ITEM 1. INTERIM FINANCIAL STATEMENTS
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
516,272
|
|
|
$
|
263,139
|
|
Restricted cash
|
|
|
3,277,401
|
|
|
|
3,938,978
|
|
Contract assets
|
|
|
267,875
|
|
|
|
12,668,925
|
|
Real estate property development completed
|
|
|
12,186,696
|
|
|
|
100,817,944
|
|
Other current assets
|
|
|
3,221,166
|
|
|
|
2,031,937
|
|
Total current assets
|
|
|
19,469,410
|
|
|
|
119,720,923
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
565,049
|
|
|
|
614,008
|
|
Real estate property development completed, net of current portion
|
|
|
95,754,116
|
|
|
|
1,115,086
|
|
Security deposits
|
|
|
3,323,619
|
|
|
|
7,972,117
|
|
Real estate property under development
|
|
|
222,643,172
|
|
|
|
215,745,225
|
|
Deferred tax assets
|
|
|
265,238
|
|
|
|
-
|
|
Due from local government for real estate property development completed
|
|
|
2,757,723
|
|
|
|
2,725,854
|
|
Total Assets
|
|
$
|
344,778,327
|
|
|
$
|
347,893,213
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Construction loans
|
|
$
|
88,507,594
|
|
|
$
|
77,332,569
|
|
Accounts payables
|
|
|
27,034,139
|
|
|
|
27,368,510
|
|
Other payables
|
|
|
5,501,340
|
|
|
|
5,289,176
|
|
Construction deposits
|
|
|
1,835,018
|
|
|
|
1,814,232
|
|
Contract liabilities
|
|
|
1,790,712
|
|
|
|
1,907,828
|
|
Customer deposits
|
|
|
18,276,196
|
|
|
|
16,139,572
|
|
Shareholder loans
|
|
|
2,132,845
|
|
|
|
2,129,114
|
|
Accrued expenses
|
|
|
2,991,946
|
|
|
|
3,585,644
|
|
Taxes payable
|
|
|
12,172,114
|
|
|
|
13,882,875
|
|
Total current liabilities
|
|
|
160,241,904
|
|
|
|
149,449,520
|
|
|
|
|
|
|
|
|
|
|
Tax payable - long term
|
|
|
8,100,554
|
|
|
|
8,006,943
|
|
Customer deposits, net of current portion
|
|
|
886,045
|
|
|
|
1,043,692
|
|
Construction loans, less current portion
|
|
|
17,142,861
|
|
|
|
29,464,867
|
|
Construction deposits, net of current portion
|
|
|
1,242,398
|
|
|
|
1,228,041
|
|
Total liabilities
|
|
|
187,613,762
|
|
|
|
189,193,063
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 100,000,000 shares authorized, 45,050,000 shares issued and outstanding as of June 30,2020 and September 30, 2019
|
|
|
45,050
|
|
|
|
45,050
|
|
Additional paid-in capital
|
|
|
129,907,805
|
|
|
|
129,907,805
|
|
Statutory surplus
|
|
|
10,360,251
|
|
|
|
10,360,251
|
|
Retained earnings
|
|
|
30,614,192
|
|
|
|
34,070,767
|
|
Accumulated other comprehensive loss
|
|
|
(13,762,733
|
)
|
|
|
(15,683,723
|
)
|
Total stockholders' equity
|
|
|
157,164,565
|
|
|
|
158,700,150
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
344,778,327
|
|
|
$
|
347,893,213
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Real estate sales
|
|
$
|
3,046,430
|
|
|
$
|
8,156,204
|
|
|
$
|
7,240,503
|
|
|
|
25,260,556
|
|
Less: Sales tax
|
|
|
(29,222
|
)
|
|
|
(283,809
|
)
|
|
|
(95,503
|
)
|
|
|
(788,766
|
)
|
Impairment losses on real estate property development completed
|
|
|
(2,703,031
|
)
|
|
|
-
|
|
|
|
(2,703,031
|
)
|
|
|
-
|
|
Cost of real estate sales
|
|
|
(1,728,217
|
)
|
|
|
(7,091,672
|
)
|
|
|
(4,900,210
|
)
|
|
|
(20,571,449
|
)
|
Gross (loss) profit
|
|
|
(1,414,040
|
)
|
|
|
780,723
|
|
|
|
(458,241
|
)
|
|
|
3,900,341
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
77,404
|
|
|
|
85,863
|
|
|
|
477,962
|
|
|
|
360,763
|
|
General and administrative expenses
|
|
|
973,318
|
|
|
|
467,159
|
|
|
|
2,381,572
|
|
|
|
1,721,778
|
|
Total operating expenses
|
|
|
1,050,722
|
|
|
|
553,022
|
|
|
|
2,859,534
|
|
|
|
2,082,541
|
|
Operating (loss) income
|
|
|
(2,464,762
|
)
|
|
|
227,701
|
|
|
|
(3,317,775
|
)
|
|
|
1,817,800
|
|
Interest expense, net
|
|
|
(16,171
|
)
|
|
|
(11,307
|
)
|
|
|
(49,010
|
)
|
|
|
(152,149
|
)
|
Other expense
|
|
|
(58,380
|
)
|
|
|
(9,982
|
)
|
|
|
(155,109
|
)
|
|
|
(312,145
|
)
|
(Loss) income before income taxes
|
|
|
(2,539,313
|
)
|
|
|
206,412
|
|
|
|
(3,521,894
|
)
|
|
|
1,353,506
|
|
Provision (benefit) for income taxes
|
|
|
35,860
|
|
|
|
53,243
|
|
|
|
(65,319
|
)
|
|
|
374,582
|
|
Net (loss) income
|
|
|
(2,575,173
|
)
|
|
|
153,169
|
|
|
|
(3,456,575
|
)
|
|
|
978,924
|
|
Other Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
363,273
|
|
|
|
(3,837,762
|
)
|
|
|
1,920,990
|
|
|
|
66,953
|
|
Comprehensive (loss) income
|
|
$
|
(2,211,900
|
)
|
|
$
|
(3,684,593
|
)
|
|
$
|
(1,535,585
|
)
|
|
|
1,045,877
|
|
Basic and diluted (loss) income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
|
0.02
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA HGS REAL ESTATE INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(Unaudited)
|
|
Common Stock
|
|
|
Additional
|
|
|
Statutory
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in Capital
|
|
|
Surplus
|
|
|
Earnings
|
|
|
loss
|
|
|
Total
|
|
Balance at September 30, 2018
|
|
|
45,050,000
|
|
|
$
|
45,050
|
|
|
$
|
129,907,805
|
|
|
$
|
9,925,794
|
|
|
$
|
30,803,052
|
|
|
$
|
(9,003,865
|
)
|
|
$
|
161,677,836
|
|
Net income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
484,210
|
|
|
|
-
|
|
|
|
484,210
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(178,758
|
)
|
|
|
(178,758
|
)
|
Balance at December 31, 2018
|
|
|
45,050,000
|
|
|
$
|
45,050
|
|
|
$
|
129,907,805
|
|
|
$
|
9,925,794
|
|
|
$
|
31,287,262
|
|
|
$
|
(9,182,623
|
)
|
|
$
|
161,983,288
|
|
Net income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
341,545
|
|
|
|
-
|
|
|
|
341,545
|
|
Foreign currency translation
adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,083,473
|
|
|
|
4,083,473
|
|
Balance at March 31, 2019
|
|
|
45,050,000
|
|
|
$
|
45,050
|
|
|
$
|
129,907,805
|
|
|
$
|
9,925,794
|
|
|
$
|
31,628,807
|
|
|
$
|
(5,099,150
|
)
|
|
$
|
166,408,306
|
|
Net income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153,169
|
|
|
|
-
|
|
|
|
153,169
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,837,762
|
)
|
|
|
(3,837,762
|
)
|
Balance at June 30, 2019
|
|
|
45,050,000
|
|
|
$
|
45,050
|
|
|
$
|
129,907,805
|
|
|
$
|
9,925,794
|
|
|
$
|
31,781,976
|
|
|
$
|
(8,936,912
|
)
|
|
$
|
162,723,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
45,050,000
|
|
|
$
|
45,050
|
|
|
$
|
129,907,805
|
|
|
$
|
10,360,251
|
|
|
$
|
34,070,767
|
|
|
$
|
(15,683,723
|
)
|
|
$
|
158,700150
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(257,381
|
)
|
|
|
-
|
|
|
|
(257,381
|
)
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,380,862
|
|
|
|
4,380,862
|
|
Balance at December 31, 2019
|
|
|
45,050,000
|
|
|
$
|
45,050
|
|
|
$
|
129,907,805
|
|
|
$
|
10,360,251
|
|
|
$
|
33,189,365
|
|
|
$
|
(11,302,861
|
)
|
|
$
|
162,823,631
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(624,021
|
)
|
|
|
-
|
|
|
|
(624,021
|
)
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,823,145
|
)
|
|
|
(2,823,145
|
)
|
Balance at March 31,2020
|
|
|
45,050,000
|
|
|
$
|
45,050
|
|
|
$
|
129,907,805
|
|
|
$
|
10,360,251
|
|
|
$
|
33,189,365
|
|
|
$
|
(14,126,006
|
)
|
|
$
|
159,376,465
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,575,173
|
)
|
|
|
-
|
|
|
|
(2,575,173
|
)
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
363,273
|
|
|
|
363,273
|
|
Balance at June 30,2020
|
|
|
45,050,000
|
|
|
$
|
45,050
|
|
|
$
|
129,907,805
|
|
|
$
|
10,360,251
|
|
|
$
|
30,614,192
|
|
|
$
|
(13,762,733
|
)
|
|
$
|
157,164,565
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Nine months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,456,575
|
)
|
|
$
|
978,924
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
(266,319
|
)
|
|
|
374,582
|
|
Depreciation
|
|
|
56,366
|
|
|
|
60,065
|
|
Impairment losses on real estate property development completed
|
|
|
2,703,031
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Contract assets
|
|
|
12,600,352
|
|
|
|
2,028,876
|
|
Real estate property development completed
|
|
|
(7,549,755
|
)
|
|
|
(57,234,276
|
)
|
Real estate property under development
|
|
|
(4,393,458
|
)
|
|
|
58,333,457
|
|
Other current assets
|
|
|
(1,170,228
|
)
|
|
|
(183,682
|
)
|
Security deposit
|
|
|
4,761,043
|
|
|
|
-
|
|
Accounts payables
|
|
|
(657,012
|
)
|
|
|
11,517,215
|
|
Other payables
|
|
|
150,939
|
|
|
|
584,025
|
|
Contract liabilities
|
|
|
(139,990
|
)
|
|
|
(4,004,221
|
)
|
Customer deposits
|
|
|
1,785,335
|
|
|
|
(1,644,082
|
)
|
Construction deposits
|
|
|
(426
|
)
|
|
|
8,599
|
|
Accrued expenses
|
|
|
(631,420
|
)
|
|
|
(12,911
|
)
|
Taxes payables
|
|
|
(1,979,971
|
)
|
|
|
(1,599,226
|
)
|
Net cash provided by operating activities
|
|
|
1,811,912
|
|
|
|
9,207,345
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
Repayments of construction loans
|
|
|
(2,405,349
|
)
|
|
|
(11,418,405
|
)
|
Net cash used in financing activities
|
|
|
(2,405,349
|
)
|
|
|
(11,418,405
|
)
|
|
|
|
|
|
|
|
|
|
Effect of changes of foreign exchange rate on cash and restricted cash
|
|
|
184,993
|
|
|
|
15,360
|
|
Net decrease in cash and restricted cash
|
|
|
(408,444
|
)
|
|
|
(2,195,700
|
)
|
Cash and restricted cash , beginning of period
|
|
|
4,202,117
|
|
|
|
6,775,577
|
|
Cash and restricted cash, end of period
|
|
$
|
3,793,673
|
|
|
$
|
4,579,877
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
5,142,658
|
|
|
$
|
5,439,715
|
|
Income taxes paid
|
|
$
|
504,064
|
|
|
$
|
287,416
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to amounts on condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
516,272
|
|
|
$
|
538,666
|
|
Restricted Cash
|
|
$
|
3,277,401
|
|
|
$
|
4,041,211
|
|
Total cash and restricted cash
|
|
$
|
3,793,673
|
|
|
$
|
4,579,877
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
China HGS Real Estate, Inc. (“China
HGS” or the “Company” or “we”, “us”, “our”), through its subsidiaries and
variable interest entity (“VIE”), engages in real estate development, and the construction and sales of residential
apartments, parking space and commercial properties in Tier 3 and Tier 4 cities and counties in China.
