $0.5 million), on June 30, 2009, and 4) a final cash payment of RMB 2.8 million (approximately $0.4 million), on September 30, 2009. If the Company does not make payments after 45 days of signing the agreement, a 1% penalty per month will be calculated based on the payable amount. If the payment is delayed for more than 3 months, the original shareholders of Xinxing Property have the right to cancel the deal. As of March 31, 2009, the remaining balance under the agreement amounted to $1,756,209.

Note 11 — Loans Payable

Loans payable represent amounts due to various banks and are due on demand or within two years. These loans can generally be renewed with the banks when they expire. Loans payable as of March 31, 2009 and December 31, 2008 consisted of the following:

   
March 31,
2009
   
December 31,
2008
 
Commercial Bank Weilai Branch
           
Due December 25, 2009, annual interest is at 7.5%, secured by the Company's 24G project
  $ 4,390,522     $ 5,130,084  
                 
Commercial Bank Weilai Branch
               
Due August 29, 2010, annual interest is at 10.21%, guaranteed by Tsining and secured by the Company's Tsining building and partial of the Junjing II properties
    5,122,276       5,130,084  
                 
Xi'an Rural Credit Union Zao Yuan Rd. Branch
               
Due September 14, 2009, annual interest is at 11.8%, secured by the Company's JunJing Yuan I, Yuan I, Han Yuan, and Xin Xing Tower projects
    3,366,067       3,371,198  
                 
China Construction Bank, Xi'an Branch
               
Due August 27, 2011, annual interest is at floating interest rate based on 110% of People’s Bank of China rate, secured by the Company's JunJing Yuan II
    21,513,560       21,986,076  
                 
Total
  $ 34,392,425     $ 35,617,442  

 
11

 
 
All loans were borrowed for construction projects. All interest paid was capitalized and allocated to various construction projects.

On June 28, 2008, the Company signed a strategic partnership Memorandum of Understanding (“MOU”) with China Construction Bank Xi’an Branch that established a RMB 1 billion (approximately US$147 million) credit line for real estate development by the Company and its subsidiaries. Under the MOU, the company and its subsidiaries are required to set up a basic deposit account with China Construction Bank, to maintain a current ratio of not less than 90% and to maintain liabilities to assets ratio of not greater than 65%. On August 28, 2008, the Company entered a loan agreement with China Construction Bank Xi’an Branch to draw down the first RMB 150 million loan, which will mature on August 27, 2011. $21,986,075 (RMB 150 million) was received by the Company on December 31, 2008. As of March 31, 2009, our current ratio was approximately 178.4%, and our liabilities to assets ratio was approximately 49.2%. The Company will be able to draw down approximately another $101 million before we reach the maximum liabilities to assets ratio of 65%. If we are unable to meet all above covenants, we may not be able to draw down new loans from China Construction Bank and this will cause the delay of our projects under construction.

Note 12 – Fair Value of Financial Instruments

On January 1, 2008 the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), for financial assets and liabilities. This statement provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, which for the first quarter of the year 2009 is March 31, 2009.

The fair-value hierarchy established in SFAS No. 157 prioritizes the inputs used in valuation techniques into three levels as follows:

Level-1 –
Observable inputs – quoted prices in active markets for identical assets and liabilities;

Level-2 –
Observable inputs other than the quoted prices in active markets for identical assets and liabilities – such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data;

Level-3 –
Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of the measurement date, March 31, 2009, and the basis for that measurement, by level within the fair value hierarchy:

Fair Value Measurements Using
 
Assets/Liabilities
 
   
Level 1
   
Level 2
   
Level3
   
At Fair Value
 
Warrants liabilities
    -     $ 949,904       -     $ 949,904  
Derivative liabilities
    -     $ 636,360       -     $ 636,360  
Total
    -     $ 1,586,264       -     $ 1,586,264  

Note 13 - Convertible Debt

On January 28, 2008, the Company issued Senior Secured Convertible Debt due in 2013 (the "Convertible Debt") and warrants to subscribe for common shares for an aggregate purchase price of US$20 million. The Convertible Debt bears interest at 5% per annum (computed based on the actual days elapsed in a period of 360 days) of the RMB notional principle amount, payable quarterly in arrears in U.S. Dollars on the first business day of each calendar quarter and on the maturity date. In addition, 1,437,467 five-year warrants were granted with a strike price of $6.07 per common share, which are callable if certain stock price thresholds are met. Approximately 215,620 warrants are also available as a management incentive if certain milestones are met. If the aggregate principal amount of the Convertible Debt is reduced to US$10 million or less as a result of repayment by the Company pursuant to the Convertible Debt as a result of any optional conversion by the Investors or mandatory conversion by the Company of the Convertible Debt, then each Investor agrees to surrender to the Company warrants for an aggregate number of shares of common stock equal to such Investors’ pro rata share of 107,810 shares. If the aggregate principal amount of the Convertible Debt is reduced to $Nil as a result of repayment by the Company pursuant to the Convertible Debt as a result of any optional conversion by the Investors or mandatory conversion by the Company of the Convertible Debt, then each Investor agrees to surrender to the Company warrants in addition to the 107,810 warrants surrendered pursuant to the $10 million reduction noted above for an aggregate number of shares of common stock equal to such Investor’s pro rata share of 107,810 shares. The Company may hold in treasury and reissue to the officers and directors of the Company any warrants surrendered by the Investors. As of October 28, 2009, the Company did not repay any principle of Convertible Debt and the Investors did not deliver any optional conversion request to the Company.

The Investors have the right to convert up to 45% ($9 million) of the principal amount of the Convertible Debt into common shares at an initial conversion price of $5.57, subject to an upward adjustment. The Company, at its discretion, may redeem the remaining $11 million of Convertible Debt at 100% of the principle amount, plus any accrued and unpaid interest. The warrants associated with the Convertible Debt grant the Investors the right to acquire shares of common stock at $6.07 per share, subject to customary anti-dilution adjustments. The warrants may be exercised to purchase common stock at any time up to and including February 28, 2013.

The Convertible Debt is secured by a first priority, perfected security interest in certain shares of common stock of Lu Pingji, the Chairman of the Company. The Convertible Debt is subject to events of default customary for convertible securities and for a secured financing.

Both the warrants and the embedded derivative associated with Convertible Debt meet the definition of a derivative instrument according to FASB No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Because the warrant and the convertible debt are denominated in U.S. dollars but the company’s functional currency is the Chinese Renminbi, the exemption from derivative instrument accounting provided by FASB No. 133, paragraph 11(a)(1) is not available and therefore the warrant and embedded conversion option are recorded as derivative instrument liabilities and periodically marked-to-market. The fair value of the warrants and the embedded derivative on inception were determined to be $3,419,653 and $3,927,375, respectively, using the Cox-Rubinstein-Ross Binomial Lattice Model (the “CRR Model”) with the following assumption: expected life 4.32 years, expected volatility - 75%, risk free interest rate - 2.46% and dividend rate - 0%. The fair value of the warrants and embedded derivative at March 31, 2009 were determined to be $553,941 (December 31, 2008 - $658,682) and $636,360 (December 31, 2008 – 760,398) respectively, using the Cox-Rubinstein-Ross Binomial Lattice Model with the following assumption: expected life 3.83 - 3.91 years, expected volatility 90%, risk free interest rate 1.37-1.39% and dividend rate - 0%. For three months ended March 31, 2009 and 2008, the Company recorded a change in fair value for warrants and embedded derivative of $(104,740) (2008 - $243,756) and $(124,038) (2008 - $248,511) respectively in the condensed consolidated statements of income and comprehensive income. 
 
 
12

 
 
After allocating the gross proceeds to the fair value of the warrants and the embedded derivative instrument, the remaining proceeds were allocated as the initial carrying value of the Convertible Debt. The initial carrying value of the Convertible Debt is accreted to its stated amount on maturity using the effective interest method. The effective interest rate was determined to be 15.42%. The carrying value of Convertible Debt at March 31, 2009 was $13,903,756 (December 31, 2008 - $13,621,934). Related interest expense and accretion expense for the three months ended March 31, 2009 were $263,363 (2008 - $177,777) and $281,822 (2008 - $171,683) respectively.

In connection with this transaction, the Company and the Investors entered into a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the terms and conditions of the Registration Rights Agreement, the Company agreed to register within 60 calendar days after closing shares of common stock issuable to the Investors for resale on a Form S-3 Registration Statement to be effective no later than the 180th day after the closing date of the transaction. If the Form S-3 is not available at that time, then the Company will file a Registration Statement on such form as is then available to effect a registration of the registrable securities, subject to the consent of the Investors, which consent will not be unreasonably withheld. The Company shall register an amount of common stock for resale that equals at least 125% of the sum of shares issuable upon conversion of the Convertible Debt and the exercise of the warrants. The registration rights granted under the Registration Rights Agreement are subject to customary exceptions and qualifications and compliance with certain registration procedures. The Company is subject to the late registration penalty payment equal to the product of (i) the Investor’s outstanding principal amount and (ii) the quotient obtained by dividing 12% by 360 (the “Late Payments”).

