UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10−Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2020

 

¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_______ to ________

 

Commission File Number: 001-34864

 

CHINA HGS REAL ESTATE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Florida   33-0961490
(State or Other Jurisdiction of Incorporation)   (I.R.S. Employer Identification Number)

 

6 Xinghan Road, 19th Floor, Hanzhong City

Shaanxi Province, PRC 723000

 (Address of Principal Executive Offices, Zip Code)

 

+(86) 091 - 62622612

(Registrant’s Telephone Number, including Area Code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer x   Smaller reporting company x
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

 

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 14, 2020 is as follows:

 

Class of Securities   Shares Outstanding  
Common Stock, $0.001 par value     45,050,000  

 

 

 

 

 

 

TABLE OF CONTENTS

   

    Page
PART I FINANCIAL INFORMATION 1
     
Item 1. Unaudited Interim Financial Statements 1
  Condensed Consolidated Balance Sheets at March 31, 2020 and September 30, 2019 1
  Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended March 31, 2020 and 2018 2
  Condensed Consolidated Statements of Stockholders’ Equity for the six months ended March 31, 2020 and 2018  
  Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2018 3
  Notes to Condensed Consolidated Financial Statements 4-22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
Item 4. Controls and Procedures 37
     
PART II OTHER INFORMATION 38
     
Item 1. Legal Proceedings 38
Item 1A. Risk Factors  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3. Defaults upon Senior Securities 38
Item 4. Mine Safety Disclosures 38
Item 5. Other Information 38
Item 6 Exhibits 38
  Signatures 39

 

 

  1  

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. INTERIM FINANCIAL STATEMENTS

  

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,     September 30,  
    2020     2019  
ASSETS                
Current assets:                
Cash   $ 658,313     $ 263,139  
Restricted cash     3,877,935       3,938,978  
Contract assets     214,057       12,668,925  
Real estate property development completed     13,913,109       100,817,944  
Other current assets     2,977,062       2,031,937  
Total current assets     21,640,476       119,720,923  
                 
Property, plant and equipment, net     582,467       614,008  
Real estate property development completed, net of current portion     98,003,569       1,115,086  
Security deposits     4,882,739                   7,972,117  
Real estate property under development     220,591,224       215,745,225  
Deferred tax assets     232,884       -  
Due from local government for real estate property development completed     2,751,608                   2,725,854  
Total Assets   $ 348,684,967     $ 347,893,213  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
Construction loans   $ 88,311,349     $ 77,332,569  
Accounts payables     27,715,544       27,368,510  
Other payables     5,449,409                   5,289,176  
Construction deposits     1,830,949       1,814,232  
Contract liabilities     1,855,044       1,907,828  
Customer deposits     18,632,287                 16,139,572  
Shareholder loans     2,132,129                   2,129,114  
Accrued expenses     2,945,345                   3,585,644  
Taxes  payable     12,687,474                 13,882,875  
Total current liabilities     161,559,530       149,449,520  
                 
Tax payable - long term     8,082,593       8,006,943  
Customer deposits, net of current portion     1,039,431       1,043,692  
Construction loans, less current portion     17,387,305       29,464,867  
Construction deposits, net of current portion     1,239,643       1,228,041  
Total liabilities     189,308,502       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 March 31, 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     33,189,365       34,070,767  
Accumulated other comprehensive deficit     (14,126,006)       (15,683,723 )
Total stockholders' equity     159,376,465       158,700,150  
                 
Total Liabilities and Stockholders' Equity   $ 348,684,967     $  347,893,213  

 

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

 

  2  

 

 

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

  

    Three months ended March 31,     Six months ended March 31,  
    2020     2019     2020     2019  
Real estate sales   $ 1,889,829     $ 9,367,156     $ 4,194,073       17,104,352  
Less: Sales tax     (27,048 )     (362,846 )     (66,281 )     (504,957 )
Cost of real estate sales     (1,466,381 )     (7,556,593 )     (3,171,993 )     (13,479,777  
Gross profit     396,400       1,447,717       955,799       3,119,618  
Operating expenses                                
Selling and distribution expenses     200,390       104,926       400,558       274,900  
General and administrative expenses     819,415       783,687       1,408,254       1,254,619  
Total operating expenses     1,019,805       888,613       1,808,812       1,529,519  
Operating income (loss)     (623,405 )     559,104       (853,013 )     1,590,099  
Interest expense, net     (15,586 )     (35,611 )     (32,839 )     (140,842 )
Other expense     (96,729 )     (29,010 )     (96,729 )     (302,163 )
Income (loss) before income taxes     (735,720 )     494,483       (982,581 )     1,147,094  
Provision (benefit) for income taxes     (111,699 )     152,938       (101,179 )     321,339  
Net income (loss)     (624,021 )     341,545       (881,402 )     825,755  
Other Comprehensive income                                
Foreign currency translation adjustment     (2,823,145 )     4,083,473       1,557,717       3,904,715  
Comprehensive income (loss)   $ (3,447,166 )   $ 4,425,018     $ 676,315       4,730,470  
Basic and diluted income (loss) per common share                                
Basic and diluted   $ (0.01 )   $ 0.01     $ (0.02 )     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.