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”)
for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three
and nine months ended June 30, 2020 and 2019 are not necessarily indicative of the results that may be expected for the full year.
The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the fiscal year ended September 30, 2019 filed with the SEC on January 14, 2020.
Going concern
In recent years, the Chinese government
has implemented measures to control overheating residential and commercial property prices including but not limited to restriction
on home purchase, increase the down-payment requirement against speculative buying, development of low-cost rental housing property
to help low-income groups while reducing the demand in the commercial housing market, increase the real estate property tax to
discourage speculation, and control of the land supply and slowdown the construction land auction process, etc. In addition, in
December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout China and worldwide, which
has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and
duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce the
spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions,
suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, including, but
not limited to, the temporary closure of the Company’s facilities and operations beginning in early February through early
March 2020, limited support from the Company’s employees, delayed access to construction raw material supplies, reduced customer
visit to the Company’s sales office, and inability to promote the real estate property sales to customers on a timely basis,
our revenue decreased by approximately $18.0 million during nine months ended June 30, 2020 as compared to the same period of 2019
due to decreased sales volume of both residential and commercial properties developed by us, as a result, we reported a net loss
of approximately $3.5 million for the nine months ended June 30,2020. In addition, as of June 30 2020, we had an approximately
$140.8 million working capital deficit. The deficit increased by $111.1 million as compared to a deficit of $29.7 million as of
September 30, 2019. Based on assessment of current economic environment, customer demand and sales trend, and the negative impact
from COVID-19 outbreak and spread, we believe that the real estate market downturn will continue to be uncertain in the coming
months and we may not be able to liquidate our large balance of completed real estate property within the next 12 months as we
originally expected. Therefore, approximately $95.8 million completed real estate property originally recorded under our current
assets as of September 30, 2019 has been reclassified as non-current assets as of June 30,2020. In addition, as of June 30, 2020,
we had large construction loans payable balance of approximately $88.5 million with maturity less than one year and large accounts
payable balance of approximately $27.0 million to be paid to subcontractors within one year. These factors led to our working capital
deficit of approximately $140.8 million as of June 30, 2020. The above mentioned facts raised substantial doubt about the Company's
ability to continue as a going concern for the next 12 months from the date of this filing.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
(continued)
In assessing its liquidity, management
monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its
operating and capital expenditure commitments. As of June 30, 2020, our total cash and restricted cash balance decreased to approximately
$3.8 million as compared to approximately $4.2 million as of September 30, 2019. With respect to capital funding requirements,
the Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. As of June 30, 2020,
we had approximately $107.9 million completed residential apartments and commercial units available for sale to potential buyers
when needed (including approximately $12.1 million current portion and approximately $95.8 million non-current portion of real
estate property development completed). For the current portion of $12.1 million completed residential apartments and commercial
units, we estimate we will be able to substantially sell them within one year to generate cash to be used in our operations and
funding our other real estate projects under development. Although we reported approximately $27.0 million accounts payable as
of June 30, 2020, due to the long term relationship with our construction suppliers and subcontractors, we were able to effectively
manage cash spending on construction and negotiate with them to adjust the payment schedule based on our cash on hand. In addition,
most of our existing real estate development projects related to old town renovation which are supported by local government. As
of June 30, 2020, we reported approximately $88.5 million short-term construction loans and approximately $17.1 million long-term
construction loans borrowed from financial institutions controlled by local government and such loans can only be used on old town
renovation related project development. We expect that we will be able to renew all of the existing construction loans upon their
maturity and borrow additional new loans from local financial institutions when necessary, based on our past experience and the
Company’s good credit history. Also, the Company’s cash flows from pre-sales and current sales should provide financial
support for our current developments and operations. As of June 30, 2020, we had approximately $19.2 million customer deposits
(including approximately $18.3 million short-term and approximately $0.9 million non-current customer deposits) representing cash
advance from buyers for pre-sales of our residential units and we believe such cash advance can be used to fund our ongoing construction
projects whenever necessary. During the nine months ended June 30, 2020, we had five large ongoing construction projects (see Note
3, real estate property under development) which were under preliminary development stage due to delayed inspection and acceptance
of the development plans by local government. In June 2020, we completed the residence relocation surrounding Liangzhou Road related
projects and expects to construct the Liangzhou Road related projects starting from the fourth quarter of fiscal year 2020. For
other four projects, we expect we will be able to obtain government’s approval of the development plans on these projects
before the end of fiscal year 2020, and start the pre-sale of the real estate property to generate cash when certain property development
milestones have been achieved. For the nine months ended June 30, 2020 and 2019, the Company had positive cash flow from operating
activities. In addition, our principal shareholder, Mr. Xiaojun Zhu has been providing and has committed to continue to provide
his personal funds to support the Company’s operation whenever necessary.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF
PRESENTATION (continued)
Amid the COVID-19 outbreak and spread,
we have resumed our business activities in early March 2020 and we expect the negative impact of the COVID-19 coronavirus outbreak
on our business to be temporary and our sales activities have started to run as normal, which will help us to increase our real
estate proper sales in the upcoming months. During the period from February to June 2020, in response to COVID-19 outbreak, various
level of government bodies have implemented credit release polices to encourage residential real estate property purchase. The
real estate market transaction volume is expected to slowly recover during the latter half of 2020.
Due to the effects of the outbreak of COVID-19
discussed above, to the extent that we experience a more adverse operating environment, incur unanticipated capital expenditures,
or if we decide to accelerate our growth, then additional financing may be required. Currently, we are working to improve our liquidity
and capital sources primarily through financial support from our principal shareholder and debt or equity financing. In order to
fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation,
therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds as needed. At the
present time, however, we do not have commitments of funds from any third party. No assurance can be given that additional financing,
if required, would be available on favorable terms or at all.
Based on above reasons, there is a substantial
doubt about the Company's ability to continue as a going concern for the next 12 months from the date of this filing.
Principles of consolidation
The unaudited condensed consolidated financial
statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”),
China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”)
and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”).
All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.
Use of estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial
statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development
revenue under the percentage of completion method, the selection of the useful lives of property and equipment, impairment provision
on real estate property development completed and real estate property under development, provision necessary for contingent liabilities,
revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial
statements are reasonable and prudent. Actual results could differ from these estimates.
Fair value of financial instruments
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value,
prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair
value as follows:
Level 1-Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3-Inputs are unobservable inputs
which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The carrying amounts reported in the accompanying
condensed consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights,
loans and all current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair
value of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are
received in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term other
loans payable.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition
Most of the Company’s revenue is
derived from real estate sales of condominiums and commercial property in the PRC. The majority of the Company’s contracts
contain a single performance obligations involving significant real estate development activities that are performed together to
deliver a real estate property to customers. Revenues arising from real estate sales are recognized when or as the control of the
asset is transferred to the customer. The control of the asset may transfer over time or at a point in time. For the sales of individual
condominium units in a real estate development project, the Company has an enforceable right to payment for performance completed
to date, revenue is recognized over time by measuring the progress towards complete satisfaction of that performance obligation.
Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.
Under percentage completion method, revenue
and profit from the sales of long term real estate development properties is recognized by the percentage of completion method
on the sale of individual units when all the following criteria are met:
a.
|
Construction is beyond a preliminary stage.
|
b.
|
The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
|
c.
|
Sufficient units have already been sold to assure that the entire property will not revert to rental property.
|
d.
|
Sales prices are collectible.
|
e.
|
Aggregate sales proceeds and costs can be reasonably estimated.
|
If any of the above criteria is not met,
proceeds shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method,
revenues from individual real estate condominium units sold under development and related costs are recognized over the course
of the construction period, based on the completion progress of a project. The progress towards complete satisfaction of the performance
obligation is measured based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference
to the contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In
relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and
construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized
by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to
the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the
previously recognized amounts.
Any changes in significant judgments and/or
estimates used in determining construction and development revenue could significantly change the timing or amount of construction
and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in
which they are determined.
Revenue from the sales of completed real
estate condominium units is recognized at the time of the closing of an individual unit sale. This occurs when the customer obtains
the physical possession, the legal title, or the significant risks and rewards of ownership of the assets and the Company has present
right to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally
recognized at the time of the projects are completed.
Disaggregation of Revenues
Disaggregated revenues was as follows:
|
|
For the three months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue recognized for completed condominium real estate projects
|
|
$
|
3,046,430
|
|
|
$
|
149,448
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
8,006,756
|
|
Total
|
|
$
|
3,046,430
|
|
|
$
|
8,156,204
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
|
|
For the Nine months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue recognized for completed condominium real estate
projects
|
|
$
|
7,240,503
|
|
|
$
|
1,126,013
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
24,134,543
|
|
Total
|
|
$
|
7,240,503
|
|
|
$
|
25,260,556
|
|
Contract balances
Timing of revenue recognition may differ
from the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior
to invoicing, or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration
that is conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which
are the Company’s unconditional rights to consideration other than to the passage of time. Contract liabilities include cash
collected in excess of revenues. Customer deposits are excluded from contract liabilities.
The Company has elected to apply the optional
practical expedient for costs to obtain a contract which allows the Company to immediately expense sales commissions (included
under selling expenses) because the amortization period of the asset that the Company otherwise would have used is one year or
less. Contract assets and liabilities are generally classified as current based on our contract operating cycle.
The Company provides “mortgage loan
guarantees” only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The
period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receive the loan proceeds
in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been
transferred to the buyer. The procedures to obtain the Certificate of Ownership take Nine to twelve months (the “Mortgage
Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank decides
not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If,
during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months,
we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell
the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan
guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back
and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this
event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company
has not returned any loan proceeds pursuant to its mortgage loan guarantees.
Foreign currency translation
The Company’s financial information
is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”),
the currency of the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC
830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated
into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses.
Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign
currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.
|
|
For Nine months
ended June 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
Period end RMB : USD exchange rate
|
|
|
7.0651
|
|
|
|
6.8650
|
|
|
|
7.1477
|
|
Period average RMB : USD exchange rate
|
|
|
7.0364
|
|
|
|
6.8265
|
|
|
|
6.8753
|
|
The RMB is not freely convertible into
foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made
that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real estate property development completed
and under development
Real estate property consists of finished
residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential
unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the
development cost and allocated to each project. Real estate property development completed and real estate property under development
are stated at the lower of cost or fair value.