The Company commenced negotiations with the Investors in December 2008 for a waiver for the Late Payments, as the Company and the Investors believed that the registration would become effective within a short period of time. However, as the registration has not become effective as of September 2009, the Company has accrued for the Late Payments (see Note 2). On September 28, 2009, the Company reached a First Amendment (the “Amendment”) with the Investors to settle the Late Payments, in the amount of $2,400,000, by the issuance of 614,290 common stock. The 614,290 common stock was determined by dividing $2,400,000, the total Late Payments up to September 28, 2009, by 95% of the historical volume weighted average price (“VWAP”) of the common stock , as determined by using Bloomberg function VWAP, for the immediate preceding 30 days period. In accordance with the Amendment, the Investors waived any further Late Payments against the Company under the Registration Rights Agreement.

Note 14 — Noncontrolling Interest

Noncontrolling interest consists of the interest of noncontrolling shareholders in the subsidiaries of the Company. As of March 31, 2009 noncontrolling interest amounted to $29,062,215 (December 31, 2008 - $29,109,350).
 
On November 5, 2008, the Company and Prax Capital entered into a conditional joint agreement to develop 79 acres within China Housing’s Baqiao project located in Xi’an. Prax Capital invested $29.3 million for a 25% interest in Puhua with various distribution rights. Prax Capital’s shares are redeemable at the option of the holder, provided that Prax gives advance notice, and with the Company’s approval. Prax has the first right of distribution and there is a maximum amount that Prax can receive. At this time, the Company believes that it is not probable that Prax Capital will exercise their redemption option.
 
On November 5, 2008, New Land entered into a Deed of Guarantee (the “Guarantee”), in favor of Prax Capital and Success Hill (Success Hill and together with Prax, the “Beneficiaries”) whereby the Company guaranteed the performance of certain obligations of New Land and Manstate pursuant to the terms and conditions of various agreements entered into by and between Prax Capital, Success Hill, and New Land, among others, in connection with Framework Agreement entered into on November 5, 2008, (“Framework Agreement”) by and between New Land, the Company, and Prax Capital. Prax Capital and New Land, through the Framework Agreement and the other related agreements, intend to participate jointly in the bidding of land use rights with respect to a parcel of land and shall cause that land to be developed, operated and sold.
 
13


The Guarantee is a continuing guarantee and shall remain effective until a termination event occurs as contemplated by the Guarantee. If the Company fails to timely and fully perform its obligations under the Guarantee, then the Beneficiaries shall be afforded the appropriate remedy as contemplated by the Guarantee, including but not limited to, the claim for damages and the reimbursement of expenses. Any amounts payable under the Guarantee by the Company shall include interest accrued at the rate of 10% from the due date of such payment.

During the first quarter of 2009, the Company owns a 75% interest in Puhua (Xi’an) Real Estate Development Co., Ltd. (“Puhua”), a real estate development company. Given the Company’s controlling ownership interest, the accounts of Puhua have been consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the noncontrolling investors’ interests in the net assets and operations of Puhua to the extent of the noncontrolling investor’s investments.

   
Noncontrolling interest
 
Noncontrolling Interest at December 31, 2008
   
29,109,350
 
Noncontrolling interests’ share of loss for the three months ended March 31, 2009
   
(47,135
)
Noncontrolling Interest at March 31, 2009
 
$
29,062,215
 

Note 15 — Shareholders' Equity

Pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settle in, a Company's Own Stock," the warrants issued contain a provision permitting the holder to demand payment based on a Black Scholes valuation in certain circumstances. Therefore, under EITF 00-19 and SFAS No. 133, the Company recorded the warrants as a liability at their fair value on the date of grant and then marked them to $395,963 at March 31, 2009 (2008 - $458,461) using the CRR Binomial Lattice Model with the following assumptions: expected life ranges from 0.22 to 3.09 years, expected volatility 90%, risk fee interest rate ranges from 0.21% to 1.18%, and dividend rate - 0%. The change in fair value of warrants for the three months ended March 31, 2009 was $(62,499) (2008 - $(253,245)).

Including the fair value of warrants associated with the convertible debenture (See Note 12), the total warrant liability as at March 31, 2009 was $949,904 (2008 - $1,117,143). The total change in fair value of warrants for the period ended March 31, 2009 was $(167,239) (2008 - $(9,489)).

As of December 31, 2008, the Company accrued as a liability $78,600 in stock-based compensation expense for 54,583 shares of common stock granted by the Company to various directors and executive in 2009. As of March 31, 2009, none of the above shares were issued.

Warrants

Following is a summary of the warrant activity:
 
   
Number of
Warrants
Outstanding
   
Weighted Average
Exercise
Price
 
             
December 31, 2008
    4,381,980     $ 4.96  
Granted
    0       0  
Exercised
    0       0  
March 31, 2009
    4,381,980     $ 4.96  
 
14


Following is a summary of the status of warrants outstanding at March 31, 2009:

   
Outstanding Warrants
 
Exercise
Price
 
Number
 
Average Remaining
Contractual Life
 
           
$3.31
   
213,131
 
0.29 years
 
$4.50
   
2,731,382
 
3.09 years
 
$6.07
   
1,437,467
 
3.91 years
 

Note 16 — Statutory Reserves

In accordance with the laws and regulations of the People’s Republic of China, the income of a wholly-owned Foreign Invested Enterprises, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves. The proportion of allocation for reserve funds is no less than 10 percent of the profit after tax until the accumulated amount of allocation for statutory surplus reserve funds reaches 50 percent of the registered capital. Statutory reserves represent restricted retained earnings.

Statutory surplus reserves are to be utilized to offset prior years' losses, or to increase its share capital. When a limited liability company converts its surplus reserves to capital in accordance with a shareholders' resolution, the Company will either distribute new shares in proportion to the number of shares held by each shareholder, or increase the par value of each share. Except for the reduction of losses incurred, any other usage should not result in this reserve balance falling below 25% of the registered capital. Registered capital at March 31, 2009 is approximately $82.6 million (December 31, 2008 - $81.8 million).

Pursuant to the board of directors' resolution, Tsining transferred 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund, and will do so until such reserve balance reaches 50% of the Company's registered capital.

The transfer to this reserve must be made before any distributions of any dividends are distribution to shareholders. For the three months ended March 31, 2009, the Company appropriated $0 (March 31, 2008 - $0) to this surplus reserve. In connection with the Xinxing Property acquisition, the statutory reserve increased by $154,812.

Note 17 — Earnings Per Share

Earnings per share for three months ended March 31, 2009 and 2008 were determined by dividing net income for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding.

   
March 31,
2009
   
March 31,
2008
 
Numerator
           
Income attributable to common shareholders - basic
 
$
1,302,719
   
$
47,685
 
Effect of dilutive securities
               
Warrants
   
0
     
(253,245
)
Income attributable to common shareholders - diluted
 
$
1,302,719
   
$
(205,560
)
Denominator
               
Weighted average shares outstanding - basic
   
30,893,757
     
30,142,565
 
Effect of dilutive securities
               
Warrants
   
0
     
155,525
 
Shares to be issued to directors
   
28,504
     
0
 
Weighted average shares outstanding - diluted
   
30,922,261
     
30,298,090
 
Net Income / (Loss) per share
               
Basic
 
$
0.04
   
$
0.00
 
Diluted
 
$
0.04
   
$
(0.01
)
 
15


The outstanding warrants have an anti-dilutive effect on the earnings per share and are therefore excluded from the determination of diluted earnings per share calculation.

Note 18 — Commitments and Contingencies

The Company leases part of its office and hotel space under operating lease agreements. The future minimum rental payments required under the operating lease agreements are summarized below.

The Company entered into a contract with Xi’an Baqiao local government for a rubber river dam construction project. The Company is committed to expend approximately $1,024,455 for this project.

As of March 31, 2009, the Company had one land use right with an unpaid balance of approximately $2.6 million. The balance is not due until the vendor removes the existing building on the land and changes the zoning status on the land use right certificate.

   
Payment due by period
 
Commitments and
Contingencies
 
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
Over 5
years
 
                               
Rental lease
  $ 420,907     $ 152,012     $ 58,140     $ 52,754     $ 158,001  
Rubber dam construction
    1,024,455       1,024,455       -       -       -  
Land use right
    2,590,408       -       2,590,408       -       -  
Total
  $ 4,035,770     $ 1,176,467     $ 2,648,548     $ 52,754     $ 158,001  
 
16

 
ITEM 2. Management's Discussion and Analysis

FORWARD-LOOKING STATEMENTS
 
Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements, which can be identified by the use of terminology such as estimates, projects, plans, believes, expects, anticipates, intends, or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties, and other factors affecting our operations, market growth, services, products, and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events 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, and 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.

17

 
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.
 
Restatement of Financial Statements

On October 21, 2009, we determined that the Company will restate its financial statements for the quarter ended March 31, 2009 as reported on Form 10-Q filed May 7, 2009. Pursuant to a registration rights agreement entered into in connection with the Company’s issuance of its 5.0% Senior Secured Convertible Debt, the Company is required to pay the investors of the debt certain late registration payments (“Late Payments”) if the Company failed to file a registration statement within 60 days after the closing date of the transaction or if such registration statement failed to become effective by 90 calendar days, or 120 days if the registration statement is subject to a full review by the U.S. Securities and Exchange Commission. The Company commenced negotiations with the investors of the 5.0% Senior Secured Convertible Debt to waive the Late Payments in December 2008. The investors of the 5.0% Senior Secured Convertible Debt have thereafter decided to claim the Late Payments. Because the Company failed to accrue the Late Payments, the Company has decided to restate its financial statements for the quarter ended March31, 2009 as reported on Form 10-Q to accrue the corresponding expenses. Prior to the restatement, the Company did not accrue the Late Payments. After the restatement, the Company will present the Late Payments as security registration expense.