 

  3  

 

 

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     Income (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  
                                                         
Balance at September 30, 2019     45,050,000     $ 45,050     $ 129,907,805     $ 10,360,251     $ 34,070,767     $ (15,683,723 )   $ 158,700,150  
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     $ 33,813,386     $ (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  

 

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

 

  4  

 

 

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

    Six  months ended March 31,  
    2020     2019  
Cash flows from operating activities                
Net income (loss)   $ (881,402 )   $ 825,755  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Deferred tax provision (benefit)     (235,179 )     321,339  
Depreciation     37,710       40,073  
Changes in assets and liabilities:                
Contract assets     651,289       264,661  
Real estate property development completed     2,937,724       807,172  
Real estate property under development     (2,835,288 )     8,646,320  
Other current assets     (935,053 )     (147,825 )
Security deposit     3,195,887       -  
Accounts payables     89,325       (937,339 )
Other payables     111,347       577,196  
Contract liabilities     (71,507 )     1,256,887  
Customer deposits     2,349,028       (2,950,683 )
Construction deposits     (428 )     8,594  
Accrued expenses     (675,478 )     (57,874 )
Taxes payables     (1,379,060 )     (1,189,102 )
Net cash provided by operating activities     2,358,915       7,465,174  
                 
Cash flow from financing activities                
Repayments of construction loans     (2,128,585 )     (9,227,072 )
Net cash used in financing activities     (2,128,585 )     (9,227,072 )
                 
Effect of changes of foreign exchange rate on cash and restricted cash     103,801       127,062  
Net increase (decrease) in cash and restricted cash     334,131       (1,634,836 )
Cash and restricted cash , beginning of period     4,202,117       6,775,577  
Cash and restricted cash, end of period   $ 4,536,248     $ 5,140,741  
Supplemental disclosures of cash flow information:                
Interest paid   $ 3,416,592     $ 3,614,641  
Income taxes paid   $ 375,601     $ 209,392  
                 
Reconciliation to amounts on condensed consolidated balance sheets:                
Cash   $ 658,313     $ 1,133,688  
Restricted   $ 3,877,935     $ 4,007,053  
Total cash and restricted cash   $ 4,536,248     $ 5,140,741  

  

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

 

  5  

 

 

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 six months ended March 31, 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 $12.9 million during six months ended March 31, 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 $0.9 million for the six months ended March 31, 2020. In addition, as of March 31 2020, we had an approximately $139.9 million working capital deficit. The deficit increased by $110.2 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 $96.9 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 March 31, 2020. In addition, as of March 31, 2020, we had large construction loans payable balance of approximately $88.3 million with maturity less than one year and large accounts payable balance of approximately $27.7 million to be paid to subcontractors within one year. These factors led to our working capital deficit of approximately $139.9 million as of March 31, 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 and going concern, 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 March 31, 2020, our total cash and restricted cash balance increased to approximately $4.5 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 March 31, 2020, we had approximately $111.9 million completed residential apartments and commercial units available for sale to potential buyers when needed (including approximately $13.9 million current portion and approximately $98 million non-current portion of real estate property development completed). For the current portion of $13.9 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 $27.7 million accounts payable as of March 31, 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 March 31, 2020, we reported approximately $88.3 million short-term construction loans and approximately $17.4 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 March 31, 2020, we had approximately $19.6 million customer deposits (including approximately $18.6 million short-term and approximately $1 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. As of March 31, 2020, we had five large ongoing construction projects (see Note 3, real estate property under development) which are currently under preliminary development stage due to delayed inspection and acceptance of the development plans by local government. 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 six months ended March 31, 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.

 

  6  

 

 

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

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.

 

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, 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.

  7  

 

 

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 March 31,  
    2020     2019  
Revenue recognized  for completed condominium real estate projects   $ 1,889,829     $ 226,731  
Revenue recognized for condominium real estate projects under development     -       9,140,425  
Total   $ 1,889,829     $ 9,367,156  

 

  8  

 

 

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 six months ended March 31,  
    2020     2019  
Revenue recognized  for completed condominium real estate projects   $ 4,194,073     $ 976,564  
Revenue recognized for condominium real estate projects under development     -       16,127,788  
Total   $ 4,194,073     $ 17,104,352  

 

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 six 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 six months
ended March 31,
    September 30,  
    2020     2019     2019  
Period end RMB : USD exchange rate     7.0808       6.7112       7.1477  
Period average RMB : USD exchange rate     7.0117       6.8302       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.