Expenditures for land development, including
cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and
allocated to development projects by the specific identification method. Costs are allocated to specific units within a project
based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied
by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers
is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc.
Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed
and real estate property under development are reclassified on the balance sheet into current and non-current portions based on
the estimated date of construction completion and sales. The real estate property development completed classification is based
on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business
and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property
is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The
majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects.
The Company considers its normal operating cycle is 12 months.
Real estate property development completed
and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized
only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if
it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real
estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to
the carrying value of such project. The Company continues to assess the impairment provision when triggering events occur. For
the three months and nine months ended June 30, 2020, the Company recognized $2,703,031 impairment losses for certain slow moving
real estate property development completed. For the three months and nine months ended June 30, 2019, the Company did not recognize
any impairment for real estate property under development or completed.
Capitalization of Interest
Interest incurred during and directly related
to real estate development projects is capitalized to the related real estate property under development during the active development
period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially
complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings
or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property
under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed
as incurred. For the three and nine months ended June 30, 2020, the total interest capitalized in the real estate property development
was $1,697,227 and $5,157,611, respectively. For the three and nine months ended June 30, 2019, the total interest capitalized
in the real estate property development was $ 1,857,424 and $ 5,403,867, respectively
Impairment of long-lived assets
The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the
asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount
of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted
cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal
projections, and other available information as considered necessary.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Income taxes
Deferred tax assets and liabilities are
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
ASC 740-10-25 prescribes a more-likely-than-not
threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in
a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for
tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax
positions as of June 30, 2020 and September 30, 2019
The Company is a corporation organized
under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries
in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC. As
a result, the Company did not generate any U.S. taxable income for the three and nine months ended June 30,2020 and 2019.
As of June 30, 2020, the tax years ended
September 30, 2010 through September 30, 2019 for the Company’s PRC entities remain open for statutory examination
by PRC tax authorities. The parent Company China HGS Real Estate Inc.’s both U.S. federal tax returns and Florida state tax
returns are delinquent since 2009 and accordingly all of these tax returns remain open for statutory examination by U.S. federal
and state tax authorities.
On December 22, 2017, the Tax Cuts
and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years
beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial
system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31,
2017. Due to the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and
recorded accrued amounts in our consolidated financial statements as of June 30,2020 and September 30, 2019, including an
approximately $2.3 million provision on the deemed repatriation of undistributed foreign earnings and an additional $0.9 million
provision for delinquent U.S. and State tax fillings.
Land appreciation tax (“LAT”)
In accordance with the relevant taxation
laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value,
which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property
development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant
tax laws.
The whole project must be completed before
the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion
of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law
vary among different geographic areas. Hanzhong, where the project Mingzhu Garden, Nan Dajie and Central Plaza are located, implements
this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong
is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.
Comprehensive income (loss)
In accordance with ASC 220-10-55, comprehensive
income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners.
The Company’s only components of comprehensive income (loss) for the three and nine months ended June 30,2020 and 2019 were
net income (loss) and foreign currency translation adjustments.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Basic and diluted earnings (loss) per
share
The Company computes earnings (loss) per
share (“EPS”) in accordance with the ASC 260, “Earnings per share”, which requires companies to present
basic and diluted EPS. Basic EPS is measured as net income (loss) divided by the weighted average common shares outstanding for
the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares
(e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share
or decrease loss per share) are excluded from the calculation of diluted EPS. There was no anti-dilutive share for the three and
nine months ended June 30, 2020 and 2019.
Concentration risk
The Company's operations are carried out
in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political,
economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are
subject to specific considerations and significant risks not typically associated with companies in North America. The Company's
results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s
cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance.
The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts
The Company is dependent on third-party
sub-contractors, manufacturers, and distributors for all construction services and supply of construction materials. For the three
and nine months ended June 30, 2020 and 2019, no single supplier accounted for more than 10% of the Company’s total project
expenditures.
Recent Accounting Pronouncements
In June 2016, the FASB amended guidance
related to the impairment of financial instruments as part of ASU2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments, which will be effective January 1, 2020. The guidance replaces the incurred loss
impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of
expected credit loss. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial
Instruments - Credit Losses, which clarified that receivables from operating leases are not within the scope of Topic
326 and instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842. On
May 15, 2019, the FASB issued ASU 2019-05, 9 which provides transition relief for entities adopting the Board’s credit losses
standard, ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU
2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost and (2) are within
the scope of the credit losses guidance in ASC 326-20, (3) are eligible for the fair value option under ASC 825-10, and (4) are
not held-to-maturity debt securities. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-05 are effective for
fiscal years beginning after December 15, 2019, including interim periods therein. An entity may early adopt the ASU in any interim
period after its issuance if the entity has adopted ASU 2016-13. For all other entities, the effective date will be the same as
the effective date of ASU 2016-13. In January 2020, the FASB issued ASU 2020-2, “Financial Instruments – Credit Losses
(Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to
SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020” (“ASU
2020-02”). ASU 2020-02 added and amended SEC paragraphs in the Accounting Standards Codification to reflect the issuance
of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the
revised effective date of the new leases standard. This ASU is effective upon issuance. The Company is evaluating the impact this
ASU will have on its consolidated financial statements.
In August 2018, the FASB Accounting Standards
Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements
for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements.
ASU 2018-13 is effective for all entities for fiscal years and interim periods within those fiscal years beginning after December
15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted
on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not expect this guidance
will have a material impact on its consolidated financial statements.
In December 2019, the FASB issued
ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended
to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing
guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and
interim periods within those fiscal years, which is fiscal 2022 for us, with early adoption permitted. The Company does not expect
adoption of the new guidance to have a significant impact on our financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT
COMPLETED AND UNDER DEVELOPMENT
The following summarizes the components of real estate property
development completed and under development As of June 30, 2020 and September 30, 2019:
|
|
Balance as of
|
|
|
|
June
30, 2020
|
|
|
September 30, 2019
|
|
Development completed:
|
|
|
|
|
|
|
|
|
Hanzhong City Mingzhu Garden Phase I
|
|
$
|
536,514
|
|
|
$
|
530,314
|
|
Hanzhong City Mingzhu Garden Phase II
|
|
|
32,039,504
|
|
|
|
24,264,216
|
|
Hanzhong City Nan Dajie (Mingzhu Xinju)
|
|
|
-
|
|
|
|
1,157,554
|
|
Hanzhong City Oriental Pearl Garden
|
|
|
22,381,060
|
|
|
|
19,070,129
|
|
Yang County Yangzhou Pearl Garden Phase I
|
|
|
-
|
|
|
|
1,514,241
|
|
Yang County Yangzhou Pearl Garden Phase II
|
|
|
3,165,446
|
|
|
|
3,054,412
|
|
Yang County Yangzhou Palace
|
|
|
49,818,287
|
|
|
|
52,342,164
|
|
Real estate property development completed
|
|
|
107,940,812
|
|
|
|
101,933,030
|
|
Less: Real estate property completed – short-term
|
|
|
12,186,696
|
|
|
|
100,817,944
|
|
Real estate property completed – long-term
|
|
$
|
95,754,116
|
|
|
$
|
1,115,086
|
|
Under development:
|
|
|
|
|
|
|
|
|
Hanzhong City Shijin Project
|
|
|
6,855,916
|
|
|
|
6,776,688
|
|
Hanzhong City Liangzhou Road and related projects (a)
|
|
|
155,193,732
|
|
|
|
146,958,903
|
|
Hanzhong City Hanfeng Beiyuan East (b)
|
|
|
732,284
|
|
|
|
706,194
|
|
Hanzhong City Beidajie (b)
|
|
|
55,157,657
|
|
|
|
56,654,212
|
|
Yang County East 2nd Ring Road (c)
|
|
|
4,703,583
|
|
|
|
4,649,228
|
|
Real estate property under development –long-term
|
|
$
|
222,643,172
|
|
|
$
|
215,745,225
|
|
|
(a)
|
In September 2013, the Company entered
into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and
expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the
Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to
resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately
$33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to
have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou
Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road
reformation and expansion project was extended, because the local government included more area and resettlement residences into
the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government
to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of June 30, 2020, the
main Liangzhou road construction is substantially completed. The Company also completed the relocation of residence by the end
of June 2020 and expects to launch the construction of the Liangzhou Road related projects starting from the fourth quarter of
fiscal year 2020. Due to historical delays in government’s approval and acceptance, the Company included such balance in
real estate property under development as non-current assets.
The Company’s development
cost incurred on Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as
agreed by the local government. As of June 30,2020, the actual costs incurred by the Company were $155,193,732 (September 30,
2019 - $146,958,903) and the incremental cost related to residence resettlement approved by the local government. The Company
determined that the Company’s Investment in Liangzhou Road Project in exchange for interests in future land use rights is
a barter transaction with commercial substance.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT
COMPLETED AND UNDER DEVELOPMENT
|
(b)
|
In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended June 30, 2014. As of June 30,2020, the local government has not completed the budget for these projects therefore the delivery to these projects for government’s acceptance and related settlement were extended to 2021. Due to historical delays in government’s approval and acceptance, the Company included such balance in real estate property under development as non-current assets.
|
|
(c)
|
The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (June 30,2020 and 2019 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as of June 30,2020 and in process of government review and approval. Due to historical delays in government’s approval and acceptance, the Company included such balance in real estate property under development as non-current assets.
|
For the three months and nine months ended
June 30, 2020, the Company recognized $2,703,031 impairment losses for certain slow moving real estate property development completed.
For the three months and nine months ended June 30, 2019, the Company did not recognize any impairment for real estate property
under development or completed. The Company will continue to assess the impairment provision for the year ended September 30, 2020.
NOTE 4. CONSTRUCTION LOANS
|
|
June 30,
2020
|
|
|
September 30,
2019
|
|
Loan A (i)
|
|
$
|
88,845,432
|
|
|
$
|
90,186,614
|
|
Loan B (ii)
|
|
|
16,805,023
|
|
|
|
16,610,822
|
|
|
|
|
105,650,455
|
|
|
|
106,797,436
|
|
Less: current maturities of construction loans
|
|
|
88,507,594
|
|
|
|
77,332,569
|
|
Construction loans – long-term portion
|
|
$
|
17,142,861
|
|
|
$
|
29,464,867
|
|
|
(i)
|
On June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to approximately $109.7 million (RMB 775,000,000) for a long term loan at 4.75% interest per year to develop Liangzhou Road Project. As of June 30, 2020, the Company borrowed $88,845,432 under this credit line (September 30, 2019- $90,186,614) with final due date in October 2021. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Yangzhou Palace project with carrying value of $49,818,287 as of June 30, 2020 (September 30, 2019- $52,342,164). In addition, the Company was required to provide a security deposit for the loan received. As of June 30,2020, the security deposits paid were $2,830,816 (September 30, 2019 - $5,174,014) for loans received. For the three and nine months ended June 30, 2020, interest paid was $1,565,156 and $4,761,043 (2019- $1,692,826 and $4,986,267), respectively, which was capitalized in to the development cost of Liangzhou road project. Due to local government’s delay in reallocation of residence in Liangzhou Road and related area, the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available in this loan to the Company and the Company’s withdraw will be based on the project’s development progress. The total required loan repayment schedule assuming total loan proceeds are borrowed are listed below:
|
For the periods ended:
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
June 30, 2021
|
|
|
88,507,594
|
|
|
|
625,315,000
|
|
June 30, 2022
|
|
|
337,838
|
|
|
|
4,386,860
|
|
Total
|
|
|
88,845,432
|
|
|
|
629,701,860
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 4. CONSTRUCTION LOANS (continued)
|
(ii)
|
In December 2016, the Company signed a
loan agreement with Hantai District Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to
approximately $17 million (RMB 119,000,000) for the development of Hanzhong City Liangzhou Road project. As of June 30, 2020, the
balance of loan was $16,805,023 (September 30, 2019 -$16,610,822). The loan carries interest at a fixed interest of 1.2% and is
due on June 20, 2031. The Company is required to repay the loan by equal annual principal repayment of approximately $3.4 million
from December 2027 through June 2031. The Company pledged the assets of Liangzhou Road related projects with carrying value of
$155,193,732 as collateral for the loan. Total interest of $51,502 and $154,463 for the three and nine months ended June 30, 2020
(2019- $53,516 and $158,632) , respectively, were capitalized in to the development cost of Hanzhong City Liangzhou Road project.