Warrants and derivative liability

As of March 31, 2009, the Company has approximately $0.9 million of warrants liability and $0.6 million of fair value of embedded derivatives on the balance sheet, which is approximately 0.86% and 0.57% of the total liabilities, respectively.

We are using 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 warrant liability and embedded derivatives every quarter and recognize the change of fair value as gain or loss in 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.
 
The following table summarizes the fair value of warrant liability and embedded derivative as at various periods.

   
2008
   
2009
 
   
3rd Quarter
   
4th Quarter
   
1st Quarter
 
                   
Warrants Liability
 
$
2.2
   
$
1.1
   
$
0.9
 
Fair value of embedded derivatives
 
$
1.4
   
$
0.8
   
$
0.6
 
 
18

 
Real estate held for development or sale, intangible asset and deposits on land use rights
 
As of October 27, 2009, our market capitalization is approximately $115 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 as a result from the use of the assets and their eventual disposition. If the total of the expected undiscounted cash flow is less than the carrying amount of the assets, we would 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 would be recorded as adjustments to the cost basis. There has been no impairment on the real estate inventories and no impairment loss has been recorded for the three months ended March 31, 2009 and 2008.
 
The following summarizes the components of real estate inventories as at March 31, 2009 and December 31, 2008:

   
March 31, 2009
   
December 31, 2008
 
             
Finished projects
 
$
9,199,897
   
$
  10,181,827
 
Construction in progress
   
99,506,955
     
  50,468,184
 
                 
Total real estate held for development or sale
 
$
108,706,852
   
$
  60,650,011
 
 
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 $41.6 million in intangible assets. If the Baqiao District Government does not extend the agreement, we will write off the intangible assets from our balance sheet, which will affect our income statement in 2011.

Intangible asset
 
The Company’s intangible asset is related to the exclusive rights to develop 487 acres land in the Baqiao area that the Company acquired during 2007. We assessed the fair value of this intangible asset based on the current-period operating cash flow and a projection of future cash flows. It is the Company’s understanding 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.

As of March 31, 2009 and December 31, 2008, intangible asset consists of the following:

   
March 31, 2009
   
December 31, 2008
 
Intangible acquired
 
$
47,262,297
   
$
47,334,342
 
Accumulated amortization
   
(5,648,720
)
   
(1,290,682)
 
                 
Intangible assets, net
 
$
41,613,577
   
$
46,043,660
 
 
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 months ended March 31, 2009 and 2008, the Company has recorded $0 of impairment on the intangible asset.
 
19

 
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 487 acre land in the Baqiao project. During fiscal 2007, the Company sold 18.5 acre land and the related profit margin realized on that sale represents 2.4% of total estimated profit margin on the whole 487 acre project, therefore the Company amortized $1,157,758 (2.4% ) of 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 (2007 -$1,157,758) of amortization on the intangible asset. Amortization expense for the three months ended March 31, 2009 and 2008 amounted to $4,360,003 and $0 respectively. The amortization expense was capitalized in the real estate construction in progress.
 
Management re-evaluated the expected profit margin from the 487 acre land as at March 31, 2009 and recalculated the intangible amortization related to the 2008 land sales based on the new estimate. As a result, management found the difference resulted from change of estimate was not material. Therefore there was no adjustment made in the three months ended March 31, 2009 due to the change of accounting estimate of total profit margin in 487 acres land.
 
Deposits on land use rights

   
March 31, 2009
   
December 31, 2008
 
             
Deposits on land use rights
   
28,566,252
     
47,333,287
 

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.
 
Material trends and uncertainties that may impact our 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 more caution on the part of homebuyers and consequently fewer home purchases. According to the data from 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. As currently all our projects are in Xi’an city, the downturn of the real estate market in Xi’an caused the decline of our operating revenues in 2008. Since 2009, we see the market sentiment has improved and the transaction volume has increased compared to same period of 2008. During the second quarter of 2009, our revenue increased approximately 70.7% over same period 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 would need in order to purchase our homes, as well as adversely affect 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 better compete for home buyers. A reduction in pricing could result in a decline in revenues and in our margins. We do not expect any substantial change of current mortgage policy and the prevailing mortgage rate in the near future.
 
        The real estate development industry is capital intensive, and development requires 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 increased amounts of equity to be invested in a project by borrowers in connection with new loans. Failure to obtain sufficient capital to fund its planned capital and other expenditures could have a material adverse effect on our business.
 
20

 
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 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 us necessary licenses, permits and approvals could have an adverse effect on our operations.

As of March 31, 2009, we had $10,598,200 of cash and cash equivalents, a decrease of $26,827,140, compared with $37,425,340 of cash and cash equivalents as of December 31, 2008.

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 our future projects, through cash flow provided by operations and additional funds raised by future financings. Upon acquiring land for future development, we intend to raise funds to develop our projects by obtaining mortgage financing mainly from local banking institutions with which we have done business in the past. We believe that our relationships with these banks are in good standing and that our real estate will secure the loans needed. We believe that adequate cash flow will be available to fund our operations.

BUSINESS
 
China Housing & Land Development, Inc., 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, China Housing has been engaged in the acquisition, development, management, and sales of residential and commercial real estate properties and land through its subsidiaries in China.
 
China Housing & Land Development is the first and only Chinese real estate development company traded on NASDAQ.
 
By leveraging its strong background and capabilities, China Housing & Land Development has been able to capitalize on the supply of available land and develop residential and commercial properties, further increase China Housing's brand recognition, and outperform its competitors in the development of medium size residential and commercial real estate projects in greater Xi'an.

China Housing & Land Development 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 12 to 28 stories high, usually of steel-reinforced concrete, that are completed within approximately 24 months of securing all required permits.

 
Mid-rise apartment buildings, typically 7 to 11 stories high, usually 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 high, often of steel-reinforced concrete, that are completed within about 12 months of securing all required permits.

21


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

 
Projects under construction, where the building construction has started but has not yet been completed;

 
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 progressing;

 
Projects in planning, where 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; and

 
Completed projects, where the construction has been finished and most of the units in the buildings have been sold, leased, or rented.

Projects under construction

Project name
 
Type of
Projects
 
Actual or
Estimated
Construction
Period
 
Actual or
Estimated
Pre-sale
Commencement
Date
   
Total Site
Area
(m2)
   
Total GFA
(m2)
   
Sold GFA by
March 31, 
2009
(m2)
 
JunJing II
Phase One
 
Multi-Family
residential &
Commercial
 
Q3/2007
- Q3/2009
   
Q2/2008
     
39,524
     
136,012
     
76,295
 
                                         
JunJing II
Phase Two
 
Multi-Family
residential &
Commercial
 
Q2/2009
- Q2/2011
   
Q3/2009
     
29,800
     
112,556
     
-
 

Project name
 
Total
Number of
Units
   
Number of
Units sold
   
Estimated
Revenue
($ millions)
   
Contracted
Revenue by
March 31, 
2009
($ millions)
   
Recognized
Revenue by
March 31, 
 2009
 ($ millions))
 
JunJing II
Phase One
   
1,182
     
745
     
95.6
     
45.6
     
34.3
 
                                         
JunJing II
Phase Two
   
1,015
     
-
     
94.1
     
-
     
-
 
 
JunJing II: JunJing II is located at 38 East Hujiamiao, Xi’an, with total GFA about 248,568 square meters. It is the first Canadian style residential community with “green and energy-saving” characteristics, and won the “National Energy Saving Project.” 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 presale campaign in the second quarter of 2007.
 
22

 
As of March 31, 2009, our customers have signed pre-sales purchase agreements for apartments with purchase prices totaling $45.6 million, of which we have recognized $34.3 million in revenues, based on the percentage of completion method of accounting. About $10.4 million of those pre-sales payments were booked as advances from customers and will be recognized as revenues as construction advances.
 
We will start the construction work for Phase Two in the second quarter 2009 and will begin accepting pre-sale purchase agreements during the third quarter 2009. Revenue from pre-sales in Phase Two will begin to be recognized when the construction starts above the ground level.
 
Projects under planning and in process
 
Project
name
 
Type of
Projects
 
Estimated
Construction
Period
 
Estimated
Pre-sale
Commencement
Date
   
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
 
Puhua
 
Multi-Family
residential &
Commercial
 
Q3/2009
- Q3/2014
   
Q4/2009
     
192,582
     
610,000
     
5,000
 
JunJing III
 
Multi-Family
residential &
Commercial
 
Q3/2009
- Q3/2011
   
Q3/2009
     
8,094
     
51,470
     
570
 
 
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 percent 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. We believe this represents a major growth opportunity for the Company.
 
Xi’an has designated the Baqiao District as a major resettlement zone where the city expects 900,000 middle to upper income people to settle. The Xi’an government intends to generate a success similar to that created by Pudong for Shanghai, which has resulted in new economic opportunities and provided housing for Shanghai’s growing population.

The Xi’an municipal government plans to invest 50 billion RMB (over $6 billion) in infrastructure in the Baqiao New Development Zone. The construction of a large-scale public wetland park is well underway; it will embellish the natural environment adjacent to China Housing’s Baqiao project.
 
