Notes
to Consolidated Financial Statements
1.
|
Nature
and Continuance of Operations
|
HQDA
Elderly Life Network Corp. (formerly Hartford Retirement Network Corp.) (the “Company”) was incorporated under the
laws of the State of Nevada on January 21, 2004. In September 2017, the Company acquired Shanghai Hongfu Health Management Ltd
(Shanghai Hongfu”), a company incorporated in the People’s Republic China (“PRC”). Following the acquisition,
on April 23, 2018, the Company changed its name to HQDA Elderly Life Network Corp.
Through
Shanghai Hongfu, the Company purchased senior living facilities and launched a senior living residences business, which hosts
to mostly men and women over the age of 50. The Company intends to expand its business of owning, leasing and/or operating senior
living residences that will provide seniors with a supportive, home life setting with care and services, including activities
of daily living, life enrichment and health and wellness.
The
Company’s consolidated financial statements as of June 30, 2020 and for the year then ended have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course
of business. The Company reported a net loss of $4,756,825 and $1,823,334 for the years ended June 30, 2020 and 2019, respectively.
As of June 30, 2020, it had a negative working capital deficiency of $4,471,670 while it had a working capital of $1,412,674
at June 30, 2019.
Management
cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive, or raise
additional debt and/or equity capital. Management believes that the Company’s capital resources will not be adequate to
continue operating and maintaining its business strategy for the next 12 months. If the Company is unable to raise additional
capital in the near future, management expects that the Company will need to curtail operations, seek additional capital on less
favorable terms and/or pursue other remedial measures. These consolidated financial statements do not include any adjustments
related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
2.
|
Summary
of Significant Accounting Policies
|
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (GAAP). The Company’s consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Shanghai Hongfu. All inter-company balances have been eliminated upon consolidation. The Company’s
fiscal year end is June 30.
Certain
prior year figures have been adjusted to conform to the current year’s presentation.
Foreign
currency translation
The
United States dollar (“USD”) is the Company’s reporting currency. The Company’s wholly owned operating
subsidiary; Shanghai Hongfu is located in China. The net sales generated and the related expenses directly incurred from
the operations are denominated in local currency, Renminbi (“RMB”). The functional currency of the subsidiary is generally
the same as the local currency.
Assets
and liabilities measured in RMB are translated into USD at the prevailing exchange rates in effect as of the financial statement
date and the related gains and losses, net of applicable deferred income taxes, are reflected in accumulated other comprehensive
income (loss) in its consolidated balance sheets. Income and expense accounts are translated at the average exchange rate for
the period. The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to
offset the impact of foreign currency fluctuations.
Stated
on July 1, 2018, Shanghai Hongfu has changed its functional currency to RMB. Prior to the change, the functional currency for
the Company’s subsidiary was U.S. dollars. Monetary assets and liabilities denominated in local currency, RMB were translated
using the exchange rate prevailing at the balance sheet date. Gains and losses arising from the settlement of RMB denominated
transactions or balances are included in current earnings.
Cash
and cash equivalents
Cash
and cash equivalents include bank deposits and liquid investments with original maturities of three months or less.
Concentration
risk
The
Company maintains cash with banks in the USA and PRC. Should any bank holding cash become insolvent, or if the Company is otherwise
unable to withdraw funds, the Company would lose the cash with that bank; however, the Company has not experienced any losses
in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. In China, a depositor has
up to RMB500,000 insured by the People’s Bank of China Financial Stability Bureau (“FSD”). In the United States,
the standard insurance amount is $250,000 per depositor in a bank insured by the Federal Deposit Insurance Corporation (“FDIC”).
Financial
instruments that potentially subject the Company to significant concentrations of credit risk are cash and cash equivalents and
accounts receivable. As of June 30, 2020 and 2019, nil and $188,372 of the Company’s cash and cash equivalents held by financial
institutions were uninsured, respectively. With respect to accounts receivable, the Company generally does not require collateral
and does not have an allowance for doubtful accounts.
Revenue
recognition
On
July 1, 2018 the Company adopted Accounting Standards Update (“ASU”) 2014-09, Accounting Standards Codification Topic
606, Revenue from Contracts with Customers (ASC 606), which is a comprehensive new revenue recognition model that requires
revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the
consideration expected to be received in exchange for those goods or services. The Company adopted ASC 606 using the modified
retrospective method. The Company evaluated its revenue streams to identify whether it would be subject to the provisions of ASC
606 and any differences in timing, measurement or presentation of revenue recognition. The Company’s main source of revenue
is generated from operating senior living residences. The Company recognizes resident fees and services, other than move-in fees,
monthly as services are provided. Under ASC 606, the pattern and timing of recognition of income from assisted living facility
is consistent with the prior accounting model.