 

  9  

 

 

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. For the three months ended December 31, 2019 and 2018, 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 six months ended March 31, 2020, the total interest capitalized in the real estate property development was $1,732,506 and $3,460,383, respectively. For the three and six months ended March 31, 2019, the total interest capitalized in the real estate property development was $1,827,172 and $3,546,443, 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. There is no impairment of long-lived assets during the three and six months ended March 31, 2020 and 2019.

 

  10  

 

    

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 March 31, 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 six months ended March 31, 2020 and 2019.

 

As of March 31, 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 March 31, 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. The Company is in the process of engaging a tax professional to file its delinquent tax returns

 

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 six months ended March 31, 2020 and 2019 were net income (loss) and foreign currency translation adjustments.

 

  11  

 

 

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 six months ended March 31, 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 six months ended March 31, 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 issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 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.

 

  12  

 

  

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 March 31, 2020 and September 30, 2019:

 

    Balance as of  
    March 31, 2020     September 30, 2019  
Development completed:                
Hanzhong City Mingzhu Garden Phase I   $ 535,324     $ 530,314  
Hanzhong City Mingzhu Garden Phase II     32,326,540       24,264,216  
Hanzhong City Nan Dajie (Mingzhu Xinju)     1,168,491       1,157,554  
Hanzhong City Oriental Pearl Garden     22,147,815       19,070,129  
Yang County Yangzhou Pearl Garden Phase I     1,528,547       1,514,241  
Yang County Yangzhou Pearl Garden Phase II     3,185,820       3,054,412  
Yang County Yangzhou Palace     51,024,141       52,342,164  
Real estate property development completed     111,916,678       101,933,030  
Less:  Real estate property completed – short-term     13,913,109       100,817,944  
Real estate property completed – long-term   $ 98,003,569     $ 1,115,086  
Under development:                
Hanzhong City Shijin Project     6,840,714       6,776,688  
Hanzhong City Liangzhou Road and related projects (a)     151,261,464       146,958,903  
Hanzhong City Hanfeng Beiyuan East (b)     730,660       706,194  
Hanzhong City Beidajie (b)     57,065,228       56,654,212  
Yang County East 2nd Ring Road (c)     4,693,154       4,649,228  
Real estate property under development –long-term   $ 220,591,224     $ 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 December 31, 2019, the main Liangzhou road construction is substantially completed, due to the complicated multiple level of government review process, plus the COVID-19 impact, the Company did not receive the government acceptance as of March 31, 2020. The Company expects the government’s acceptance to be completed before the end of fiscal 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 March 31, 2020 the actual costs incurred by the Company were $151,261,464 (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.

 

 

  13  

 

 

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 March 31, 2014. As of March 31, 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 latter half of fiscal 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.

 

(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 (March 31, 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 March 31, 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.

 

NOTE 4. CONSTRUCTION LOANS

 

    March 31,
2020
    September 30,
2019
 
Loan A (i)   $ 88,930,892     $ 90,186,614  
Loan B (ii)     16,767,762       16,610,822  
      105,698,654       106,797,436  
Less: current maturities of construction loans     88,311,349       77,332,569  
Construction loans – long-term portion   $ 17,387,305     $ 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 million (RMB 775,000,000) for a long term loan at 4.75% interest per year to develop Liangzhou Road Project. As of December 31, 2019, the Company borrowed $88,930,892 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 $50,167,910 as of March 31, 2020  (September 30, 2019- $52,342,164). In addition, the Company was required to provide a security deposit for the loan received. As of March 31, 2020, the security deposits paid were $2,058,199 (September 30, 2019 - $5,174,014) for loans received. For the three and six months ended March 31, 2020, interest paid was $1,599,637 and $3,195,887 (2019- $1,685,442 and $3,294,441), 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  
March 31, 2021     88,311,349       625,315,000  
March 31, 2022     619,543       4,386,860  
Total     88,930,892       629,701,860  
                 

 

  14  

 

 

 

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 March 31, 2020, the balance of loan was $16,767,762 (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 $151,261,464 as collateral for the loan. Total interest of $51,732 and $102,961 for the three and six months ended March 31, 2020 (2019- $52,856 and $105,116) , 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 six months ended March 31, 2020 was $76,062 and $151,414 (2019- $77,810 and $154,583), respectively, which was included in the construction capitalized costs.