Through its New Land subsidiary, China Housing sold 18.4 acres to another developer in 2007 and generated about $24.41 million in revenue.
 
In 2008, we established a joint venture with Prax Capital Real Estate Holdings Limited (Prax Capital) to develop 79 acres within the Baqiao project, which will be the first phase of the Baqiao project’s development. Prax Capital invested $29.3 million cash in the joint venture. The project is further described in Puhua section below.
 
After selling 18.4 acres and placing 79 acres in the joint venture, about 390 acres remained available for the Company to develop in the Baqiao project.
 
23

 
Puhua:   The Puhua project, the Company’s 79 acre joint venture located in Baqiao project, has a total land area of 192,582 square meters and an expected gross floor area of about 610,000 square meters. In November 2008, the Company entered into an agreement with Prax Capital China Real Estate Fund I, Ltd., to form the joint venture. The joint venture was formed in late 2008, subject to certain conditions and approvals, which were satisfied, Prax Capital Real Estate Holdings Limited invested US$29.3 million cash in the joint venture, the joint venture acquired the land use rights early in the first quarter 2009, and the joint venture is proceeding with the project.
 
JunJing III: JunJing III is near our JunJing II project and the city expressway. It has an expected total gross floor area of about 51,470 square meters. The project will consist of 3 high rise buildings, each 28 to 30 stories high. The project is targeting middle to high income customers who require a high quality living environment and convenient transportation to the city center. We plan to start construction during the third quarter 2009 and the pre-sales during the same quarter. The total estimated revenue from this project is about $46.0 million.
 
 
Completed Projects
 
Project name
 
Type of
Projects
 
Completion
Date
   
Total Site
Area
(m2)
   
Total GFA
(m2)
   
Total
Number of
Units
   
Number of
Units sold by
March 31,
2009
 
Tsining
Mingyuan
 
Multi-Family
residential &
Commercial
   
Q2/2000
     
17,526
     
53,055
     
303
     
303
 
Lidu
Mingyuan
 
Multi-Family
residential &
Commercial
   
Q4/2001
     
5,289
     
8,284
     
56
     
56
 
Tsining
Hanyuan
 
Multi-Family
residential &
Commercial
   
Q4/2003
     
3,026
     
32,229
     
238
     
238
 
Tsining Home
IN
 
Multi-Family
residential &
Commercial
   
Q4/2003
     
8,483
     
30,072
     
215
     
213
 
Tsining
Gangwan
 
Multi-Family
residential &
Commercial
   
Q4/2004
     
12,184
     
41,803
     
466
     
466
 
Tsining-24G
 
Hotel,
Commercial
   
Q2/2006
     
8,227
     
43,563
     
773
     
685
 
JunJing I
 
Multi-Family
residential &
Commercial
   
Q3/2006
     
55,588
     
167,931
     
1,671
     
1,567
 
 
Tsining Mingyuan: 8 East Youyi Road, Xi’an. The construction area was 53,055 square meters. Mingyuan is a residential complex consisting of 303 apartments ranging from two to four bedrooms. Construction commenced in March 1998 and was completed in April 2000. In total, the project generated total sales of $19.98 million.

Lidu Mingyuan: 25 East Mutoushi, Xi’an. Located in the prime area near Xi’an historic Bell Tower, the project covers 1.3 acres with a building area of 8,284 square meters, and has 56 apartments ranging from two to four bedrooms. The project began in October 2000 and was completed in November 2001. Total sales were $4.32 million.

24


Tsining Hanyuan: 6 East Youyi Road, Xi’an. Located in the south of Xi’an, the area is noted for its schools and universities. The project was started in February 2002 and completed in December 2003. It is comprised of 238 two and three bedroom apartments and covering a total construction area of 32,229 square meters. The project generated total sales of $14.05 million.
 
Tsining Home IN: 88 North Xingqing Road, Xi’an. Located near the city center, the Home IN project consists of 215 two and three bedroom western-style apartments. Total construction area is 30,072 square meters. The project, completed in December 2003, generated total sales of $12.79 million.
 
Tsining GangWan: 123 Laodong Road, Xi’an. Less than one mile from the western hi-tech industrial zone, GangWan spans three acres and is comprised of eight buildings with a total construction area of 41,803 square meters. The project began in April 2003 and was completed in December 2004. GangWan has 466 apartments ranging from one to three bedrooms. Total sales were US$ 18.44 million.
 
Tsining-24G: 133 Changle Road, Xi’an. 24G is a redevelopment of an existing 26 floor building, located in the center of the most mature and developed commercial belt of the city. This upscale development includes secured parking, cable TV, hot water, air conditioning, natural gas access, internet connection, and exercise facilities. This project was awarded “The Most Investment Potential Award in Xi’an city” in 2006. Target Customers were white-collar workers, small business owners and traders as well as entrepreneurs. Total area available for residential use was 43,563 square meters, covering 372 one to three bedroom serviced apartments. The project started construction in June 2005 and was completed in June 2006 with total sales of $39.08 million.
 
Tsining JunJing Garden I: 369 North Jinhua Road, Xi’an. JunJing Garden I was the first German style residential & commercial community in Xi’an, designed by the world-famous WSP architectural design house. Its target Customer is local middle income families. The project has 15 residential apartment buildings consisting of 1,230 one to five bedroom apartments. The Garden features secured parking, cable TV, hot water, heating systems, and access to natural gas. Total GFA available was 167,931 square meters. JunJing Garden I was also a commercial venture that houses small businesses serving the needs of JunJing Garden I residents and surrounding residential communities. The project was completed in September 2006 and generated total revenue of $50.46 million.
 
25


CONSOLIDATED OPERATING RESULTS

Three Months Ended March 31, 2009 Compared With Three Months Ended March 31, 2008

Revenues

Our revenues are mainly derived from the sale of residential and commercial units and buildings, infrastructure work we perform for the local government, and land development projects in the Baqiao area.

In the first quarter of 2009, most of our revenues came from Tsining JunJing II phase one, which consists of 13 residential buildings and 3 auxiliary buildings, including one kindergarten, with a gross floor area of about 136,012 square meters. This project is currently under construction and collecting funds under pre-sale agreements.
 
Effective January 1, 2008, the company adopted the percentage of completion method of accounting for revenue recognition for all building construction projects in progress, which currently includes the Tsining JunJing II. The full accrual method was used before that date for all our residential, commercial, and infrastructure projects. Infrastructure projects continue to be accounted for using the full accrual method of accounting.
 
   
3 months
   
3 months
 
   
ended
   
ended
 
Revenues by project:
 
March 31,
2009
   
March 31,
2008
 
US dollars
           
             
Project Under Construction
           
Tsining JunJing II Phase One
 
$
10,305,262
   
$
-
 
                 
Projects Completed
               
Tsining JunJing I
   
1,580,565
     
4,347,648
 
Tsining-24G
   
862,593
     
-286,622
 
Tsining Gangwan
   
158,724
     
23,336
 
Tsining Hanyuan
   
-
     
-
 
Tsining Home In
   
18,725
     
53,220
 
Tsining Mingyuan
   
-
     
44,567
 
Lidu Mingyuan
   
-
     
-
 
                 
Infrastructure Project
               
Baqiao infrastructure construction
   
-
     
-
 
                 
Project In Process
               
Baqiao
   
-
     
-
 
                 
Revenues from the sales of properties
 
$
12,925,869
   
$
4,182,149
 
 
The revenues from the sale of properties in the three months ended March 31, 2009 increased 209% to $12,925,869 from $4,182,149 in the same period 2008. The increase was primarily due to the increased revenue from Tsining JunJing II Phase One, our current project under construction.
 
26

 
The revenue from completed projects totaled $2,620,607 in the three months ended March 31, 2009 compared with $4,182,149 in the same period of 2008. The 37.3% decrease was due mainly to the absence of revenues from Tsining-24G and JunJing I as both projects had been completed.
 
As a result of the utilization of the full accrual method of accounting for infrastructure projects, we have not recognized revenues from the infrastructure project in the Baqiao area. We expect to finish the river dam in second quarter 2009 and recognize the revenues when the project is delivered to the local government.

Our Project in Process is the Baqiao project where we have the exclusive right to develop 487 acres. In 2007, we acquired the development rights and recognized $24,405,717 in revenue as a result of a 18.4 acre land sale to an unrelated developer. Near the end of 2008, we established a joint venture with Prax Capital Real Estate Holdings Limited (Prax Capital) to co-develop 79 acres within the Baqiao project. Prax Capital invested $29.3 million cash in the joint venture. About 390 acres remain available for development in the Baqiao project.
                 