Additionally, in September 2017, the Urban
Development Center Co., Ltd. approved a construction loan for the Company in the amount of approximately $25 million (RMB 175,000,000)
with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required
to repay the loan by equal annual principal repayment of approximately $5 million from December 2027 through May 2031. The amount
of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road is approved and the construction
starts, which is expected to begin in the 2019. Interest charge for three and nine months ended June 30,2020 was $75,739 and $227,152
(2019- $78,699 and $233,282), respectively, which was included in the construction capitalized costs.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 5. CUSTOMER DEPOSITS
Customer deposits consist of amounts received from customers
for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:
|
|
June 30,
2020
|
|
|
September 30,
2019
|
|
Customer deposits by real estate projects
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)
|
|
$
|
7,202,654
|
|
|
$
|
7,029,356
|
|
Oriental Pearl Garden
|
|
|
4,201,957
|
|
|
|
4,182,454
|
|
Liangzhou road and related projects
|
|
|
886,045
|
|
|
|
1,043,692
|
|
Yangzhou Pearl Garden
|
|
|
1,740,371
|
|
|
|
1,163,407
|
|
Yangzhou Palace
|
|
|
5,131,214
|
|
|
|
3,764,355
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,162,241
|
|
|
|
17,183,264
|
|
Less: Customer deposits - short-term
|
|
|
18,276,196
|
|
|
|
16,139,572
|
|
Customer deposits - long-term
|
|
$
|
886,045
|
|
|
$
|
1,043,692
|
|
Customer deposits are typically 10% - 20%
of the unit price for those customers who purchase properties in cash and 30%-50% of the unit price for those customers who purchase
properties with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the
Company upon consummation of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the
customers default, the bank will repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately
nine to twelve months, the banks have no recourse to the Company for customers’ defaults. As of June 30, 2020 and September
30, 2019, approximately $3.3 million and $3.9 million was guaranteed by the Company, respectively.
NOTE 6. SHAREHOLDER’S LOANS
|
|
As of
|
|
|
|
March 31,
2020
|
|
|
September 30,
2019
|
|
Shareholder loan – USD loan (a)
|
|
$
|
1,810,000
|
|
|
$
|
1,810,000
|
|
Shareholder loan – RMB loan (b)
|
|
|
322,845
|
|
|
|
319,114
|
|
Total
|
|
$
|
2,132,845
|
|
|
$
|
2,129,114
|
|
|
a.
|
The Company has a one year loan agreement (“USD Loan Agreement”) with our Chairman, CEO and principal shareholder”, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The interest rate for the loan is 4% per annum and the loan matured on July 19, 2014. The Company entered into the amendments to the USD Loan Agreement to extend the term until July 31, 2021. The Company recorded interest of $18,100 and $54,300 for each of the three and nine months ended June 30,2020 and 2019. The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying condensed consolidated balance sheets as of June 30, 2020 and September 30, 2019, respectively.
|
|
b.
|
On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow in order to support the Company’s Liang Shan Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed upon maturity to September 25, 2020, with at an interest rate of 4.35% per year. For the three and nine months ended June 30,2020, the interest was $5,085 and $14,952 (2019 -$5,148 and $25,686), respectively, which is capitalized in the development cost of Liangzhou road project.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 7. TAXES
(A) Business sales tax and VAT
The Company is subject to a 5% business
sales tax on revenue. It is the Company’s continuing practice to recognize the 5% business sales tax based on revenue as
a cost of sales as the revenue is recognized. As of June 30,2020, the Company had business sales tax payable of $6,334,324 (September
30, 2019 - $7,819,884), which is expected to be paid when the projects are completed and assessed by the local tax authority. In
May of 2016, the Business Tax has been incorporated into Value Added Tax in China, which means there will be no more Business Tax
and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter.
The Company is subject to 5% of VAT for its all existing real estate project based on the local tax authority’s practice.
(B) Corporate income taxes (“CIT”)
The Company's PRC subsidiaries and VIE
are governed by the Income Tax Law of the People's Republic of China concerning the privately run enterprises, which are generally
subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax
adjustments. However, as approved by the local tax authority of Hanzhong City, the Company's CIT was assessed annually at a pre-determined
fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The local income tax rate in Hanzhong
is 2.5% and in Yang County is 1.25% on revenue for the year ended September 30, 2017. Starting from fiscal 2019, the Company's
CIT changed to 25% on taxable income. The change in the income tax policy could negatively affect the Company's net income in future
years. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities
in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation
of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply
with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further
tax payments for the difference. As of June 30, 2020 and September 30, 2019, the Company's income tax payable balances were $11,558,454
and $11,720,848, respectively. There was no interest and penalty accrued as of June 30,2020 because the Company has not received
any penalty and interest charge notice from local tax authorities. The Company expects to pay off the income tax payable balance
when the related real estate projects are completely sold. As of June 30,2020, the deferred tax asset balance amounted to $265,238
related to the loss incurred. As of September 30, 2019, the deferred tax asset balance was Nil.
The following table reconciles the statutory
rates to the Company’s effective tax rate for the three and nine months ended June 30,2020 and 2019:
|
|
Three months ended
June 30,
|
|
|
Nine months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Chinese statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Valuation allowance change and other adjustments*
|
|
|
(26.4
|
)%
|
|
|
0.8
|
%
|
|
|
(23.1
|
)%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(1.4
|
)%
|
|
|
25.8
|
%
|
|
$
|
1.9
|
%
|
|
|
27.7
|
%
|
*Valuation allowance change and other adjustments
for the three and nine months ended June 30,2020 and 2019 were primarily related to valuation allowance changes on historical losses.
Income tax expense for the three and nine
months ended June 30,2020 and 2019 is summarized as follows:
|
|
Three months ended
June 30,
|
|
|
Nine months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Current tax provision
|
|
$
|
67,180
|
|
|
$
|
-
|
|
|
$
|
201,000
|
|
|
$
|
-
|
|
Deferred tax provision (benefit)
|
|
|
(31,320)
|
|
|
|
53,243
|
|
|
|
(266,319)
|
|
|
|
374,582
|
|
Income tax provision (benefit)
|
|
$
|
35,860
|
|
|
$
|
53,243
|
|
|
$
|
(65,319)
|
|
|
$
|
374,582
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 7. TAXES (continued)
Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The
U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal
corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating
many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation
of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating
U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers
may elect to pay the one-time transition tax over eight years or in a single lump sum. The U.S. Tax Reform also includes provisions
for a new tax on GILTI effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions
impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”),
subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject
to some limitations.
As of June 30,2020 and September 30,
2019, the Company recognized a one-time transition toll tax liability of approximately $2.3 million that represented management’s
estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s
share of previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform.
The Company’s estimate of the one-time transition toll Tax is subject to the finalization of management’s analysis
related to certain matters, such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings
and profits of certain foreign VIEs and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations
or court decisions interpreting the Tax Act may require further adjustments and changes in our estimates. The Company provided
an additional $0.9 million tax provision due to delinquent U.S. tax return fillings.
(C) Land Appreciation Tax (“LAT”)
Since January 1, 1994, LAT has
been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided
for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant
tax laws. However, the Company’s local tax authority in Hanzhong City has not imposed the regulation on real estate companies
in its area of administration. Instead, the local tax authority has levied the LAT at the rate of 0.5% in Yang County and 1.0%
in Hanzhong against total cash receipts from sales of real estate properties, rather than according to the progressive rates.
As at June 30,2020 and September 30,
2019, the outstanding LAT payable balance was Nil with respect to completed real estate properties sold up to June 30,2020 and
September 30, 2019.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 7. TAXES (continued)
(D) Taxes payable consisted of the following:
|
|
March 31,
2020
|
|
|
September 30,
2019
|
|
CIT
|
|
$
|
11,558,454
|
|
|
$
|
11,720,848
|
|
Business tax
|
|
|
6,334,324
|
|
|
|
7,819,884
|
|
Other taxes and fees
|
|
|
2,379,890
|
|
|
|
2,349,086
|
|
Total taxes payable
|
|
|
20,272,668
|
|
|
|
21,889,818
|
|
Less: current portion
|
|
|
12,172,114
|
|
|
|
13,882,875
|
|
Tax payable – long term
|
|
$
|
8,100,554
|
|
|
$
|
8,006,943
|
|
NOTE 8. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party
to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when
they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
expensed as incurred. The Company's management does not expect any liability from the disposition of such claims and litigation
individually or in the aggregate would have a material adverse impact on the Company's consolidated financial position, results
of operations and cash flows.
As an industry practice, the Company provides
guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the
total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from
the government, which generally takes nine to twelve months. Because the banks provide loan proceeds without getting the “Certificate
of Ownership” as loan collateral during this nine to twelve months’ period, the mortgage banks require the Company
to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such
guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from
the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit.
If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple
purchasers default on their payment obligations at around the same time, we will be required to make significant payments to the
banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely
basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The Company
has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage
lenders. The Company has not experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee.
As of June 30, 2020 and September 30, 2019, our outstanding guarantees in respect of our customers' mortgage loans amounted
to approximately $66 million. As of June 30, 2020 and September 30, 2019, the amount of security deposits provided for these
guarantees was approximately $3.3 million and $3.9 million respectively and the Company believes that such reserves are sufficient.
NOTE 9. PENDING NASDAQ COMPLIANCE ISSUE
On June 21, 2019, the “Company received
a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it
is no longer in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing
Rule 5550(a)(2) requires listed companies to maintain a minimum bid price of $1.00 per share. The letter noted that the bid price
of the Company’s common stock was below $1.00 for the 30-day period ending June 20, 2019. The notification letter has no
immediate effect on the Company’s listing on the Nasdaq Capital Market. Nasdaq has provided the Company with 180 days, or
until January 14, 2020, to regain compliance with the minimum bid price requirement by having a closing bid price of at least
$1.00 per share for a minimum of 10 consecutive business days. On December 19, 2019, Nasdaq determined that the Company is eligible
for an additional 180 calendar day period, or until June 15, 2020, to regain compliance. Given the extraordinary market conditions
caused by COVID-19, Nasdaq has determined to toll the compliance periods for bid price and market value of publicly held shares
requirements through June 30, 2020. In that regard, on April 16, 2020, Nasdaq filed an immediately effective rule change with
the Securities and Exchange Commission. Accordingly, the Company has until August 31, 2020, to regain compliance.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis
of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed
consolidated financial statements of China HGS Real Estate, Inc. For the three and nine months ended June 30,2020 and 2019 and
should be read in conjunction with such financial statements and related notes included in this report.