Unearned
revenue
Unearned
revenue is recorded when payments are received in advance of performing our services obligations and is recognized over the service
period. Unearned revenue is primarily related to prepayments of monthly facility and service fees.
Property
and equipment
Property
and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred. Depreciation
is computed using the straight-line method over the following estimated useful lives of the depreciable assets:
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●
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Building:
40 years
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●
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Building
improvements: 8 years
|
|
●
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Land
use rights: 40 years
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|
●
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Office
equipment and furniture: 2-5 years
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All
land in the PRC is owned by the PRC government and cannot be sold to any individual or company. The Company has recorded the amounts
paid to the PRC government to acquire long-term interests of land use rights. This type of arrangement is common for the use of
land in the PRC. The Company amortizes land use rights based on the term of the respective land use rights or expected useful
lives, which generally ranges from 15 to 50 years. The land use rights of Collective Lands has unlimited useful life time.
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value. For years ended
June 30, 2020 and 2019, the Company recognized $2,719,643 and nil impairment charges on long-lived assets, respectively.
Value
added tax
The
Company is subject to value added tax (“VAT”) for the wholly owned subsidiary operates at PRC. The applicable VAT
rate is 6% for hospitality industry in the PRC for the years ended of June 30, 2020 and 2019. The amount of VAT liability is determined
by applying the applicable tax rate to hotel income.
Income
taxes
Deferred
income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax bases, and for tax losses and credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The Company provides for deferred taxes for the estimated
future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not.
The
Tax cut and Jobs Act (the Tax Act), which was enacted in December 2017, decreased the corporate income tax rate from 35.0% to
21.0% beginning on January 1, 2018. The impact of the Tax Act was minimal to the Company’s consolidated financial statements.
The
Company’s subsidiary, Shanghai Hongfu was incorporated in the PRC, are subject to PRC’s Enterprise Income Tax. Pursuant
to the PRC Income Tax Laws, Enterprise Income Taxes (“EIT”) is generally imposed at 25%.
Use
of estimates and assumptions
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ
from these estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash, accounts and other receivables, accounts payable and accrued
liabilities. The Company believes all of the financial instruments’ recorded values approximate fair values because of their
nature or respective short durations.
Recently
Adopted Accounting Pronouncements
February
2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02 (Topic 842) “Leases.” Topic 842 supersedes the lease recognition requirements in Accounting Standards
Codification (“ASC”) Topic 840 “Leases.” Under Topic 842, lessees are required to recognize a right-of-use
asset and a lease liability for substantially all leases. Leases will continue to be classified as either finance or operating.
Topic 842 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2018 with
early adoptions permitted. The Company adopted the new standard effective July 1, 2019. As part of the adoption of ASU 2016-02,
the Company made an accounting policy election that will not recognizing leases with an initial term of 12 months or less on the
consolidated balance sheet. As of July 1, 2019, the Company only has one month-to-month office lease with monthly rent of $1,020.
The adoption of this new accounting standard had no impact on the Company’s consolidated financial statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses”. The standard, including subsequently
issued amendments (ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11), requires a financial asset measured at
amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected
to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable
and supportable forecasts that affect the collectability of the reported amount. In November 2019, the FASB issued ASU No. 2019-10
to postpone the effective date of ASU No. 2016-13 for public business entities eligible to be smaller reporting companies defined
by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company
is evaluating the impact of this guidance on its consolidated financial statements.
On
April 2, 2018, the Company entered into an Asset Purchase Agreement (the “APA”) whereby the Company will purchase
Assets A&B, including land use rights, buildings, construction rights and other property rights located in Shanghai from a
third party (the “Seller”) for a total purchase price of $36,991,173, which was its approximate fair value
as estimated by a third party appraisal firm.
A
summary of fair value of the asset as following:
Description
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|
Location
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|
Amount
(1)
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Amount
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|
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(in
Dollars)
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(in
RMB)
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Building and building improvements
and land use rights
|
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Shanghai Pudong New Area
Zhangjiang Ziwei Rd No. 372 and No. 376.
|
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$
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30,778,879
|
|
|
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193,870,000
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Land use rights
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Shanghai Chongming
District San Shuang Gong Lu No. 4797.
|
|
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6,212,294
|
|
|
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39,130,000
|
|
|
|
|
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$
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36,991,173
|
|
|
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233,000,000
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(1)
The exchange rate of 0.1587 was used to translate the RMB amounts at purchase date.