.Revenues by project:
   
2009 Q1
     
2008 Q1
 
US$
 
 
   
 
 
Project Under Construction
 
 
   
 
 
Tsining JunJing II Phase one contract sales
    12,011,390       -  
Revenue
  $ 10,305,262     $ -  
Total gross floor area (GFA) available for sale
    136,012       -  
GFA sold during the period
    19,289       -  
Remaining GFA available for sale
    59,717       -  
Percentage of completion
    70.49     -  
Percentage GFA sold during the period
    14.18 %     -  
Percentage GFA sold to date
    56.09 %     -  
Average sales price per GFA
    623       -  
 
 
 
   
 
 
Projects Completed
 
 
   
 
 
Tsining JunJing I
  $ 1,580,565     $ 4,347,648  
Total gross floor area (GFA) available for sale
    167,931       167,931  
GFA sold during the period
    638       5,332  
Remaining GFA available for sale
    8,867       11,142  
Percentage of completion
    100 %     100 %
Percentage GFA sold during the period
    0.38 %     3.18 %
Percentage GFA sold to date
    94.72 %     93.36 %
Average sales price per GFA
    2,477       815  
 
 
 
   
 
 
Tsining-24G
  $ 862,593     $ -286,622  
Total gross floor area (GFA) available for sale
    43,563       43,563  
GFA sold during the period
    749       - 175  
Remaining GFA available for sale
    5,310       5,854  
Percentage of completion
    100 %     100 %
Percentage GFA sold during the period
    1.72 %     -0.40 %
Percentage GFA sold to date
    87.81 %     86.56 %
Average sales price per GFA
    1,151       1,634  
 
 
 
   
 
 
Tsining Gangwan
  $ 158,724     $ 23,336  
Total gross floor area (GFA) available for sale
    41,803       41,803  
GFA sold during the period
    222       38  
Remaining GFA available for sale
    1,162       1,447  
Percentage of completion
    100 %     100 %
Percentage GFA sold during the period
    0.53 %     0.09 %
Percentage GFA sold to date
    97.22 %     96.54 %
Average sales price per GFA
    716       622  
 
 
 
   
 
 
Tsining Hanyuan
  $ -     $ -  
Total gross floor area (GFA) available for sale
    32,229       32,229  
GFA sold during the period
    -       -  
Remaining GFA available for sale
    -       -  
Percentage of completion
    100 %     100 %
Percentage GFA sold during the period
    0 %     0 %
Percentage GFA sold to date
    100 %     100 %
Average sales price per GFA
    N/A       N/A  
 
 
 
   
 
 
Tsining Home In
  $ 18,727     $ 53,220  
Total gross floor area (GFA) available for sale
    30,072       30,072  
GFA sold during the period
    48       148  
Remaining GFA available for sale
    2,803       3,048  
Percentage of completion
    100 %     100 %
Percentage GFA sold during the period
    0.16 %     0.49 %
Percentage GFA sold to date
    90.68 %     89.87 %
Average sales price per GFA
    389       361  
 
 
 
   
 
 
Tsining Mingyuan
  $ -     $ 44,567  
Total gross floor area (GFA) available for sale
    53,055       53,055  
GFA sold during the period
    -       78  
Remaining GFA available for sale
    -       -  
Percentage of completion
    100 %     100 %
Percentage GFA sold during the period
    0 %     0.15 %
Percentage GFA sold to date
    100 %     100 %
Average sales price per GFA
    N/A       570  
 
 
 
   
 
 
Lidu Mingyuan
  $ -     $ -  
Total gross floor area (GFA) available for sale
    8,284       8,284  
GFA sold during the period
    -       -  
Remaining GFA available for sale
    -       -  
Percentage of completion
    100 %     100 %
Percentage GFA sold during the period
    0 %     0 %
Percentage GFA sold to date
    100 %     100 %
Average sales price per GFA
    N/A       N/A  
 
 
 
   
 
 
Infrastructure Project
 
 
   
 
 
Baqiao infrastructure construction
  $ -     $ -  
 
 
 
   
 
 
Project In Process
 
 
   
 
 
Baqiao
  $ -     $ -  
 
 
    
   
    
 
Revenues from the sales of properties
  $ 12,925,869     $ 4,182,149  

Revenues from projects under construction
 
Tsining JunJing II Phase One

Tsining JunJing II Phase One was our major revenue generating construction project in the three months ended March 31, 2009, contributing $10,305,262 in revenues. By March 31, 2009, we had pre-sold about 745 units in the project, totaling approximately 76,295 square meters.

JunJing II Phase One consists of 13 middle-rise and high-rise residential buildings and 3 auxiliary buildings, including a kindergarten, with a gross floor area of about 136,012 square meters. Estimated total revenues for  Phase One are approximately $95.6 million. The company expects to complete the construction of Phase One in the third quarter of 2009.

Please note that the method of percentage of completion has being utilized to recognize revenue from Jan. 1, 2008. Therefore, only revenue recognition of Tsining JunJing II is under this method. The percentages of completion of the construction for each building as at March 31, 2009 are shown below:
 
Tsining JunJing II Phase one Building
 
Percentage of Completion
 
#1  
   
71.34
%
#2  
   
77.85
%
#3  
   
77.59
%
#4  
   
71.88
%
#5  
   
95.10
%
#7  
   
88.93
%
#8  
   
69.92
%
#9  
   
71.72
%
#14  
   
72.45
%
#15  
   
74.41
%
#21  
   
65.52
%

The above are all the buildings under pre-sale in JunJing II Phase One.

Phase Two of JunJing II consists of 12 middle-rise and high-rise buildings and will begin contributing revenue from second quarter of 2009. The total revenues from Phase Two are expected to be about $94.1 million.
 
Revenues from projects completed
 
Revenues in three months ended March 31, 2009 for completed projects decreased 37.3 percent to $2,620,607 compared with $4,182,149 in the same period 2008. The decrease in revenues for the three months ended March 31, 2009 was primarily due to the absence of revenue from Tsining -24G and JunJing I because both projects had been completed.
 
Other income
 
Other income includes property management fees, rental income, revenues from disposal of fixed assets as well as governments allowance for the equivalent cost of interest on the companys investments required to support infrastructure construction, continued river management, and suburban planning for the entire Baqiao high-technology industrial park. We recognized $918,814 in other income in the three months ended March 31, 2009 compared with $564,488 in the same period of 2008. The 62.8% increase is mainly due to the acquisition of Xinxing Property Management during the first quarter of 2009, which contributed approximately $548,945 to our consolidated revenues.
 
Cost of properties and land
 
The cost of properties and land in the three months ended March 31, 2009 increased 310.3% percent to $9,498,215 compared with $2,367,112 in the same period of 2008. The increase was primarily as a result of the increase sales volume in our JunJing II Phase One project.

 
27


The percentage of completion method of accounting is based on estimated costs incurred, and is preferable as it accurately reflects the business activity of the company and matches revenues with the costs incurred in the pursuit of such revenue. The company has determined that retrospective application to periods prior to January 1, 2008 is not practical as the necessary information needed to restate prior periods is not available. Therefore, the company began to apply the percentage completion method on a prospective basis beginning January 1, 2008.

Gross profit and profit margin

Gross profit for the three months ended March 31, 2009 was $4,346,468, up 82.66 percent from $2,379,525 in the same period of 2008. The gross profit margin for the three months ended March 31, 2009 was 31.39 percent compared with 50.13 percent in the same period of 2008. The decrease in the gross profit margin was mainly due to the different product mix. The residential units we sold during the three months ended March 31, 2009 generally had lower profit margins than the premium-priced retail units sold in the same period of 2008.

Selling, general, and administrative expenses
 
Selling, general, and administrative expenses for the three months ended March 31, 2009 increased 22.66 percent to $1,408,824 from $1,148,601 in the same period of 2008. The increase in selling, general, and administrative expenses was due primarily to the marketing expenses associated with Tsining JunJing II Phase One project and the administrative expenses related to the Puhua formation.
 
Stock-based compensation
 
We did not incur stock-based compensation expenses in the three months ended March 31, 2009 or during the same period of 2008.
 
Other expenses

Other expenses mainly consist of late delivery settlements and maintenance costs.

Other expenses in the three months ended March 31, 2009 increased 150.1 percent to $39,795 compared with $15,910 in the same period of 2008.

Operating profit and operating profit margin

Operating profit is defined as gross profit minus selling, general, and administrative expenses, stock-based compensation, and other expenses.
 
Operating profit in the three months ended March 31, 2009 was $2,897,848 compared with $1,215,014 in the same period of 2008, up 139.0 percent, primarily due to the higher revenue generated by Tsining JunJing II Phase One and, partially offset by higher selling, general, and administrative expenses in the first quarter of 2009. As a result, the operating profit margin was 20.9 percent for the first quarter of 2009 compared with 25.6 percent for the same period of 2008.
 
Interest expense
 
Interest expense in the three months ended March 31, 2009 decreased 23.1 percent to $338,078 from $439,673 in the same period of 2008, due primarily to capitalization and repayment of an 8 million RMB bank loan in Xi’an Tsining Housing Development Co., Ltd. In mid-2008, the company signed a RMB 1 billion (about $147 million) construction credit line agreement with China Construction Bank. During 2008, we drew down about $22 million of the credit line, of which the company repaid $0.44 million during three months ended March 31, 2009. The loan from China Construction Bank has an interest rate that floats at 110 percent of the People’s Bank of China reference rate.
 
28

 
Change in fair value of embedded derivative

The embedded derivative is related to the company’s $20 million convertible debt offering completed in January 2008. The change in the fair value of embedded derivatives was a periodic adjustment to the estimated cost to the company, which was provided by the Cox-Ross-Rubinstein Binomial Lattice valuation model. The company booked $(124,038) in the three months ended March 31, 2009 compared with $284,511 increase in the fair value of embedded derivative in the same period of 2008.

Change in fair value of warrants

In 2006, 2007, and 2008 the company issued warrants in conjunction with the issuance of common shares or convertible debt. The warrants permit the shareholders to buy additional common shares at the prices specified in the warrant agreements.