As used in this report, the terms “Company,”
“we,” “our,” “us” and “HGS” refer to China HGS Real Estate, Inc. and its subsidiaries.
Preliminary Note Regarding Forward-Looking Statements.
We make forward-looking statements in
Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based
on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include
information about our possible or assumed future results of operations which follow under the headings “Business Overview,”
“Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include
the words “believes,” “expects,” “anticipates,” “intends,” “plans,”
“estimates” or similar expressions.
Forward-looking statements are subject
to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking
statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic
filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on
any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we
undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments
or otherwise. These forward-looking statements include, among other things, statements relating to:
|
•
|
our ability to sustain our project development
|
|
•
|
our ability to obtain additional land use rights at favorable prices;
|
|
•
|
the market for real estate in Tier 3 and 4 cities and counties;
|
|
•
|
our ability to obtain additional capital in future years to fund our planned expansion; or
|
|
•
|
economic, political, regulatory, legal and foreign exchange risks associated with our operations.
|
Business Overview
We conduct substantially all of our business
through Shaanxi Guangsha Investment and Development Group Co., Ltd, in Hanzhong, Shaanxi Province. Since the initiation of our
business, we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties in China.
For the first nine months ended June 30,
2020, our sales, gross profit and net loss were approximately $7.2 million, negative $0.5 million and $3.5 million, respectively,
representing an approximate 71.3%, 111.7% and 453.1% decrease in sales, gross profit and net income as compared to nine months
ended June 30, 2019, respectively. The decrease in sales was mainly resulted from less gross floor area (“GFA”) sold
during nine months ended June 30, 2020 as a result of recent Chinese government curbs designed to cool the Chinese real estate
market, which includes but not limit to restriction on home purchase, increase the down-payment requirement against speculative
buying, development of low-cost rental housing property to help low-income groups while reducing the demand in the commercial housing
market, increase the real estate property tax to discourage speculation, and control of the land supply and slowdown the construction
land auction process, etc. In addition, for the nine months ended June 30, 2020, the Company recognized $2,703,031 impairment losses
for certain slow moving real estate property development completed, which resulted in gross loss. Furthermore, in December 2019,
a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout China and worldwide, which has caused
significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of
business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce the spread of
the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension
of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, including, but not limited
to, the temporary closure of the Company’s facilities and operations beginning in early February through early March 2020,
limited support from the Company’s employees, delayed access to construction raw material supplies, reduced customer visit
to the Company’s sales office, and inability to promote the real estate property sales to customers on a timely basis. The
COVID-19 outbreak and spread also negatively impacted our operation result for the nine months ended June 30, 2020, to certain
extent.
For the nine months ended June 30, 2020,
we did not recognized any revenue under the percentage of completion method because all the real estate project generating revenue
has been completed by September 30, 2019 and our current under development projects have not met the criteria for revenue recognition
under the percentage of completion method. As a result, we put our focus on selling previously completed commercial and residential
units in order to reduce the inventory stockpile during current period and accordingly 100% of our current quarter revenue was
recognized under the completed contract method.
Total revenue recognized under the percentage
of completion method for the nine months ended June 30, 2019 was $24.1 million representing 95.5% of total revenue for the period,
with related costs of these real estate sales was $19.6 million, representing 95.1% of the real estate costs in the period. During
nine months ended June 30, 2019, the gross profit before sales tax from the percentage of completion method was $4.6 million, representing
97.5% of the total gross profit for that period. .
For the nine months ended June 30,2020,
the average selling price (“ASP”) for our real estate projects (excluding sales of parking spaces) located in Yang
County was approximately $687 per square meter, an increase of 35.5% from the ASP of $507 per square meter for the nine months
ended June 30, 2019, which was mainly due to more commercial units with higher selling price were sold during the nine months ended
June 30, 2020. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $569 per square
meter for the nine months ended June 30,2020, increased from the ASP of $372 per square meter for the nine months ended June 30,
2019, because the Company sold certain real estate projects in Hangzhou at discounted price during first nine months of last year.
Market Outlook
The Chinese government is expect to continue
implementing the tighten measurement to cool down the real estate market. These measures may include but not limit to restriction
on home purchase, increase the down-payment requirement against speculative buying, development of low-cost rental housing property
to help low-income groups while reducing the demand in the commercial housing market, increase the real estate property tax to
discourage speculation, and control of the land supply and slowdown the construction land auction process, etc. The downward pressure
on home sales and prices will be especially obvious in third- and fourth-tier cities, while the property market in the first- and
second-tier cities is expected to be resilient.
As of June 30, 2020, the relocation of
residence in Liangzhou Road related projects has been substantially completed and the Company will launch the construction of the
projects starting from the fourth quarter of fiscal year 2020. These projects will comprise of residential for end-users and upgraders,
shopping malls as well as serviced apartments and offices to satisfy different market demands.
In December 2019, a novel strain of coronavirus (COVID-19) surfaced.
COVID-19 has spread rapidly to many parts of the PRC and other parts of the world in the first quarter of 2020, which has caused
significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of
business disruptions related to COVID-19, as well as its impact on the PRC and international economies and, as such, the Company
is unable to determine if it will have a material impact to its operations.
Based on current economic environment,
customer demand and sales trend, and the negative impact from COVID-19 outbreak and spread, we believe that the real estate market
downturn will continue to be uncertain in the coming months. However, during the period from February to June 2020, in response
to COVID-19 outbreak, various level of government bodies have implemented credit release polices to encourage residential real
estate property purchase. The real estate market transaction volume is expected to slowly recover during the latter half of 2020.
We intend to remain focused on our existing
construction projects in Hanzhong City and Yang County, deepening our institutional sales network, enhancing our cost and operational
synergies and improving cash flows and strengthening our balance sheet. In this respect, we began the construction of the following
large high rise residential projects in Hanzhong City and Yang County:
Liangzhou road and related projects
In September 2013, the Company entered
into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and
expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the
Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to
resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately
$33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to
have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou
Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road
reformation and expansion project was extended, because the local government included more area and resettlement residences into
the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government
to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of June 30, 2020, the
main Liangzhou road construction is substantially completed. As of June 30, 2020, the relocation of residence in Liangzhou Road
related projects has been substantially completed and the Company will launch the construction of the projects starting from the
fourth quarter of fiscal year 2020. .Due to historical delays in government’s approval and acceptance, the Company included
such balance in real estate property under development as non-current assets.
As of June 30, 2020, the actual costs incurred
by the Company was approximately $155.2 million (September 30, 2019 - $147.0 million) and the incremental cost related to
residence resettlement was approved by the local government. The Company determined that the Company’s Investment in Liangzhou
Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance.
The Liangzhou Road related projects mainly
consists Oriental Garden Phase II, Liangzhou Mansion and Pearl Commercial Plaza surrounding the Liangzhou road area:
Oriental Pearl Garden Phase II
Oriental Garden Phase II project is planned
to consist of 8 high-rise residential buildings and 6 commercial buildings with total planned GFA of 370,298 square meters. The
project will also include a farmer’s market.
Liangzhou Mansion
Liangzhou Mansion project is planned to
consist of 7 high-rise building and commercial shops on the first floor with total planned GFA of 160,000 square meters.
Pearl Commercial Plaza
Pearl Commercial Plaza is planned to consist
one office building, one service apartment (or hotel), classical architecture style of Chinese traditional houses and shopping
malls with total planned GFA of 124,191 square meters.
The Company plans to start the construction
of these three real estate projects in 2020 after the road construction is fully completed and passes local government’s
inspection and approval. These related projects may take 2-3 years to fully complete.
Road Construction
Other road construction projects mainly
included a Yang County East 2nd Ring Road construction project. The Company was engaged by the Yang County local government to
construct the East 2nd Ring Road with a total length of 2.15 km and a budgeted price of approximately $23.8 million (or RMB 168
million), which was approved by the local Yang County government in March 2014. The local government is required to repay
the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing
rate with the similar term published by China construction bank (June 30,2020 and September 30, 2019 - 4.75%). The local government
has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The
road construction was substantially completed as of June 30,2020 and in process of government review and approval.
In September 2012, the Company was
approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters.
The project was deferred and then restarted during the quarter ended June 30, 2014. As of June 30, 2020, the local government was
still in the process of assessing the budget for these projects.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial
condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated
financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis and use them on historical
experience and various other assumptions that are believed to be reasonable under the circumstances as the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates because of different assumptions or conditions.
We believe the following critical accounting
policies affect our significant estimates and judgments used in the preparation of our condensed consolidated financial statements.
These policies should be read in conjunction with Note 2 of the notes to unaudited condensed consolidated financial statements.
Revenue recognition
Most of the Company’s revenue is
derived from real estate sales of condominiums and commercial property in the PRC. The majority of the Company’s contracts
contain a single performance obligations involving significant real estate development activities that are performed together
to deliver a real estate property to customers. Revenues arising from real estate sales are recognized when or as the control of
the asset is transferred to the customer. The control of the asset may transfer over time or at a point in time. For the sales
of individual condominium units in a real estate development project, the Company has an enforceable right to payment for performance
completed to date, revenue is recognized over time by measuring the progress towards complete satisfaction of that performance
obligation. Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.
Under percentage completion method, revenue
and profit from the sales of long term real estate development properties is recognized by the percentage of completion method
on the sale of individual units when all the following criteria are met:
a.
|
Construction is beyond a preliminary stage.
|
b.
|
The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
|
c.
|
Sufficient units have already been sold to assure that the entire property will not revert to rental property.
|
d.
|
Sales prices are collectible.
|
e.
|
Aggregate sales proceeds and costs can be reasonably estimated.
|
If any of the above criteria is not met,
proceeds shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method,
revenues from individual real estate condominium units sold and related costs are recognized over the course of the construction
period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation
is measured based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference to the
contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In relation
to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction
costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining
the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs.
Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized
amounts.
Any changes in significant judgments and/or
estimates used in determining construction and development revenue could significantly change the timing or amount of construction
and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in
which they are determined.
Revenue from the sales of completed real
estate condominium units is recognized at the time of the closing of an individual unit sale. This occurs when the customer obtains
the physical possession, the legal title, or the significant risks and rewards of ownership of the assets and the Company has present
right to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally
recognized at the time of the projects are completed.
Contract balances
Timing of revenue recognition may differ
from the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior
to invoicing, or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration
that is conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which
are the Company’s unconditional rights to consideration other than to the passage of time. Contract liabilities include cash
collected in excess of revenues. Customer deposit are excluded from contract liabilities.
The Company has elected to apply the optional
practical expedient for costs to obtain a contract which allows the Company to immediately expense sales commissions (included
under selling expenses) because the amortization period of the asset that the Company otherwise would have used is one year or
less. Contract assets and liabilities are generally classified as current based on our contract operating cycle.
The Company provides “mortgage loan
guarantees” only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The
period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receive the loan proceeds
in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been
transferred to the buyer. The procedures to obtain the Certificate of Ownership take nine to twelve months (the “Mortgage
Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank decides
not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If,
during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months,
we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell
the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan
guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back
and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this
event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company
has not returned any loan proceeds pursuant to its mortgage loan guarantees.
Use of estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial
statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development
revenue under the percentage of completion method, the selection of the useful lives of property and equipment, impairment provision
on real estate property development completed and real estate property under development, provision necessary for contingent liabilities,
revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial
statements are reasonable and prudent. Actual results could differ from these estimates.