As
of June 30, 2020, the Company has paid a total of $24,879,490 (RMB 176 million). On September 1, 2018, the Company obtained the
full management and operation rights of the senior hotel property and other assets (Property A) located at Shanghai Pudong New
Area pursuant to the Operation Rights Transferring Agreement entered on August 31, 2018 with the seller. Although the Company
has the rights to operate the senior living services of Asset A purchased under this agreement, and is currently generating revenues,
the Company has not received a deed because the seller is involved in several lawsuits that have restrictions on assets transferring
sentenced Shanghai local district courts. The Company has decided not to make any further payments until the asset is legally
free of the restrictions. The Seller filed a lawsuit against Shanghai Hongfu for the contract default and no-payment on installments
pursuant to the APA on May 1, 2020. See Note 10 for more details about the lawsuit.
Further,
the Company consummated the share purchase agreement to acquire the entity – Shanghai Qiaoyuan Information Technology Co.,
Ltd (“SH QYIT”) on November 2018 who holds the land use rights of Property B located on Shanghai Chongming. Asset
B has been transferred to Properties and equipment, net during the year ended June 30, 2019. The two acquisitions were
accounted for assets acquisitions.
On
April 16, 2019 the Company entered into a Business Project Investment Agreement (the “Acquisition Agreement”) with
Palau Asia-Pacific International Aviation and Travel Agency (“Palau Asia-Pacific”) consisting of Palau Asia Pacific
Air Management Limited, Global Tourism Management Limited and Global (Guangzhou) Tourism Service Co., Ltd. (collectively the “Project
Company”) pursuant to which it will acquire 51% of the issued and outstanding capital stock of Project Company for $8,000,000,
representing 49% of the Project .The Company paid $3,000,000 deposit on April 2019 toward the Acquisition Agreement entered and
decided to rescind the investment given the ongoing COVID-19 pandemic. The Company entered a rescission agreement (the “Rescission
Agreement”) with Palau Asia-Pacific on September 8, 2020. According to the Rescission Agreement, the Company shall return
the 51% stock ownership back to Palau Asia-Pacific, who shall deliver to us $285,514 and $733,200 Hong Kong Dollar back, totaling
$94,605 cash, thus both parties shall release each other from further liabilities under the Acquisition Agreement. As of June
30, 2020, the Company recorded $2,619,881 impairment loss on $3,000,000 deposit paid pursuant to the Rescission Agreement. $380,119
total residual amount was received by the end of June 30, 2020.
4.
|
Properties
and Equipment, net
|
|
|
June
30,
|
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June
30,
|
|
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2020
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|
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2019
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Land use rights and land
use rights improvements
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$
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5,531,446
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$
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5,699,429
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Furniture and office equipment
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6,130
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|
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10,039
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Capitalized software
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|
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46,947
|
|
|
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146,710
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Accumulated depreciation
|
|
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(260,540
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)
|
|
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(117,629
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)
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Total properties
and equipment, net
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$
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5,323,983
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|
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$
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5,738,549
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During
the years ended June 30, 2020 and 2019, the depreciation expenses amounted to $150,132 and $115,980, respectively. Capitalized
software was determined to be impaired of $99,763 during the year ended June 30, 2020 due to the unfavorable business prospective
and uncompleted APP development.
5.
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Related
Party Transactions
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Receivable
and Payable
Receivable
from related parties amounted $194,812 and $168,958 at June 30, 2020 and 2019, respectively. Payable to related parties amounted
to $3,537,325 and $2,207,742 as of June 30, 2020 and 2019, respectively. The incremental of related party amounts represented
operation advances and funding to support the Company’s daily operations. The payable balances bear no interest and due
on demand.
Related
party transactions
On
July 2018, the Company entered a $172,600 (RMB1,185,000) service agreement with one entity that is under the common control of
the Company’s CEO to develop the Company’s website and a BBC shopping APP. The Company capitalized the development
cost of the website and APP in the amount of $146,710 based on the completion percentage method with $43,150 payable as
of June 30, 2019. During the year ended June 30, 2020, the APP development was halt and no further progress was made while the
website was completed. The Company decided and mutually agreed to terminate the remaining APP development effective on June 30,
2020 due to the strategic direction and macro-economic condition. The unperformed obligation under the service agreement for both
parties were cancelled semiseriously pursuant to the termination agreement. $43,150 payable to the related party was waived
and recognized accordingly as of June 30, 2020.
On
September 1, 2019, the Company entered a three-year cooperation agreement with Zhonghuiai Wufu (Shanghai) Hotel Management Co.,
Ltd., (“ZHAWF Shanghai”), a related party, with respect to the daily operation and management of the senior hotel
purchased on April 2018. According to the agreement, the Company shall pay RMB 1million per year to ZHAWF Shanghai for the service
provided. The Company amended the execution date of the cooperation agreement from September 1, 2018 to January 1,
2019 with three-year term. For the year ended June 30, 2020, the Company recorded hotel management fee of $213,329 (RMB 1.5 million)
and $102,268 payable due to ZHAWF Shanghai as of June 30, 2020.