In the three months ended March 31, 2008, shareholders exercised a total of 1,870 warrants to buy a total of 1,870 common shares. A shareholder typically only exercises a warrant to buy common shares when the stock price is higher than the warrant exercise price. The shareholder pays the exercise price and the company covers the difference between the warrant exercise price and the share price at the time of conversion.
 
In addition, the company was required to estimate the fair value of its remaining warrants outstanding and adjust the value as appropriate, and it chose to use the Cox-Ross-Rubinstein Binomial Lattice valuation model to estimate their fair value.
 
The change in fair value of warrants was $(167,239) in the three months ended March 31, 2009, compared to $(9,489) during the same period of 2008, which consisted of the periodic adjustment to the estimated cost to the company to provide the common shares, assuming that all the warrants will be exercised sometime in the future. The basis for estimating the cost to provide those common shares was provided by the valuation model.

Security registration expenses

Pursuant to the agreement with the investors of the 5% Senior Secured Convertible Debt (Note 13), the Company was required to pay the investors certain late registration payments (“Late Payments”) if the company failed to file a Registration Statement within 60 days after the closing date of the 5% Senior Secured Convertible Debt. The Company commenced negotiations with the investors of the 5% Senior Secured Convertible Debt to waive the Late Payments in December 2008, as both parties believed that the registration statement would become effective within a short period of time. However, as the registration statement has not become effective as of September 2009, the investors of the 5% Senior Secured Convertible Debt have decided to claim the Late Payments. The Company has decided to present the Late Payments as security registration expenses.

The security registration expenses were $600,000 for the three months ended March 31, 2009, compared to $0 in the same period of 2008.

Provision for income taxes

The company booked a provision for income tax of $713,641 compared with the $280,951 recorded in the same period of 2008.
 
The effective tax rate was 27.3 percent for 2009 and 85.5 for 2008. The primary reason for the high effective tax rates in 2008 was that the change in fair value of embedded derivative and warrants could not be deducted from the income before taxes.
 
Noncontrolling Interest

We recorded $(47,135) loss attributable to noncontrolling shareholder of Puhua and Success Hill, which is related to the formation of Puhua in the first quarter of 2009. We did not have any loss attributable to noncontrolling shareholder in the same period of 2008.

Net income

Net income in the three months ended March 31, 2009 increased 2,533 percent to $1,255,584 from $47,685 in the same period of 2008.

As explained above, the increase in net income was due primarily to the improvement of market sentiment, higher sales revenues from our current construction project, and a higher average sales price for the units sold, partly offset by the higher selling, general, and administrative expenses and the change in the fair value of warrants and the embedded derivative in the first quarter of 2009.

 
29

 

Basic and diluted earnings per share
 
Basic earnings per share was $0.04 in the three months ended March 31, 2009, compared to $0.00 in the same period of 2008. Diluted earnings per share was $0.04 in the three months ended March 31, 2009, compared to $(0.01) in the same period of 2008.
 
Common shares used to calculate basic and diluted EPS
 
The weighted average shares outstanding used to calculate the basic earnings per share was 30,893,757 shares in the three months ended March 31, 2009 and 30,142,565 shares in the same period of 2008. The weighted average shares outstanding used to calculate the diluted earnings per share was 30,897,575 shares in the three months ended March 31, 2009 and 30,298,090 shares in the same period of 2008.
 
Foreign exchange

The company operates in China and accounts in the Chinese renminbi(RMB) but reports its financial results in U.S. dollars, based on the exchange rates of the two currencies. The fluctuation of exchange rates during the three months ended March 31, 2009 and the same period of 2008, when translating the operating results and financial positions at different exchange rates, created the accrued gain (loss) on foreign exchange.

Cash flow discussion
 
The decrease in cash for the three months ended March 31, 2009 was $(26,759,990) compared with $12,187,924 increase in cash in the same period of 2008.

Cash flow from operating activities in the three months ended March 31, 2009 decreased 631.4 percent to $(25,801,611) from $(3,527,844) in the same period of 2008, primarily due to the operating cash outflow associated with the development of Tsining JunJing II Phase One.

The cash from investing activities in the three months ended March 31, 2009 was $813,922, compared with $(245,617) use of cash in the same period of 2008, primarily due to the cash acquired from Xinxing Property Management Co. Ltd. and the proceeds from sale of fixed assets.

Cash flow from financing activities in the three months ended March 31, 2009 used $(1,772,301) compared with $15,961,385 in 2008, since the company issued the $20 million convertible debt and warrants in the first quarter of 2008.

In mid-2008, the company signed a RMB 1 billion (about $147 million) construction credit line agreement with China Construction Bank to support the company’s development projects. The company has been granted a RMB 22 million loan for the JunJing II Phase One project and expects another 22 million loan once the JunJing II Phase Two project begins.
 
Debt leverage

Total debt consists of the sum of the balance sheet lines titled Payables for acquisition of businesses, Loans from employees, Loans payable and Convertible debt.

Total debt outstanding as of March 31, 2009 was $59,390,438 compared with $59,186,304 on December 31, 2008.

Net debt outstanding (total debt less cash) as of March 31, 2009 was $48,041,477 compared with $20,955,952 on December 31, 2008. The company's net debt as a percent of total capital (net debt plus shareholders' equity) was 29.6 percent on March 31, 2009 and 15.6 percent on December 31, 2008. The increase in net debt as a percent of total capital was primarily due to the payment of land use right in the first quarter of 2009, which decreased our cash to $10.6 million at March 31, 2009 from $37.4 million on December 31, 2008.

 
30

 

Liquidity and capital resources

Our principal demands for liquidity are for the development of new properties, property acquisitions, and general corporate purposes.

As of March 31, 2009, we had $10,598,200 of cash and cash equivalents, a decrease of $26,827,140, compared with $37,425,340 of cash and cash equivalents as of December 31, 2008.

Financial obligations

As of March 31, 2009, we had total bank loans of $34,392,425 with a weighted average interest rate of 9.22 percent. Future scheduled maturities of loans payable were as follows:

Due Date
 
Outstanding Amount
 
2009-09-14
 
$
3,366,067
 
2009-12-25
 
$
4,390,522
 
2010-08-29
 
$
5,122,276
 
2011-08-27
 
$
21,513,560
 

Mortgage debt (total bank loans) is secured by the assets of the company.

Loans payable

Loans payable represent amounts due to various banks and are due on demand or normally due within one year. These loans generally can be renewed with the banks when the loans mature.

Most of the obligations of the company are tied to specific projects. The terms of the loans typically are 1 to 3 years. Loan extensions are determined by mutual agreement when the current term expires and both parties will consider the remaining time needed to complete the project. Most of these loans are payable when the project has been completed and the residents or businesses take possession.

The following table summarizes the company's loans payable that were outstanding as of March 31, 2009:

(Millions of dollars)
 
Balance
   
Interest rate
 
Due date
               
Xi'an Rural Credit Union
 
$
3.37
     
11.8
%
14-Sep-2009
Commercial Bank Weilai
 
$
4.39
     
7.5
%
  25-Dec-2009
Commercial Bank Weilai
 
$
5.12
     
10.21
%
29-Aug-2010
China Construction Bank
 
$
21.51
     
8.94
%
28-Aug-2011

The currently indicated annual interest requirement on these loans totals about $3.2 million. The loan from China Construction Bank has an interest rate that floats at 110 percent of the People’s Bank of China reference rate.

The following table summarizes the amounts and types of the company's obligations and provides the estimated period of maturity for the financial obligations by class as of March 31, 2009:

 
31

 

Obligations Due by Period
 
1 year
   
1-3 years
   
3-5 years
 
(Millions of dollars)
                 
                   
Current liabilities:
                 
Accounts payable
 
$
9.63
             
Income and other taxes payable
         
$
8.82
       
Other payables
         
$
4.21
       
Advances (deposits) from customers
         
$
10.56
       
Accrued expenses
 
$
3.87
               
Accrued security registration expenses
 
$
1.21
               
                       
Long-term liabilities:
                     
Warranties liabilities
                 
$
0.95
 
Deferred tax
         
$
11.47
         
Fair value of embedded derivatives
                 
$
0.64
 
Convertible debt
                 
$
13.90
 
                         
Long-term debt:
                       
Loans payable
 
$
7.76
   
$
26.63
         
Payable for acquisition of businesses
 
$
9.43
                 
Loans from employees
         
$
1.67
         

Liquidity expectation

The company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements for the year 2009.

We intend to meet our liquidity requirements, including capital expenditures related to the purchase of land for the development of our future projects, through cash flow provided by operations and additional funds raised by future financings. Upon acquiring land for future development, we intend to raise funds to develop our projects by obtaining mortgage financing mainly from local banking institutions with which we have done business in the past. We believe that our relationships with these banks are in good standing and that our real estate will secure the loans needed. We believe that adequate cash flow will be available to fund our operations.
 
As part of our funding plan, on March 9, 2007, we entered into a Share Transfer Agreement with the shareholders of New Land, under which we have acquired 32,000,000 shares of the New Land, constituting 100 percent equity ownership of New Land.
 
New Land is now in cooperation with the Baqiao District Government of Xi'an City to develop the Baqiao Science & Technology Industrial Park, a provincial development zone in Shaanxi Province. With this acquisition, the company gained the right to develop and sell 487 acres of property that has been targeted for new residential developments.