 

 

 

  15  

 

 

 

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:

 

    March 31,
2020
    September 30,
2019
 
Customer deposits by real estate projects                
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)   $ 7,130,972     $ 7,029,356  
Oriental Pearl Garden     4,203,656       4,182,454  
Liangzhou road and related projects     1,039,431       1,043,692  
Yangzhou Pearl Garden     1,316,058       1,163,407  
Yangzhou Palace     5,981,601       3,764,355  
                 
Total     19,671,718       17,183,264  
Less: Customer deposits - short-term     18,632,287       16,139,572  
Customer deposits - long-term   $ 1,039,431     $ 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 six to twelve months, the banks have no recourse to the Company for customers’ defaults. As of March 31, 2020 and September 30, 2019, approximately $3.9 million was guaranteed by the Company.

 

 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)     322,129       319,114  
Total   $ 2,132,129     $ 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, 2020. The Company recorded interest of $18,100 and $36,200 for each of the three and six months ended March 31, 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 March 31, 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 six months ended March 31, 2020, the interest was $5,085 and $10,122 (2019 -$5,134 and $25,422), respectively, which is capitalized in the development cost of Liangzhou road project.

 

  16  

 

  

 

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 March 31, 2020, the Company had business sales tax payable of $6,789,800 (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 March 31, 2020 and September 30, 2019, the Company's income tax payable balances were $11,601,955 and $11,720,848, respectively. There was no interest and penalty accrued as of March 31, 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 March 31, 2020, the deferred tax asset balance amounted to $232,884 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 six months ended March 31, 2020 and 2019:

 

    Three months ended
March 31,
    Six months ended
March 31,
 
    2020     2019     2020     2019  
Chinese statutory tax rate     25 %     25 %     25 %     25 %
Valuation allowance change and other adjustments*     (9.8 %)     5.9 %     (14.7 %)     3.0 %
                                 
Effective tax rate     15.2 %     30.9 %   $ 10.3 %     28.0 %

 

*Valuation allowance change and other adjustments for the three and six months ended March 31, 2020 and 2019 were primarily related to valuation allowance changes on historical losses.

 

Income tax expense for the three and six months ended March 31, 2020 and 2019 is summarized as follows:

 

    Three months ended
March 31,
    Six months ended
March 31,
 
    2020     2019     2020     2019  
Current tax provision   $ 67,000     $ -     $ 134,000     $ -  
Deferred tax provision     (178,699 )     152,938       (235,179 )     321,339  
Income tax provision   $ (111,699 )   $ 152,938     $ (101,179 )   $ 321,339  

 

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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 March 31, 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 March 31, 2020 and September 30, 2019, the outstanding LAT payable balance was Nil with respect to completed real estate properties sold up to March 31, 2020 and September 30, 2019.

 

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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   $ 11,601,956     $ 11,720,848  
Business tax     6,789,800       7,819,884  
Other taxes and fees     2,378,311       2,349,086  
Total taxes payable     20,770,067       21,889,818  
Less: current portion     12,687,474       13,882,875  
Tax payable – long term   $ 8,082,593     $ 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 six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during this six 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 March 31, 2020 and September 30, 2019, our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately $78 million. As of March 31, 2020 and September 30, 2019, the amount of security deposits provided for these guarantees was approximately $3.9 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. In response to the current market conditions caused by the ongoing spread of COVID-19, on April 16, 2020, Nasdaq filed an immediately effective rule change to give those non-compliant companies additional time to achieve compliance by extending the applicable compliance periods. On April 17, 2020, the Company received a Nasdaq extension to regain compliance until August 31, 2020.

 

NOTE 10. SUBSEQUENT EVENT

 

In December 2019, a novel strain of coronavirus was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. 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 facility and operations beginning in early February, limited support from the Company’s employees, delayed access to construction raw material supplies and inability to promote the sales of real estate properties to customers on a timely basis, the Company’s business was negatively impacted and is expected to generate lower revenue and net income for fiscal year 2020. The Company resumed operations in early March 2020 and, as such, the extent of the impact of COVID-19 on the Company’s results of operations and financial condition will depend on future developments, including the duration and spread of the outbreak and the impact on the Company’s customers, which are still uncertain and cannot be reasonably estimated at this point of time.

 

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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 six months ended March 31, 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.

 

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For the first six months ended March 31, 2020, our sales, gross profit and net loss were $4,194,073, $955,799 and $881,402, respectively, representing an approximate 75.5%, 76.5% and 206.7% decrease in sales, gross profit and net income as compared to six months ended March 31, 2019, respectively. The decrease in sales, gross profit and net income was mainly resulted from less gross floor area (“GFA”) sold during six months ended March 31, 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, 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 six months ended March 31, 2020, to certain extent.