Real estate property development completed
and under development
Real estate property consists of finished
residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential
unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the
development cost and allocated to each project. Real estate property development completed and real estate property under development
are stated at the lower of cost or fair value.
Expenditures for land development, including
cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and
allocated to development projects by the specific identification method. Costs are allocated to specific units within a project
based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied
by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers
is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc.
Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed
and real estate property under development are reclassified on the balance sheet into current and non-current portions based on
the estimated date of construction completion and sales. The real estate property development completed classification is based
on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business
and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property
is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The
majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects.
The Company considers its normal operating cycle is 12 months.
Real estate property development completed
and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized
only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if
it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real
estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to
the carrying value of such project. The Company continues to assess the impairment provision when triggering events occur. For
the three months and nine months ended June 30, 2020, the Company recognized $2,703,031 impairment losses for certain slow moving
real estate property development completed. For the three months and nine months ended June 30, 2019, the Company did not recognize
any impairment for real estate property under development or completed.
RESULTS OF OPERATIONS
Three Months Ended June 30,2020 compared to Three Months
Ended June 30, 2020
Revenues
The following is a breakdown of revenue:
|
|
For Three Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue recognized for completed condominium real estate projects
|
|
$
|
3,046,430
|
|
|
$
|
149,448
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
8,006,756
|
|
Total
|
|
$
|
3,046,430
|
|
|
$
|
8,156,204
|
|
Revenue recognized for completed condominium real estate
projects
The following table summarizes our revenue generated by different
projects:
|
|
For Three Months Ended June 30,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Variance
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II
|
|
$
|
132,563
|
|
|
4.4
|
%
|
|
$
|
176,700
|
|
|
118.2
|
%
|
|
$
|
(44,137
|
)
|
|
25.0
|
%
|
Oriental Pearl Garden
|
|
|
64,560
|
|
|
2.1
|
%
|
|
|
-
|
|
|
-
|
|
|
|
64,560
|
|
|
100
|
%
|
Yangzhou Palace
|
|
|
2,781,660
|
|
|
91.3
|
%
|
|
|
-
|
|
|
-
|
|
|
|
2,781,660
|
|
|
100
|
%
|
Yangzhou Pearl Garden Phase I and II
|
|
|
67,647
|
|
|
2.2
|
%
|
|
|
(27,252
|
)
|
|
(18.2
|
)%
|
|
|
94,899
|
|
|
(348.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Sales before sales Tax
|
|
|
3,046,430
|
|
|
100
|
%
|
|
|
149,448
|
|
|
100
|
%
|
|
|
2,896,982
|
|
|
1938.5
|
%
|
Sales Tax
|
|
|
(29,222
|
)
|
|
|
|
|
|
(4,429
|
)
|
|
|
|
|
|
(24,793
|
)
|
|
(559.8
|
)%
|
Revenue net of sales tax
|
|
$
|
3,017,208
|
|
|
|
|
|
$
|
145,019
|
|
|
|
|
|
$
|
2,872,189
|
|
|
1980.6
|
%
|
Our revenues are derived from the sale
of residential buildings, commercial store-fronts and parking spaces in projects that we have developed. Comparing to the same
period of last year, revenues before sales tax significantly increased to approximately $3.0 million for the three months ended
June 30, 2020 from approximately $0.1 million. The total GFA sold during three months ended June 30,2020 was merely 3,624
square meters, representing a significant increase from 192 square meters completed and sold during the same period of last year.
In addition, our Mingzhu Garden Phase I and Phase II, Yangzhou Pearl Garden Phase I and Phase II and Oriental Garden Phase I have
all been completed in prior years, only limited models are available for customer selection, which limited our ability to promote
our existing house model to broader range of customers. The sales tax for the three months ended June 30, 2020 was approximately
$0.03 million, significantly increased from the same period of 2019, due to more surcharge tax charged for the completed real estate
properties during the three months ended June 30, 2020.
Revenue recognized for condominium real
estate projects under development
We started to recognize revenue under the
percentage of completion method for Yangzhou Palace real estate project since second quarter of fiscal 2017. For the three months
ended June 30, 2020, there was no revenue recognized under the percentage of completion method, because Yangzhou Palace real estate
project was completed by September 30, 2019 and our current projects under development as of June 30,2020 have not met the criteria
for revenue recognition under the percentage of completion method.
For the three months ended June 30, 2019,
the Company recognized $9,140,425 revenue from Yangzhou Palace real estate project.
|
|
|
|
|
For the three months ended June 30, 2019
|
|
|
|
Total GFA
|
|
|
Average
Percentage of
Completion(1)
|
|
|
Qualified
Contract
Sales(2)
|
|
|
Revenue
Recognized
under
Percentage of
Completion
|
|
|
Accumulated
Revenue
recognized
under
Percentage of
completion
|
|
Real estate properties under
development located in
Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Palace
|
|
|
297,450
|
|
|
|
100
|
%
|
|
$
|
75,786,799
|
|
|
$
|
8,006,756
|
|
|
$
|
75,361,775
|
|
|
(1)
|
Percentage of completion
is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in the each real estate building
, estimated as of the time of preparation of our financial statements as of and for the year indicated.
|
|
(2)
|
Qualified contract sales
only include all contract sales with customer deposits balance as of June 30, 2019 equal or greater than 30% of contract sales
amount and related individual of buildings were sold over 20%.
|
|
(3)
|
The actual GFA will be
re-measured when the real estate project is completed, which could be slightly different from the estimated GFA at the beginning
of the real estate projects.
|
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
|
|
For Three Months Ended June 30,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Variance
|
|
|
|
Cost
|
|
|
%
|
|
|
Cost
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Land use rights
|
|
$
|
165,305
|
|
|
|
9.6
|
%
|
|
$
|
638,250
|
|
|
|
9.0
|
%
|
|
$
|
(472,945
|
)
|
|
|
(74.1
|
)%
|
Construction cost
|
|
|
1,562,912
|
|
|
|
90.4
|
%
|
|
|
6,453,422
|
|
|
|
91.0
|
%
|
|
|
(4,890.510
|
)
|
|
|
(75.8
|
)%
|
Total cost
|
|
$
|
1,728,217
|
|
|
|
100
|
%
|
|
$
|
7,091,672
|
|
|
|
100
|
%
|
|
$
|
(5,363,455
|
)
|
|
|
(75.6
|
)%
|
Our cost of sales consists primarily of costs associated with
land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using a specific identification
method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total
sales area of the project or phase of the project times the total cost of the project or phase of the project.
Cost of sales was approximately $1.7 million
for the three months ended June 30, 2020 compared to $7.1 million for the same period of last year. The $5.4 million decrease in
cost of sales was mainly attributable to less GFA sold during the three months ended June 30, 2020 which led to less cost of sales.
Land use rights cost: The cost of
land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our
land use rights cost varies for different projects according to the size and location of the site and the minimum land premium
set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use
rights for the three months ended June 30, 2020 were approximately $0.2 million, as compared to approximately $0.6 million for the
three months ended June 30, 2019, representing a decrease of approximately $0.4 million from the same quarter last year. The decrease
was consistent with the fact that total GFA sold in this quarter was significantly less than the same period of last year.
Construction cost: We outsource
the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction
contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for
some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction
costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified
milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and
door frames. Our construction costs for the three months ending June 30, 2020 were approximately $1.6 million as compared to approximately
$6.5 million for the same period of last year, representing a decrease of approximately $4.9 million. The decrease in construction
cost was due to decrease in units sold during the quarter ended June 30, 2020.
Gross Profit
Gross profit was approximately negative
$1.4 million for the three months ended June 30, 2020 as compared to approximately gross profit of $0.8 million for the three months
ended June 30, 2019, representing a decrease of $2.2 million, which was mainly attributable to impairment losses of $2,703,031
recognized for certain slow moving real estate property development completed during the three months ended June 30, 2020. The
gross margin for each real estate projects generally increased from the same period of last year, which was mainly due to growing
real estate price in the Hanzhong city and Yang County during fiscal 2020. The ASP for our real estate projects (excluding sales
of parking spaces) located in Yang County was approximately $855 per square meter, significantly increased from the ASP of $720
per square meter during fiscal 2019, which was mainly due to more commercial units with higher selling price were sold during the
nine months ended June 30, 2020. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately
$673 per square meter for the nine months ended June 30, 2020, increased from the ASP of $281 per square meter for the same period
of fiscal 2019, because the Company had few sales of real estate projects in Hangzhou during first nine months of last year with
discounted price. In addition, the higher margin in Yanzhou Palace during the current quarter of fiscal 2020 was due to more commercial
real estate property sold during the current quarter.
|
|
For Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
Gross Profit
|
|
|
|
Gross Margin
|
|
|
|
Gross Profit
|
|
|
|
Gross Margin
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II
|
|
$
|
38,183
|
|
|
|
28.8
|
%
|
|
$
|
49,445
|
|
|
|
28.0
|
%
|
Oriental Garden
|
|
|
16,085
|
|
|
|
24.9
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Yangzhou Pearl Garden Phase I and II
|
|
|
11,684
|
|
|
|
17.3
|
%
|
|
|
(4,298
|
)
|
|
|
15.8
|
%
|
Yangzhou Palace
|
|
|
1,252,261
|
|
|
|
45.0
|
%
|
|
|
1,019,385
|
|
|
|
12.7
|
%
|
Sales Tax
|
|
|
(29,222
|
)
|
|
|
|
|
|
|
(283,810
|
)
|
|
|
|
|
Impairment losses on real estate property development completed
|
|
|
(2,703,031
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Gross (loss) profit
|
|
$
|
(1,414,040
|
)
|
|
|
|
|
|
$
|
780,723
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
$
|
3,046,430
|
|
|
|
|
|
|
$
|
8,156,204
|
|
|
|
|
|
Operating Expenses
Total operating expenses increased by 90.0%
to approximately $1.1 million for the three months ended June 30, 2020 from $0.6 million for the three months ended June 30, 2019,
primarily as a result of an increase of 108.3% in general and administrative expense due to additional professional and project
operating related expenses incurred in the current quarter of fiscal 2020. Our total operating expenses accounted for 34.5% and
6.8% of our real estate sales before sales taxes for the three months ended June 30, 2020 and 2019, respectively.
|
|
For Three Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Selling expenses
|
|
$
|
77,404
|
|
|
$
|
85,863
|
|
General and administrative expenses
|
|
|
973,318
|
|
|
|
467,159
|
|
|
|
|
|
|
|
|
-
|
|
Total operating expenses
|
|
$
|
1,050,722
|
|
|
$
|
553,022
|
|
Percentage of Real Estate Sales before Sales Tax
|
|
|
34.5
|
%
|
|
|
6.8
|
%
|
Income Taxes
U.S. Taxes
China HGS is a Florida corporation. However,
all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not
repatriate any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the three months ended June
30, 2020 and 2019.
Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The
U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal
corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating
many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation
of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating
U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers
may elect to pay the one-time transition tax over eight years or in a single lump sum. The U.S. Tax Reform also includes provisions
for a new tax on GILTI effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions
impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”),
subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject
to some limitations.
As of June 30, 2020 and September 30,
2019 the Company accrued a one-time transition toll tax of approximately $2.3 million that represented management’s estimate
of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of
previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. The Company’s
estimate of the onetime transition toll Tax is subject to the finalization of management’s analysis related to certain matters,
such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings and profits of certain
foreign VIEs and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting
the Tax Act may require further adjustments and changes in our estimates. The Company provided an additional $0.9 million tax provision
due to delinquent U.S. tax return fillings.