The majority of the company's revenues and expenses were denominated primarily in renminbi (RMB), the currency of the People's Republic of China. There is no assurance that exchange rates between the RMB and the U.S. dollar will remain stable. The company does not engage in currency hedging. Inflation has not had a material impact on the company's business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to the following market risks, including but not limit to:
 
General Real Estate Risk — There is a risk that the Company's property values could go down due to general economic conditions, a weak market for real estate generally, or changing supply and demand. The Company's property held for sale value of approximately $14.3 million as of March 31, 2009, may change due to market fluctuations. Currently, it is valued at our cost which is significantly below the market value.

Risk Relating to Property Sales — The Company may not be able to sell a property at a particular time for its  full value, particularly in a poor market.

 
32

 
 
Foreign Currency Exchange Rate Risk — The Company does all its business in the People’s Republic of China. All the revenue and profit is denominated in RMB. When RMB depreciates, it may adversely affect the Company's financial performance. Specifically, since the Company's recent $20 million senior convertible note interest payment is denominated in US dollars, the depreciation of RMB may incur additional financing cost.
 
Item 4T. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act)). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective due to the identified significant deficiencies in our internal control over financial reporting described in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008. The Company has engaged Ernest & Young to aid in the compliance with SOX 404.

(c) Changes in Internal Control over Financial Reporting.

During the quarter ended March 31, 2009, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None for the period covered by this report.

Item 1A. Risk Factors.
 
An investment in our company has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this 10Q. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.
 
Risks Related to Our Business
 
Our home sales and operating revenues could decline due to macro-economic and other factors outside of our control, such as changes in consumer confidence and declines in employment levels.
 
Changes in national and regional economic conditions, as well as local economic conditions where the Company conducts our operations and where prospective purchasers of our homes live, may result in more caution on the part of homebuyers and consequently fewer home purchases. These economic uncertainties involve, among other things, conditions of supply and demand in local markets and changes in consumer confidence and income, employment levels, and government regulations. These risks and uncertainties could periodically have an adverse effect on consumer demand for and the pricing of our homes, which could cause our operating revenues to decline. In addition, builders are subject to various risks, many of them outside the control of the homebuilder including competitive overbuilding, availability and cost of building lots, materials and labor, adverse weather conditions which can cause delays in construction schedules, cost overruns, changes in government regulations, and increases in real estate taxes and other local government fees. A reduction in our revenues could in turn negatively affect the market price of our securities.

 
33

 
 
An increase in mortgage interest rates or unavailability of mortgage financing may reduce consumer demand for the Company’s homes.
 
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 would need in order to purchase our homes, as well as adversely affect 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 better compete for home buyers. A reduction in pricing could result in a decline in revenues and in our margins.
 
We could experience a reduction in home sales and revenues or reduced cash flows if we are unable to obtain reasonably priced financing to support our homebuilding and land development activities.
 
The real estate development industry is capital intensive, and development requires 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 increased amounts of equity to be invested in a project by borrowers in connection with new loans. The failure to obtain sufficient capital to fund our planned capital and other expenditures could have a material adverse effect on our business.
 
We are subject to extensive government regulation which could cause it to incur significant liabilities or restrict it business activities.
 
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 government agencies to grant us necessary licenses, permits and approvals could have an adverse effect on our operations.
 
We may require additional capital in the future, which may not be available on favorable terms or at all.
 
Our future capital requirements will depend on many factors, including industry and market conditions, our ability to successfully implement our new branding and marketing initiative and expansion of our production capabilities. We anticipate that we may need to raise additional funds in order to grow our business and implement our business strategy. We anticipate that any such additional funds would be raised through equity or debt financings. In addition, we may enter into a revolving credit facility or a term loan facility with one or more syndicates of lenders. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. Even if we are able to raise capital through equity or debt financings, as to which there can be no assurance, the interest of existing shareholders in our company may be diluted, and the securities we issue may have rights, preferences and privileges that are senior to those of our common stock or may otherwise materially and adversely effect the holdings or rights of our existing shareholders. If we cannot obtain adequate capital, we may not be able to fully implement our business strategy, and our business, results of operations and financial condition would be adversely affected. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” In addition, we have and will continue to raise additional capital through private placements or registered offerings, in which broker-dealers will be engaged. The activities of such broker-dealers are highly regulated and we cannot assure that the activities of such broker-dealers will not violate relevant regulations and generate liabilities despite our expectation otherwise.

 
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We depend on the availability of additional human resources for future growth.
 
We are currently experiencing a period of significant growth in our sales volume. We believe that continued expansion is essential for us to remain competitive and to capitalize on the growth potential of our business. Such expansion may place a significant strain on our management and operations and financial resources. As our operations continue to grow, we will have to continually improve our management, operational and financial systems, procedures and controls, and other resources infrastructure, and expand our workforce. There can be no assurance that our existing or future management, operating and financial systems, procedures and controls will be adequate to support our operations, or that we will be able to recruit, retain and motivate our personnel. Further, there can be no assurance that we will be able to establish, develop or maintain the business relationships beneficial to our operations, or to do so or to implement any of the above activities in a timely manner. Failure to manage our growth effectively could have a material adverse effect on our business and the results of our operations and financial condition.
 
We may be adversely affected by fluctuation in raw material prices and selling prices of our products.
 
Our projects and the raw materials we use have experienced significant price fluctuations in the past. There is no assurance that they will not be subject to future price fluctuations or pricing control. The land and raw materials we use may experience price volatility caused by events such as market fluctuations or changes in governmental programs. The market price of land and raw materials may also experience significant upward adjustment, if, for instance, there is a material under-supply or over-demand in the market. These price changes may ultimately result in increases in the selling prices of our products, and may, in turn, adversely affect our sales volume, revenue and operating profit.
 
We could be adversely affected by the occurrence of natural disasters.
 
From time to time, our development sites may experience strong winds, storms, flooding and earth quakes. Natural disasters could impede operations, damage infrastructure necessary to our constructions and operations. The occurrence of natural disasters could adversely affect our business, the results of our operations, prospects and financial condition, even though we currently have insurance against damage caused by natural disasters, including typhoons, accidents or similar events.
 
Intense competition from existing and new entities may adversely affect our revenues and profitability.
 
In general, the property development industry is intensely competitive and highly fragmented. We compete with various companies. Many of our competitors are more established than we are and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We intend to create greater awareness for our brand name so that we can successfully compete with our competitors. We cannot assure you that we will be able to compete effectively or successfully with current or future competitors or that the competitive pressures we face will not harm our business.

 
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Our operating subsidiary must comply with environmental protection laws that could adversely affect our profitability.
 
We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of the People’s Republic of China. Some of these regulations govern the level of fees payable to government entities providing environmental protection services and the prescribed standards relating to the constructions. Although our construction technologies allow us to efficiently control the level of pollution resulting from our construction process, due to the nature of our business, waste is  unavoidably generated in the processes. If we fail to comply with any of these environmental laws and regulations in the PRC, depending on the type and seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, being ordered to close down our business operations and suspension of relevant permour.
 
Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.
 
Our future success will depend in substantial part on the continued service of our senior management, including Mr. Lu Pingji, our Chairman and Chief Executive Officer, and Mr. Feng Xiaohong, our Chief Operational Officer. The loss of the services of one or more of our key personnel could impede implementation of our business plan and result in reduced profitability. We do not carry key person life or other insurance in respect of any of our officers or employees. Our future success will also depend on the continued ability to attract, retain and motivate highly qualified technical sales and marketing customer support. Because of the rapid growth of the economy in the People’s Republic of China, competition for qualified personnel is intense. We cannot guarantee that we will be able to retain our key personnel or that we will be able to attract, assimilate or retain qualified personnel in the future.
 
Risk Relating to the Residential Property Industry in China
 
We are heavily dependent on the performance of the residential property market in China, which is at a relatively early development stage.
 
The residential property industry in the PRC is still in a relatively early stage of development. Although demand for residential property in the PRC has been growing rapidly in recent years, such growth is often coupled with volatility in market conditions and fluctuation in property prices. It is extremely difficult to predict how much and when demand will develop, as many social, political, economic, legal and other factors, most of which are beyond our control, may affect the development of the market. The level of uncertainty is increased by the limited availability of accurate financial and market information as well as the overall low level of transparency in the PRC, especially in Tier II cities which have lagged in progress in these aspects when compared to Tier I cities. The lack of a liquid secondary market for residential property may discourage investors from acquiring new properties. The limited amount of property mortgage financing available to PRC individuals may further inhibit demand for residential developments.
 
We face intense competition from other real estate developers.
 
The property industry in the PRC is highly competitive. In the Tier II cities we focus on, local and regional property developers are our major competitors, and an increasing number of large state-owned and private national property developers have started entering these markets. Many of our competitors, especially the state-owned and private national property developers, are well capitalized and have greater financial, marketing and other resources than we have. Some also have larger land banks, greater economies of scale, broader name recognition, a longer track record and more established relationships in certain markets. In addition, the PRC government’s recent measures designed to reduce land supply further increased competition for land among property developers.
 
Competition among property developers may result in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled contractors, oversupply of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which new property developments will be approved and/or reviewed by the relevant government authorities and an increase in administrative costs for hiring or retaining qualified personnel, any of which may adversely affect our business and financial condition. Furthermore, property developers that are better capitalized than we are may be more competitive in acquiring land through the auction process. If we cannot respond to changes in market conditions as promptly and effectively as our competitors, or effectively compete for land acquisition through the auction systems and acquire other factors of production, our business and financial condition will be adversely affected.