 

For the six months ended March 31, 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 six months ended March 31, 2019 was $16.1 million representing 94.3% of total revenue for the period, with related costs of these real estate sales was $12.6 million, representing 93.3% of the real estate costs in the period. During six months ended March 31, 2019, the gross profit before sales tax from the percentage of completion method was $3.6 million, representing 97.6 of the total gross profit for the same period of last year.

 

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For the six months ended March 31, 2020, the average selling price (“ASP”) for our real estate projects (excluding sales of parking spaces) located in Yang County was approximately $593 per square meter, an increase of 7.9% from the ASP of $549 per square meter for the six months ended March 31, 2019, which was mainly due to more commercial units with higher selling price were sold during the six months ended March 31, 2020. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $544 per square meter for the six months ended March 31, 2020, increased from the ASP of $295 per square meter for the six months ended March 31, 2019, because the Company had few sales of real estate projects in Hangzhou during first half of last year with discounted price.

  

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.

 

The Company expects to start the construction of Liangzhou Road related project after the approval by the local government of the road. 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.

 

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:

 

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.

 

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 March 31, 2020, the main Liangzhou road construction is substantially completed, due to the complicated multiple level of government review process, the Company expected to the government's acceptance to be completed before the end of fiscal 2020. Due to historical delays in government approval and acceptance, the Company included such balance in real estate property under development as non-current assets.

 

As of March 31, 2020, the actual costs incurred by the Company was $151,261,464 (September 30, 2019 - $146,958,903) 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:

 

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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 $23.7 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 (March 31, 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 March 31, 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 March 31, 2014. As of March 31, 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.

 

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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 six 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.

 

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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, 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.

 

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RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

 

Revenues

 

The following is a breakdown of revenue:

 

    For Three Months Ended 
March  31,
 
    2020     2019  
             
Revenue recognized  for completed condominium real estate projects   $ 1,889,829     $ 226,731  
Revenue recognized for condominium real estate projects under development     -       9,140,425  
Total   $ 1,889,829     $ 9,367,156  

 

Revenue recognized for completed condominium real estate projects 

 

The following table summarizes our revenue generated by different projects:

 

    For Three Months Ended March 31,        
    2020     2019     Variance  
    Revenue     %     Revenue     %     Amount     %  
                                     
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II   $ 350,048       18.5 %   $ 275,263       121.4 %   $ 74,785       27.2 %
Oriental Pearl Garden     88,224       4.7 %     (102,020 )     (45.0 )%     190,244       (186.5 )%
Yangzhou Palace     1,451,557       76.8 %     -       -       1,451,557       100 %
Yangzhou Pearl Garden Phase I and II     -               53,488       23.6 %     (53,488 )     (100 )%
                                                 
Total Real Estate Sales before Sales Tax     1,889,829       100 %     226,731       100 %     1,663,098       733.5 %
Sales Tax     (27,048 )             (45,864 )             18,816       (41.0 )%
Revenue net of sales tax   $ 1,862,781             $ 180,867             $ 1,681,914       929.9 %

 

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 increased by 733.5% to approximately $1.9 million for the three months ended March 31, 2020 from approximately $0.2 million. The total GFA sold during three months ended March 31, 2020 was merely 3,266 square meters, representing a significant increase from the 611 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 resulted in limited sales. The sales tax for the three months ended March 31, 2020 was approximately $0.03 million, decreased by 41% from the same period of 2019, due less surcharge tax charged for the completed real estate properties during the three months ended March 31, 2020.

 

  26  

 

 

 

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 March 31, 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 other projects under development as of March 31, 2020 have not met the criteria for revenue recognition under the percentage of completion method.

 

For the three months ended March 31, 2019, the Company recognized $9,140,425 revenue from Yangzhou Palace real estate project.

 

 

          For the three months ended March 31, 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       92 %     73,209,107       9,140,425       68,808,987  

 

(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 March 31, 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 March  31,        
    2020     2019     Variance  
    Cost     %     Cost     %     Amount     %  
                                     
Land use rights   $ 133,968       9.1 %   $ 755,560       10.0 %   $ (621,592)       (82.3) %
Construction cost     1,332,413       90.9 %     6,801,033       90.0 %     (5,468,620)       (80.4) %
Total cost   $ 1,466,381       100 %   $ 7,556,593       100 %   $ (6,090,212)       (80.6) %

 

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 $1.5 million for the three months ended March 31, 2020 compared to $7.6 million for the same period of last year. The $6.1 million decrease in cost of sales was mainly attributable to less GFA sold during the three months ended March 31, 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 March 31, 2020 were approximately $0.13 million, as compared to approximately $0.7 million for the three months ended March 31, 2019, representing a decrease of approximately $0.6 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 March 31, 2020 were approximately $1.3 million as compared to approximately $6.8 million for the same period of last year, representing a decrease of approximately $5.5 million. The decrease in construction cost was due to decrease in units sold during the quarter ended March 31, 2020.