Other
During
the years ended June 30, 2020 and 2019, the Company paid management fees of $143,972 and $126,000, respectively, to the Company’s
Chief Financial Officer.
As
of June 30, 2020 and 2019, the total issued and outstanding capital stocks was 139,314,416 with a par value of $0.001 per common
share.
For
the years ended June 30, 2020 and 2019, the Company recorded zero income tax provision due to the Company’s loss position.
United
States Taxes
HQDA
is a Nevada corporation that is subject to U.S. corporate income tax on its taxable income at a rate of up to 21% for taxable
years beginning after December 31, 2017. No provision for income taxes in the United States has been made as HQDA had no taxable
income for the years ended June 30, 2020 and 2019.
PRC
Tax
The
tax law in the PRC applies an income tax rate of 25% to all enterprises. The Company’s subsidiary does not receive any preferential
tax treatment from local government.
A
reconciliation of the provision for income taxes determined at the statutory income tax rate to the Company’s income taxes
is as follows:
|
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Years
ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Loss before income taxes
|
|
$
|
(4,756,825
|
)
|
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$
|
(1,823,334
|
)
|
United States federal corporate income
tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Income tax credit computed at united
states statutory
|
|
|
(173,056
|
)
|
|
|
(382,900
|
)
|
Rate differential
in PRC and other items
|
|
|
(23,534
|
)
|
|
|
(22,486
|
)
|
|
|
|
(196,590
|
)
|
|
|
(405,386
|
)
|
Less: Change
in valuation allowance
|
|
|
196,590
|
|
|
|
405,386
|
|
Income
tax provision (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
The
tax effect of temporary differences that give arise to significant portion of the deferred tax assets are presented below:
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
Net income tax operating
loss carry forward
|
|
$
|
732,090
|
|
|
$
|
559,034
|
|
Less: Valuation
allowance
|
|
|
(732,090
|
)
|
|
|
(559,034
|
)
|
Net deferred
tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of June 30, 2020, the Company had an unused net operating loss carry-forward balance of approximately $4,172,918 that is
available to offset future taxable income. This unused net operating loss carry-forward balance expires in various years between
2024 and 2040. Management believes it is more likely than not that the Company will not realize those potential tax benefits as
the operations will not generate any operating profits in the foreseeable future. As a result, a valuation allowance was provided
against the full amount of the potential tax benefits.
8.
|
Supplemental
Cash Flow Information
|
|
|
For the years ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Transfer of deposits to properties
|
|
$
|
—
|
|
|
$
|
5,738,210
|
|
|
|
|
|
|
|
|
|
|
The
Company operates in one industry segment, being the senior housing and retirement services through its Shanghai Hongfu in China.
As of June 30, 2020 and 2019, the subsidiary had an amount of $14,461,546 and $24,453,749 in total assets, respectively, excluding
inter-company balances, and it generated $489,831 and $477,958 revenue for the years ended June 30, 2020 and 2019, respectively.
There was no revenue generated from inter-company transactions.
10.
|
Contingencies
and commitments
|
The
Company entered into the APA to acquire two properties in Shanghai totaling RMB 233,000,000. Payments of $24,879,490 (RMB 176,000,000)
have been made through June 30, 2020. Due to the Seller of the assets is involved in several lawsuits that have restrictions of
assets transferring assets under this purchase agreement sentenced by Shanghai local district courts, the Company has decided
not to make remaining payments until the asset is free of the restrictions on June 2019.
On
May 1, 2020, a lawsuit was filed against the Company and Shanghai Hongfu, by Shanghai Qiao Hong Real Estate, Ltd (i.e. the Seller)
and its subsidiaries (the “Plaintiff”) for breach of contract and non-payment of installments pursuant to the APA
entered into between the Company and the Plaintiff on April 2, 2018. The Plaintiff is alleging damages of RMB 76,654,000 (approximately
$10,842,150), including remaining RMB58 million installments, interest for delayed payment, default penalty, and etc. The lawsuit
was filed in a District Court in Shanghai, China. The Company intends to vigorously defend this action. The court had initial
opening for the lawsuit on August 8, 2020, the Company questioned whether the Plaintiff could continue to perform its asset delivery
obligations under the APA since the Plaintiff is under the criminal investigation by a district police department of Shanghai
city and requested the Plaintiff to cooperate with government agencies and courts.
As
of June 30, 2020, the remaining installments under APA was RMB57,000,000. And for the year ended June 30, 2020, the Company reserved
$1,217,240 (approximate RMB8.56 million) amount in connection to the future expenditures of the lawsuit based on the management’s
best knowledge.
The
Company has evaluated all subsequent events through the date these consolidated financial statements were issued and determine
that there were no subsequent events or transactions except disclosed in Note 5 and 10 that require recognition
or disclosures in the consolidated financial statements.