 
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In addition, risk of property over-supply is increasing in parts of China, where property investment, trading and speculation have become overly active. We are exposed to the risk that in the event of actual or perceived over-supply, property prices may fall drastically, and our revenue and profitability will be adversely affected.
 
The PRC government may adopt further measures to curtail the overheating of the property sector.
 
Along with the economic growth in China, investments in the property sectors have increased significantly in the past few years. In response to concerns over the scale of the increase in property investments, the PRC government has introduced policies to curtail property development. We believe the following regulations, among others, significantly affect the property industry in China.
 
In May 2006, the Ministry of Construction, National Development and Reform Commission, or the NDRC, PBOC and other relevant PRC government authorities jointly issued the Opinions on Adjusting the Housing Supply Structure and Stabilizing the Property Prices, which introduced measures to limit resources allocated to the luxury residential market. For instance, the new measures require that at least 70 percent of a residential project must consist of units with a GFA of less than 90 square meters per unit, and the minimum amount of down payment was increased from 20 percent to 30 percent of the purchase price of the underlying property if it has a unit GFA of 90 square meters or more. In September 2007, PBOC and China Banking Regulatory Commission issued the Circular on Strengthening the Management of Commercial Real Estate Credit Facilities, which increased the minimum down payment for any purchase of second or subsequent residential property to 40 percent of the purchase price if the purchaser had obtained a bank loan to finance the purchase of his or her first property.
 
In July 2006, the Ministry of Construction, the Ministry of Commerce, NDRC, PBOC, the State Administration for Industry and Commerce and SAFE issued Opinions on Regulating the Entry and Administration of Foreign Investment in Real Property Market, which impose significant requirements on foreign investment in the PRC real estate sector. For instance, these opinions set forth requirements of registered capital of a foreign invested real property enterprise as well as thresholds for a foreign invested real property enterprise to borrow domestic or overseas loans. In addition, since June 2007, a foreign invested real property enterprise approved by local authorities is required to register such approvals with the Ministry of Commerce.
 
The PRC government’s restrictive regulations and measures to curtail the overheating of the property sector could increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our business operations. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures, which could further slow down property development in China and adversely affect our business and prospects.
 
Our sales will be affected if mortgage financing becomes more costly or otherwise becomes less attractive.
 
Substantially all purchasers of our residential properties rely on mortgages to fund their purchases. An increase in interest rates may significantly increase the cost of mortgage financing, thus affecting the affordability of residential properties. In 2007, PBOC raised the lending rates five times. The benchmark lending rate for loans with a term of over five years, which affects mortgage rates, has been increased to 7.83 percent. The PRC government and commercial banks may also increase the down payment requirement, impose other conditions or otherwise change the regulatory framework in a manner that would make mortgage financing unavailable or unattractive to potential property purchasers. Under current PRC laws and regulations, purchasers of residential properties generally must pay at least 20 percent of the purchase price of the properties before they can finance their purchases through mortgages. In May 2006, the PRC government increased the minimum amount of down payment to 30 percent of the purchase price of the underlying property if such property has a unit GFA of 90 square meters or more. In September 2007, the minimum down payment for any purchase of second or subsequent residential property was increased to 40 percent of the purchase price if the purchaser had obtained a bank loan to finance the purchase of his or her first property. Moreover, the interest rate for bank loans of such purchase shall not be less than 110 percent of the PBOC benchmark rate of the same term and category. For further purchases of properties, there would be upward adjustments on the minimum down payment and interest rate for any bank loan. In addition, mortgagee banks may not lend to any individual borrower if the monthly repayment of the anticipated mortgage loan would exceed 50 percent of the individual borrower’s monthly income or if the total debt service of the individual borrower would exceed 55 percent of such individual’s monthly income. If the availability or attractiveness of mortgage financing is reduced or limited, many of our prospective customers may not be able to purchase our properties and, as a result, our business, liquidity and results of operations could be adversely affected.

 
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In line with industry practice, we provide guarantees to PRC banks with respect to loans procured by the purchasers of our properties for the total amount of mortgage loans. Such guarantees expire upon the completion of the registration of the mortgage with the relevant mortgage registration authorities. If there are changes in laws, regulations, policies and practices that would prohibit property developers from providing guarantees to banks in respect of mortgages offered to property purchasers and as a result, banks would not accept any alternative guarantees by third parties, or if no third party is available or willing in the market to provide such guarantees, it may become more difficult for property purchasers to obtain mortgages from banks and other financial institutions during sales and pre-sales of our properties. Such difficulties in financing could result in a substantially lower rate of sale and pre-sale of our properties, which would adversely affect our cash flow, financial condition and results of operations. We are not aware of any impending changes in laws, regulations, policies or practices which will prohibit such practice in China. However, there can be no assurance that such changes in laws, regulations, policies or practices will not occur in China in the future.
 
Risks Related to China
 
China’s Economic Policies could affect our Business.
 
Substantially all of our assets are located in China and substantially all of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China.
 
While China’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but they may also have a negative effect on us. For example, operating results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations.
 
The economy of China has been changing from a planned economy to a more market-oriented economy. In recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in China are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, the control of payment of foreign currency- denominated obligations, the setting of monetary policy and the provision of preferential treatment to particular industries or companies.
 
Capital outflow policies in China may hamper our ability to remit income to the United States.
 
China has adopted currency and capital transfer regulations. These regulations may require us to comply with complex regulations for the movement of capital. Although we believe that the Company is currently in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change; we may not be able to remit all income earned and proceeds received in connection with our operations or from the sale of our operating subsidiary to our stockholders.
 
In addition, there can be no assurance that we will be able to obtain sufficient foreign exchange to pay dividends or satisfy other foreign exchange requirements in the future.

 
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It may be difficult to effect service of process and enforcement of legal judgments upon our Company and our officers and directors because some of them reside outside the United States.
 
As our operations are presently based in China and some of our key directors and officers reside outside the United States, service of process on our key directors and officers may be difficult to effect within the United States. Also, substantially all of our assets are located outside the United States and any judgment obtained in the United States against us may not be enforceable outside the United States. We have appointed Lu Pingji, our Chairman and Chief Executive Officer, as our agent to receive service of process in any action against our Company in the United States.
 
If relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing the U.S. capital markets.
 
At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could adversely affect the market price of our common stock and our ability to access U.S. capital markets.
 
We may face obstacles from the communist system in China.
 
Foreign companies conducting operations in China face significant political, economic and legal risks. The political system in China, including a cumbersome bureaucracy, may hinder Western investment.
 
We may have difficulty establishing adequate management, legal and financial controls in China.
 
China historically has not adopted a Western style of management and financial reporting concepts and practices, modern banking, computer or other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in China. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
 
It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China.
 
Because the Company’s executive officers and directors, including, the Chairman of it’s Board of Directors, are Chinese citizens, it may be difficult, if not impossible, to acquire jurisdiction over these persons in the event a lawsuit is initiated against us and/or our officers and directors by a stockholder or group of stockholders in the United States. Also, because the majority of our assets are located in China it would also be extremely difficult to access those assets to satisfy an award entered against it in a United States court.
 
We may face judicial corruption in the People’s Republic of China.
 
Another obstacle to foreign investment in the People’s Republic of China is corruption. There is no assurance that we will be able to obtain recourse, if desired, through the People’s Republic of China’s poorly developed and sometimes corrupt judicial systems.
 
Risks Related to Our Common Stock
 
Our common stock is currently traded on the NASDAQ Capital Market. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other real estate development companies, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

 
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Our principal stockholders, current executive officers and directors own a significant percentage of our company and will be able to exercise significant influence over our Company.
 
Our executive officers and directors and principal stockholders together will beneficially own a majority of the total voting power of our outstanding voting capital stock. These stockholders will be able to determine the composition of our Board of Directors, will retain the voting power to approve all matters requiring stockholder approval and will continue to have significant influence over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the market price of the common stock or prevent our stockholders from realizing a premium over the market prices for their shares of common stock. See “Principal Stockholders” for information about the ownership of common by our executive officers, directors and principal stockholders.
 
We do not anticipate paying dividends on the Common Stock.
 
We have never paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future. Our directors intend to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business.
 
Our common stock could be considered to be a “penny stock.”
 
Our common stock could be considered to be a “penny stock” if it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Securities Exchange Act of 1934, as amended. These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on The Nasdaq Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.
 
Broker-dealer requirements may affect trading and liquidity.
 
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated there under by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.
 
Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.” Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
 
Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of our restricted stock in the public marketplace could reduce the price of our common stock.

 
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From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (Rule 144), subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1 percent of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permour, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company that has satisfied a two-year holding period. Any substantial sale of common stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price of our securities.

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

None for the period covered by this report.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

 
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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)

 
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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
China Housing & Land Development, Inc.
       
October 30, 2009
By:
/s/ 
Xiaohong Feng
     
Xiaohong Feng
     
Chief Executive Officer
     
(Principal Executive Officer)

October 30, 2009
By:
/s/ 
Cangsang Huang
     
Cangsang Huang
     
Chief Financial Officer
     
(Principal Financial and Accounting Officer)
 
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