 

  27  

 

  

Gross Profit

 

Gross profit was approximately $0.4 million for the three months ended March 31, 2020 as compared to approximately $1.4 million for the three months ended March 31, 2019, representing a decrease of $1.0 million, which was mainly attributable to less GFA sold during the current quarter of fiscal 2020. The gross margin increased from 15.5% in the second quarter of fiscal 2019 to 21.0% in second quarter of fiscal 2020. It was mainly due to growing real estate price in the Hanzhong city and Yang County during the first half of fiscal 2020. For the first half of fiscal 2020, the ASP for our real estate projects (excluding sales of parking spaces) located in Yang County was approximately $593 per square meter, an increase of 7.9% from the ASP of $549 per square meter for the same period of fiscal 2019, which was mainly due to more commercial units with higher selling price were sold during the first half of fiscal 2020. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $544 per square meter, increased from the ASP of $295 per square meter for the same period of last year, because the Company had few sales of real estate projects in Hangzhou during first half of last year with discounted price.

 

    For Three Months Ended March 31,  
    2020     2019  
    Gross Profit     Gross Margin     Gross Profit     Gross Margin  
                         
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II   $ 96,691       27.6 %   $ 69,937       25.4 %
Oriental Garden     26,357       29.9 %     (87,198 )     85.5 %
Yangzhou Pearl Garden Phase I and II     -       -       7,441       13.9 %
Yangzhou Palace     300,400       20.7 %     1,820,383       19.9  
Sales Tax     (27,048 )     -       (362,846 )        
Total Gross Profit   $ 396,400       21.0 %   $ 1,447,717       15.5 %
Total Real Estate Sales before Sales Tax   $ 1,889,829             $ 9,367,156          

 

Operating Expenses

 

Total operating expenses increased by 14.8% to approximately $1.0 million for the three months ended March 31, 2020 from $0.9 million for the three months ended March 31, 2019, primarily as a result of an increase in selling expense of $0.1 million due to more marketing activities for the three months ended March 31, 2020. Our general and administrative expense was approximately $0.8 million for the three months ended March 31, 2020, increased by $0.04 million from the three months ended March 31, 2019 due to more office expenses and professional fee expenses. Our total operating expenses accounted for 54.0% and 9.5% of our real estate sales before sales taxes for the three months ended March 31, 2020 and 2019, respectively.

  

    For Three Months Ended 
March 31,
 
    2020     2019  
             
Selling expenses   $ 200,390     $ 104,926  
General and administrative expenses     819,415       783,687  
Total operating expenses   $ 1,019,805     $ 888,613  
Percentage of Real Estate Sales before Sales Tax     54.0 %     9.5 %

 

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 March 31, 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.

  

  28  

 

 

As of March 31, 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 Loss

 

We reported net loss of approximately $0.6 million for the three months ended March 31, 2020, as compared to net income of approximately $0.3 for the three months ended March 31, 2019. The decrease of approximately $1.0 million in our net income was primarily due to lower amount of revenue for the three months ended March 31, 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 loss of $2.8 million and gain of $4.1 million for the three months ended March 31, 2020 and 2019, respectively, due to the significant fluctuation of RMB during the period. The balance sheet amounts with the exception of equity at March 31, 2020 were translated at 7.0808 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 March 31, 2020 and 2019 were 7.0117 RMB and 6.8302 RMB, respectively.

 

 Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

 

Revenues

 

The following is a breakdown of revenue:

 

    For Six Months Ended
March 31,
 
    2020     2019  
             
Revenue recognized under full accrual method   $ 4,194,073     $ 976,564  
Revenue recognized under percentage of completion method     -       16,127,788  
Total   $ 4,194,073     $ 17,104,352  

 

  29  

 

 

Revenue recognized for completed condominium real estate projects 

 

The following table summarizes our revenue generated by different projects:

 

    For Six Months Ended March 31,        
    2020     2019     Variance  
    Revenue     %     Revenue     %     Amount     %  
                                     
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and Phase II   $ 530,953       12.7 %   $ 779,795       79.9 %   $ (248,842 )     (31.9 )%
Yangzhou Pearl Garden Phase I and Phase II     8,708       0.2 %     122,672       12.6 %     (113,964 )     (92.9 )%
Oriental Garden     121,904       2.9 %     74,097       7.5 %     47,807       64.5 %
Yangzhou Palace     3,532,508       84.2 %     -       -       3,532,508       100 %
                                                 