PRC Taxes
Our Company is governed by the Enterprise
Income Tax Law of the People’s Republic of China concerning private-run enterprises, which are generally subject to tax at
a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
However, the local taxing authority of
Hanzhong City has the power to assess corporate taxes annually on local enterprises at a pre-determined fixed rate as an incentive
to stimulate the local economy and encourage entrepreneurship. In the fiscal year 2017, the taxing authority assessed us for income
taxes at the rate of 1.25% on revenue in Yang County and 2.5% on our revenue in Hanzhong, instead of the statutory rate of 25%
of net income. Starting from fiscal 2019, the Company is subject to income tax rate of 25% on taxable income. The change in the
income tax policy could negatively affect the Company’s net income in future years. Although the possibility exists for reinterpretation
of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the
local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are
different from the local tax rules and the Company is required to comply with local tax rules. The difference between the
two tax rules will not be a liability of the Company. There will be no further tax payments for the difference.
Net Income (Loss)
We reported net
losses of approximately $2.6 million for the three months ended June 30, 2020, as compared to net income of approximately $0.2
for the three months ended June 30, 2019.
Other Comprehensive Income (loss)
We operate primarily in the PRC and the
functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”). RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation
is made that RMB amounts could have been, or could be, converted into USD at the rates used in translation. Translation adjustments
resulting from this process amounted to gain of $0.4 million and loss of $3.8 million for the three months ended June 30, 2020
and 2019, respectively, due to the significant fluctuation of RMB during the same
period of last year. The balance sheet amounts with the exception of equity at June 30,2020 were translated at 7.0651 RMB to 1.00
USD as compared to 7.1477 RMB to 1.00 USD at September 30, 2019. The equity accounts were stated at their historical rate. The
average translation rates applied to the income statements accounts for the periods ended June 30,2020 and 2019 were 7.0364 RMB
and 6.8265 RMB, respectively.
Nine Months Ended June 30,2020 compared to Nine
Months Ended June 30, 2019
Revenues
The following is a breakdown of revenue:
|
|
For Nine Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue recognized under full accrual method
|
|
$
|
7,240,503
|
|
|
$
|
1,126,013
|
|
Revenue recognized under percentage of completion method
|
|
|
-
|
|
|
|
24,134,543
|
|
Total
|
|
$
|
7,240,503
|
|
|
$
|
25,260,556
|
|
Revenue recognized for completed condominium real estate
projects
The following table summarizes our revenue generated by different
projects:
|
|
For Nine Months Ended June 30,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Variance
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and Phase II
|
|
$
|
663,516
|
|
|
|
9.2
|
%
|
|
$
|
956,496
|
|
|
|
84.9
|
%
|
|
$
|
(292,980
|
)
|
|
|
(30.6
|
)%
|
Yangzhou Pearl Garden Phase I and Phase II
|
|
|
76,355
|
|
|
|
1.1
|
%
|
|
|
46,803
|
|
|
|
4.2
|
%
|
|
|
29,552
|
|
|
|
63.1
|
%
|
Oriental Garden
|
|
|
186,464
|
|
|
|
2.6
|
%
|
|
|
122,714
|
|
|
|
10.9
|
%
|
|
|
63,750
|
|
|
|
52.0
|
%
|
Yangzhou Palace
|
|
|
6,314,168
|
|
|
|
87.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
5,708,079
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
|
7,240,503
|
|
|
|
100
|
%
|
|
|
1,126,013
|
|
|
|
100
|
%
|
|
|
6,114,491
|
|
|
|
543.0
|
%
|
Sales Tax
|
|
|
(95,503
|
)
|
|
|
|
|
|
|
(123,554
|
)
|
|
|
|
|
|
|
26,420
|
|
|
|
(21.7
|
)%
|
Revenue net of sales tax
|
|
$
|
7,145,000
|
|
|
|
|
|
|
$
|
1,004,090
|
|
|
|
|
|
|
$
|
6,140,991
|
|
|
|
611.6
|
%
|
Our revenues are derived from the sale
of residential buildings, commercial store-fronts and parking spaces in projects that we have developed. Comparing to the same
period of last year, revenues before sales tax significantly increased to approximately $7.2 million for the nine months ended
June 30, 2020 from approximately $1.1 million in the same period of last year. The total GFA sold during nine months ended
June 30, 2020 was merely 10,797 square meters, representing a significant increase from the 3,093 square meters completed and sold
during the same period of last year. The sales tax for the nine months ended June 30, 2020 was approximately $0.1 million, decreased
by 21.7% from the same period of 2019, due less surcharge tax charged for the completed real estate properties during the nine
months ended June 30, 2020.
Revenue recognized for condominium real
estate projects under development
We started to recognize revenue under the
percentage of completion method for Yangzhou Palace real estate project since second quarter of fiscal 2017. For the nine months
ended June 30, 2020, there was no revenue recognized under the percentage of completion method, because Yangzhou Palace real estate
project was completed by September 30, 2019 and our current projects under development as of June 30,2020 have not met the criteria
for revenue recognition under the percentage of completion method.
For the nine months ended June 30, 2019,
the Company recognized $24,134,543 revenue from Yangzhou Palace real estate project.
Revenue recognized for condominium real estate projects under
development
|
|
|
|
|
For the Nine months ended June 30, 2019
|
|
|
|
Total GFA
|
|
|
Average
Percentage of
Completion(1)
|
|
|
Qualified
Contract
Sales(2)
|
|
|
Revenue
Recognized
under
Percentage of
Completion
|
|
|
Accumulated
Revenue
recognized
under
Percentage of
completion
|
|
Real estate properties under development located
in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Palace
|
|
|
297,450
|
|
|
|
100
|
%
|
|
$
|
75,786,799
|
|
|
$
|
24,134,543
|
|
|
$
|
75,361,775
|
|
|
(1)
|
Percentage of completion is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in the each real estate building , estimated as of the time of preparation of our financial statements as of and for the year indicated.
|
|
(2)
|
Qualified contract sales only include all contract sales with customer deposits balance as of June 30, 2019 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.
|
|
(3)
|
The actual GFA will be re-measured when the real estate project is completed, which could be slightly different from the estimated GFA at the beginning of the real estate projects.
|
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
|
|
For Nine Months Ended March 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Variance
|
|
|
|
Cost
|
|
|
%
|
|
|
Cost
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Land use rights
|
|
$
|
462,934
|
|
|
|
9.4
|
%
|
|
$
|
2,036,573
|
|
|
|
9.9
|
%
|
|
$
|
(1,573,639
|
)
|
|
|
(77.3
|
)%
|
Construction cost
|
|
|
4,437,276
|
|
|
|
90.6
|
%
|
|
|
18,534,876
|
|
|
|
90.1
|
%
|
|
|
(14,097,600
|
)
|
|
|
(76.1
|
)%
|
Total cost
|
|
$
|
4,900,210
|
|
|
|
100
|
%
|
|
$
|
20,571,449
|
|
|
|
100
|
%
|
|
$
|
(15,671,239
|
)
|
|
|
(76.2
|
)%
|
Our cost of sales consists primarily of
costs associated with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects
using a specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales
area of units to the estimated total sales area of the project or phase of the project times the total cost of the project or phase
of the project.
Cost of sales was approximately $4.9 million
for the nine months ended June 30, 2020 compared to $20.6 million for the same period of last year. The $15.7 million decrease
in cost of sales was mainly attributable to less GFA sold during the nine months ended June 30, 2020 which led to less cost of
sales.
Land use rights cost: The cost of
land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our
land use rights cost varies for different projects according to the size and location of the site and the minimum land premium
set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use
rights for the nine months ended June 30, 2020 were approximately $0.5 million, as compared to approximately $2.0 million for the
nine months ended June 30, 2019, representing a decrease of approximately $1.5 million from the same period of last year. The decrease
was consistent with the fact that total GFA sold in the first nine months 2020 was significantly less than the same period of last
year.
Construction cost: We outsource
the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction
contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for
some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction
costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified
milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and
door frames. Our construction costs for the nine months ending June 30, 2020 were approximately $4.4 million as compared to approximately
$18.5 million for the same period of last year, representing a decrease of approximately $14.1 million. The decrease in construction
cost was due to decrease in units sold during the first nine months of fiscal 2020.
Gross profit
Gross profit was approximately negative
$0.5 million for the nine months ended June 30, 2020 as compared to approximately gross profit of $3.9 million for the nine months
ended June 30, 2019, representing a decrease of $4.4 million, which was mainly attributable to impairment losses of $2,703,031
recognized for certain slow moving real estate property development completed during the nine months ended June 30, 2020. The gross
margin for each real estate projects generally increased from the same period of last year. For the first nine months of fiscal
2020, the ASP for our real estate projects (excluding sales of parking spaces) located in Yang County was approximately $687 per
square meter, an increase of 35.5% from the ASP of $507 per square meter for the nine months ended June 30, 2019, which was mainly
due to more commercial units with higher selling price were sold during the nine months ended June 30, 2020. The ASP of our Hanzhong
real estate projects (excluding sales of parking spaces) was approximately $570 per square meter for the nine months ended June
30, 2020, increased from the ASP of $372 per square meter for the nine months ended June 30, 2019, because the Company had few
sales of real estate projects in Hangzhou during first nine months of last year with discounted price. . In addition, the higher
margin in Yanzhou Palace during the first nine months of fiscal 2020 was due to more commercial real estate property sold during
the current period.
The following table sets forth the gross margin of each of our
projects:
|
|
For Nine Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Gross Profit
|
|
|
Percentage
of Revenue
|
|
|
Gross
Profit
|
|
|
Percentage
of Revenue
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)
|
|
$
|
185,245
|
|
|
|
27.9
|
%
|
|
$
|
159,592
|
|
|
|
16.7
|
%
|
Oriental Garden
|
|
|
52,504
|
|
|
|
28.2
|
%
|
|
|
(50,816
|
)
|
|
|
(41.4
|
)%
|
Yangzhou Pearl Garden
|
|
|
12,863
|
|
|
|
16.8
|
%
|
|
|
7,454
|
|
|
|
15.9
|
%
|
Yangzhou Palace
|
|
|
2,089,681
|
|
|
|
33.1
|
%
|
|
|
4,572,877
|
|
|
|
18.9
|
%
|
Sales Tax
|
|
|
(95,503
|
)
|
|
|
|
|
|
|
(788,766
|
)
|
|
|
|
|
Impairment losses on real estate property development completed
|
|
|
(2,703,031
|
)
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Total Gross Profit
|
|
|
(458,241
|
)
|
|
|
|
|
|
|
3,900,341
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
$
|
7,240,503
|
|
|
|
|
|
|
$
|
25,260,556
|
|
|
|
|
|
Operating Expenses
Total
operating expenses were approximately $52.9 million and $2.1 million for the nine months ended June 30, 2020 and 2019, respectively.
The increase in selling expenses of $0.1 million for nine months ended June 30, 2020 was primarily attributed to higher marketing
activities costs. The increase in general administration expense of $0.7 million for the nine months ended June 30, 2020 was primarily
attributed to more project operating and professional fee expenses incurred. Our total operating expenses accounted for
39.5% and 8.2% of our real estate sales before sales taxes for the nine months ended June 30, 2020 and 2019, respectively.
|
|
For Nine Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Selling expenses
|
|
$
|
477,962
|
|
|
$
|
360,763
|
|
General and administrative expenses
|
|
|
2,381,572
|
|
|
|
1,721,778
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
2,859,534
|
|
|
$
|
2,082,541
|
|
Percentage of Real Estate Sales before Sales Tax
|
|
|
39.5
|
%
|
|
|
8.2
|
%
|
Income Taxes
U.S. Taxes
China HGS is a Florida corporation. However,
all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not
repatriate any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the nine months ended June
30, 2020 and 2019.
Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The
U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal
corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating
many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation
of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating
U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers
may elect to pay the one-time transition tax over eight years or in a single lump sum. The U.S. Tax Reform also includes provisions
for a new tax on GILTI effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions
impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”),
subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject
to some limitations.
As of June 30, 2020 and September 30,
2019 the Company accrued a one-time transition toll tax of approximately $2.3 million that represented management’s estimate
of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of
previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. The Company’s
estimate of the onetime transition toll Tax is subject to the finalization of management’s analysis related to certain matters,
such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings and profits of certain
foreign VIEs and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting
the Tax Act may require further adjustments and changes in our estimates. The Company provided an additional $0.9 million tax provision
due to delinquent U.S. tax return fillings.
PRC Taxes
Our Company is governed by the Enterprise
Income Tax Law of the People’s Republic of China concerning private-run enterprises, which are generally subject to tax at
a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
However, the local taxing authority of
Hanzhong City has the power to assess corporate taxes annually on local enterprises at a pre-determined fixed rate as an incentive
to stimulate the local economy and encourage entrepreneurship. In the fiscal year 2017, the taxing authority assessed us for income
taxes at the rate of 1.25% on revenue in Yang County and 2.5% on our revenue in Hanzhong, instead of the statutory rate of 25%
of net income. Starting from fiscal 2019, the Company is subject to income tax rate of 25% on taxable income. The change in the
income tax policy could negatively affect the Company’s net income in future years. Although the possibility exists for reinterpretation
of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the
local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are
different from the local tax rules and the Company is required to comply with local tax rules. The difference between the
two tax rules will not be a liability of the Company. There will be no further tax payments for the difference.
Net Income (loss)
We reported net
loss of approximately $3.5 million for the nine months ended June 30,2020, as compared to net income of approximately $1.0 million
for the nine months ended June 30, 2019. The decrease of $4.4 million in our net income was primarily due to lower amount of revenue
for the nine months ended June 30,2020 as discussed above under Revenues and Gross Profit
Other Comprehensive Income (Loss)
We operate primarily in the PRC and the
functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”). RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation
is made that RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Translation adjustments resulting from
this process amounted to gain of $1.9 million and loss of $0.1 million for the nine months ended June 30, 2020 and 2019, respectively,
due to the significant fluctuation of RMB during the period. The balance sheet amounts
with the exception of equity at June 30, 2020 were translated at 7.0651 RMB to 1.00 USD as compared to 7.1477 RMB to 1.00 USD at
September 30, 2019. The equity accounts were stated at their historical rate. The average translation rates applied to the income
statements accounts for the periods ended June 30,2020 and 2019 were 7.0364 RMB and 6.8265 RMB, respectively.
Liquidity and Capital Resources
Our principal need for liquidity and capital
resources is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth
of our business. Historically we mainly financed our operations primarily through cash flows from operations and borrowings from
our principal shareholder.
For the recent years, the Chinese
government has implemented measures to control overheating residential and commercial property prices including but not
limited to restriction on home purchase, increase the down-payment requirement against speculative buying, development of
low-cost rental housing property to help low-income groups while reducing the demand in the commercial housing market,
increase the real estate property tax to discourage speculation, and control of the land supply and slowdown the construction
land auction process, etc. In addition, in December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has
spread rapidly throughout China and worldwide, which has caused significant volatility in the PRC and international markets.
There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its
impact on the PRC and international economies. To reduce the spread of the COVID-19, the Chinese government has employed
measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures.
Due to difficulties resulting from the COVID-19 outbreak, including, but not limited to, the temporary closure of the
Company’s facilities and operations beginning in early February through early March 2020, limited support from the
Company’s employees, delayed access to construction raw material supplies, reduced customer visit to the
Company’s sales office, and inability to promote the real estate property sales to customers on a timely basis, and our
revenue decreased by approximately $18.0 million during the first nine months of fiscal 2020 as compared to the same period
of 2019 due to decreased sales volume of both residential and commercial properties developed by us, as a result, we reported
a net loss of approximately $3.5 million for the nine months ended June 30, 2020. In addition, as of June 30,2020, we had an
approximately $140.8 million working capital deficit. The deficit increased by $111.1 million as compared to a deficit of
$29.7 million as of September 30, 2019. Based on assessment of current economic environment, customer demand and sales trend
and the negative impact from COVID-19 outbreak and spread, we believe that the real estate market downturn will continue to
be uncertain in the coming months and we may not be able to liquidate our large balance of completed real estate property
within the next 12 months as we originally expected. Therefore, approximately $95.8 million completed real estate property
originally sitting under our current assets as of September 30, 2019 has been reclassified as non-current assets as of June
30, 2020. In addition, as of June 30, 2020, we had large construction loans payable balance of approximately $88.5 million
with maturity less than one year and large accounts payable balance of approximately $27.0 million to be paid to
subcontractors within one year. These factors led to our working capital deficit of approximately $140.8 million as of June
30, 2020. The above mentioned facts raised substantial doubt about the Company's ability to continue as a going concern
for the next 12 months from the date of this filing.
In assessing its liquidity, management
monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its
operating and capital expenditure commitments. As of June 30, 2020, our total cash and restricted cash balance decreased to approximately
$3.8 million as compared to approximately $4.2 million as of September 30, 2019. With respect to capital funding requirements,
the Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. As of June 30, 2020,
we had approximately $107.9 million construction completed residential apartments and commercial units available for instant sales
to potential buyers when needed (including approximately $12.2 million current portion and approximately $95.8 million non-current
portion of real estate property development completed). For the current portion of $12.2 million completed residential apartments
and commercial units, we estimate we will be able to substantially sell them within one year to generate cash to be used in our
operations and funding our other real estate projects under development. Although we reported approximately $27.0 million accounts
payable as of June 30, 2020, due to the long term relationship with our construction suppliers and subcontractors, we were able
to effectively manage cash spending on construction and negotiate with them to adjust the payment schedule based on our cash on
hand. In addition, most of our existing real estate development projects related to old town renovation which are supported by
local government. As of June 30, 2020, we reported approximately $88.5 million short-term construction loans and approximately
$17.1 million long-term construction loans borrowed from financial institutions controlled by local government and such loans can
only be used on old town renovation related project development. We expect that we will be able to renew all of the existing construction
loans upon their maturity and borrow additional new loans from local financial institutions when necessary, based on our past experience
and the Company’s good credit history. Also, the Company’s cash flows from pre-sales and current sales should provide
financial support for our current developments and operations. As of June 30, 2020, we had approximately $19.2 million customer
deposits (including approximately $18.3 million short-term and approximately $0.9 million non-current customer deposits) representing
cash advance from buyers for pre-sales of our residential units and we believe such cash advance can be used to fund our ongoing
construction projects whenever necessary. During the nine months ended June 30,2020, we had five large ongoing construction projects
(see Note 3, real estate property under development) which were under preliminary development stage due to delayed inspection and
acceptance of the development plans by local government. In June 2020, we completed the residence relocation surrounding Liangzhou
Road related projects and expects to construct the Liangzhou Road related projects starting from the fourth quarter of fiscal year
2020. For other four projects, we expect we will be able to obtain government’s approval of the development plans on these
projects by before the end of fiscal year 2020, and start the pre-sale of the real estate property to generate cash when certain
property development niches have been achieved. For the nine months ended June 30,2020 and 2019, the Company had positive cash
flow from operating activities. In addition, our principal shareholder, Mr. Xiaojun Zhu has been providing and will continue to
provide his personal funds to support the Company’s operation whenever necessary.
Amid the COVID-19 outbreak and spread,
we have resumed our business activities in early March 2020 and we expect the negative impact of the COVID-19 coronavirus outbreak
on our business to be temporary and our sales activities have started to run as normal, which will help us to increase our real
estate proper sales in the upcoming months. During the period from February to June 2020, in response to COVID-19 outbreak, various
level of government bodies have implemented credit release polices to encourage residential real estate property purchase. The
real estate market transaction volume is expected to slowly recover during the latter half of 2020.
Due to the effects of the outbreak of COVID-19
discussed above, to the extent that we experience a more adverse operating environment, incur unanticipated capital expenditures,
or if we decide to accelerate our growth, then additional financing may be required. Currently, we are working to improve our liquidity
and capital sources primarily through financial support from our principal shareholder and debt or equity financing. In order to
fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation,
therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds as needed. At the
present time, however, we do not have commitments of funds from any third party. No assurance can be given that additional financing,
if required, would be available on favorable terms or at all.
Based on above reasons, there is a substantial
doubt about the Company's ability to continue as a going concern for the next 12 months from the date of this filing.
Cash Flow
Comparison of cash flows results is summarized as follows:
|
|
Nine months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net cash provided by operating activities
|
|
$
|
1,811,912
|
|
|
$
|
9,207,345
|
|
Net cash used in financing activities
|
|
|
(2,405,349
|
)
|
|
|
(11,418,405
|
)
|
Effect of change of foreign exchange rate on cash and restricted cash
|
|
|
184,993
|
|
|
|
15,360
|
|
Net decrease in cash and restricted cash
|
|
|
(408,444
|
)
|
|
|
(2,195,700
|
)
|
Cash and restricted cash, beginning of period
|
|
|
4,202,117
|
|
|
|
6,775,577
|
|
Cash and restricted cash, end of period
|
|
$
|
3,793,673
|
|
|
$
|
4,579,877
|
|
Operating Activities
Net cash provided by operating activities
during the nine months ended June 30, 2020 was approximately $1.8 million, consisting of net loss of approximately $3.5 million,
adjusted by impairment losses of $2.7 million on certain slow moving real estate property development completed projects and net
changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed together with
the changes in the cost and earnings in excess of billings by approximately $12.6 million due to sales of our Yangzhou Palace project,
a collection of security deposit of $4.8 million and an increase in customer deposit received of $1.8 million, offset by additional
spending in real estate under development of $4.4 million and payments of accrued expense and tax payable in aggregated of approximately
$2.6 million.
Net cash provided by operating activities during the nine months
ended June 30, 2019 was approximately $9.2 million, consisting of net income of approximately $1.0 million, noncash adjustments
of $0.4 million and net changes in our operating assets and liabilities, which mainly included an increase of accounts payable
of $11.5 million due to increasing spending on Liangzhou road and affiliated project and Yangzhou Palace project, a decrease in
real estate property under development by approximately $58.3 million due to the completion of Yangzhou Palace project which was
reclassified to real estate property completed and a decrease of approximately $2.0 million in contract receivable due to collection,
offset with an increase in real estate property completed of $57.2 million due to the completion of Yangzhou Palace project and
a decrease in contract liabilities of approximately $4.0 million.
Financing Activities
Net cash flows used in financing activities
was approximately $2.4 million for nine months ended June 30, 2020, which due to a repayment of construction loans of approximately
$2.4 million during the nine months ended June 30,2020.
Net cash flows used in financing activities
was approximately $11.4 million for nine months ended June 30, 2019, which mainly included a repayment of other bank loans of approximately
$11.4 million during the nine months ended June 30, 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
Inflation has not had a material impact
on our business and we do not expect inflation to have a material impact on our business in the near future.