Total Real Estate Sales before Sales Tax     4,194,073       100 %     976,564       100 %     3,217,509       329.5 %
Sales Tax     (66,281 )             (123,554 )             57,273       (46.4 )%
Revenue net of sales tax   $ 4,127,792             $ 853,010             $ 3,274,782       383.9 %

 

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 increased by 329.5% to approximately $4.2 million for the six months ended March 31, 2020 from approximately $1.0 million in the same period of last year. The total GFA sold during six months ended March 31, 2020 was merely 7,173 square meters, representing a significant increase from the 3,342 square meters completed and sold during the same period of last year. As of March 31, 2020, 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 resulted in lower sales for current period. The sales tax for the six months ended March 31, 2020 was approximately $0.07 million, decreased by 46.4% from the same period of 2019, due less surcharge tax charged for the completed real estate properties during the six months ended March 31, 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 six months ended March 31, 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 other projects under development as of March 31, 2020 have not met the criteria for revenue recognition under the percentage of completion method.

 

For the six months ended March 31, 2019, the Company recognized $16,127,788 revenue from Yangzhou Palace real estate project.

 

Revenue recognized for condominium real estate projects under development

 

          For the six months ended March 31, 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       92 %     73,209,107       16,127,788       68,808,978  

 

(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 March 31, 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.

 

  30  

 

 

Cost of Sales

 

The following table sets forth a breakdown of our cost of sales:

 

    For Six Months Ended March  31,        
    2020     2019     Variance  
    Cost     %     Cost     %     Amount     %  
                                     
Land use rights   $ 297,629       9.4 %   $ 1,339,701       9.9 %   $ (1,042,072 )     (77.8 )%
Construction cost     2,874,364       90.6 %     12,140,076       90.1 %     (9,265,712 )     (76.3 )%
Total cost   $ 3,171,993       100 %   $ 13,479,777       100 %   $ (10,307,784 )     (76.5 )%

  

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 $3.2 million for the six months ended March 31, 2020 compared to $13.5 million for the same period of last year. The $10.3 million decrease in cost of sales was mainly attributable to less GFA sold during the six months ended March 31, 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 six months ended March 31, 2020 were approximately $0.3 million, as compared to approximately $1.3 million for the six months ended March 31, 2019, representing a decrease of approximately $1.0 million from the same period of last year. The decrease was consistent with the fact that total GFA sold in the first six 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 six months ending March 31, 2020 were approximately $2.9 million as compared to approximately $12.1 million for the same period of last year, representing a decrease of approximately $9.3 million. The decrease in construction cost was due to decrease in units sold during the first half of fiscal 2020.

 

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Gross Profit

 

Gross profit was approximately $1.0 million for the six months ended March 31, 2020 as compared to approximately $3.1 million for the six months ended March 31, 2019, representing a decrease of $2.2 million, which was mainly attributable to less GFA sold during the first half of fiscal 2020. The gross margin increased from 18.2% in the first half of fiscal 2019 to 22.8% in first half of fiscal 2020. It was mainly due to growing real estate price in the Hanzhong city and Yang County during the first half of fiscal 2020. For the first half of fiscal 2020, the ASP for our real estate projects (excluding sales of parking spaces) located in Yang County was approximately $593 per square meter, an increase of 7.9% from the ASP of $549 per square meter for the same period of fiscal 2019, which was mainly due to more commercial units with higher selling price were sold during the first half of fiscal 2020. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $544 per square meter, increased from the ASP of $295 per square meter for the same period of last year, because the Company had few sales of real estate projects in Hangzhou during first half of last year with discounted price.

 

The following table sets forth the gross margin of each of our projects:

 

    For Six Months Ended March 31,  
    2020     2019  
    Gross Profit     Percentage
of Revenue
    Gross
Profit
    Percentage
of Revenue
 
                         
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)   $ 147,062       27.7 %   $ 110,146       14.1 %
Oriental Garden     36,419       29.9 %     (50,782 )     (41.4 )%
Yangzhou Pearl Garden     1,179       13.5 %     11,719       15.8 %
Yangzhou Palace     837,420       23.7 %     3,553,492       22.0 %
Sales Tax     (66,281 )             (504,957 )        
Total Gross Profit     955,799       22.8 %     3,119,618       18.2 %
Total Real Estate Sales before Sales Tax   $ 4,194,073             $ 17,104,352          

 

Operating Expenses

 

Total operating expenses were approximately $1.8 million and $1.5 million for both the six months ended March 31, 2020 and 2019, respectively. The increase in selling expenses of $0.1 million for six months ended March 31, 2020 was primarily attributed to higher marketing activities costs. The increase in general administration expense of $0.2 million for the six months ended March 31, 2020 was primarily attributed to more office expenses and professional fee expenses incurred. Our total operating expenses accounted for 43.1% and 8.9% of our real estate sales before sales taxes for the six months ended March 31, 2020 and 2019, respectively.

 

    For Six Months Ended
March 31,
 
    2020     2019  
             
Selling expenses   $ 400,558     $ 274,900  
General and administrative expenses     1,408,254       1,254,619  
Total operating expenses   $ 1,808,812     $ 1,529,519  
Percentage of Real Estate Sales before Sales Tax     43.1 %     8.9 %

  

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 six months ended March 31, 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.

  

  32  

 

 

As of March 31, 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 $0.9 million for the six months ended March 31, 2020, as compared to net income of approximately $0.8 million for the six months ended March 31, 2019. The decrease of $1.7 million in our net income was primarily due to lower amount of revenue for the six months ended March 31, 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 gain adjustments resulting from this process amounted to $1.6 million and $3.9 million for the six months ended March 31, 2020 and 2019, respectively, due to the significant fluctuation of RMB during the period. The balance sheet amounts with the exception of equity at March 31, 2020 were translated at 7.0808 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 March 31, 2020 and 2019 were 7.0117 RMB and 6.8302 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 $12.9 million during the first half 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 $0.9 million for the six months ended March 31, 2020. In addition, as of March 31, 2020, we had an approximately $139.9 million working capital deficit. The deficit increased by $110.2 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 $96.9 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 March 31, 2020. In addition, as of March 31, 2020, we had large construction loans payable balance of approximately $88.3 million with maturity less than one year and large accounts payable balance of approximately $27.7 million to be paid to subcontractors within one year. These factors led to our working capital deficit of approximately $139.9 million as of March 31, 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.

 

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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 March 31, 2020, our total cash and restricted cash balance increased to approximately $4.5 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 March 31, 2020, we had approximately $111.9 million construction completed residential apartments and commercial units available for instant sales to potential buyers when needed (including approximately $13.9 million current portion and approximately $98.0 million non-current portion of real estate property development completed). For the current portion of $13.9 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 $27.7 million accounts payable as of March 31, 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 March 31, 2020, we reported approximately $88.3 million short-term construction loans and approximately $17.4 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 March 31, 2020, we had approximately $19.6 million customer deposits (including approximately $18.6 million short-term and approximately $1 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. As of March 31, 2020, we had five large ongoing construction projects which are currently under preliminary development stage due to delayed inspection and acceptance of the development plans by local government. 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 six months ended March 31, 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.

 

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.

 

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Cash Flow

 

Comparison of cash flows results is summarized as follows:

 

    Six months ended
March 31,
 
    2020     2019  
Net cash provided by operating activities   $ 2,358,915     $ 7,465,174  
Net cash used in financing activities     (2,128,585 )     (9,227,072 )
Effect of change of foreign exchange rate on cash and restricted cash     103,801       127,062  
Net (decrease) increase in cash and restricted cash     334,131       (1,634,836 )
Cash and restricted cash, beginning of period     4,202,117       6,775,577  
Cash and restricted cash, end of period   $ 4,536,248     $ 5,140,741  

 

Operating Activities

 

Net cash provided by operating activities during the six months ended March 31, 2020 was approximately $2.4 million, consisting of net loss of approximately $0.9 million and net changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed by approximately $2.9 million due to sales of our Yangzhou Palace project, a collection of security deposit of $3.2 million and an increase in customer deposit received of $2.3 million, offset by additional spending in real estate under development of $2.8 million and payments of accrued expense and tax payable in aggregated of approximately $2.1 million.

 

Net cash provided by operating activities during the six months ended March 31, 2019 was approximately $7.5 million, consisting of net income of approximately $0.8 million, noncash adjustments of $0.4 million and net changes in our operating assets and liabilities, which mainly included a decrease in real estate property under development by approximately $8.6 million due to sales of our Yang County Palace project and a decrease of approximately $1.3 million in contract receivable due to collection, offset with a decrease in customer deposit of approximately $3.0 million and reduced tax payable by $1.2 million due to tax payments made.

 

Financing Activities

 

Net cash flows used in financing activities was approximately $2.1 million for six months ended March 31, 2020, which due to a repayment of construction loans of approximately $2.1 million during the six months ended March 31, 2020.

 

Net cash flows used in financing activities was approximately $9.2 million for six months ended March 31, 2019, which mainly included a repayment of construction loans of approximately $9.2 million during the six months ended March 31, 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.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Foreign Exchange Risk

 

All of our net sales, and a majority of our costs and expenses are denominated in RMB. Although the conversion of RMB is highly regulated in China, the value of RMB against the value of the U.S. dollar or any other currency nonetheless may fluctuate and be affected by, among other things, changes in China’s political and economic conditions. Under current policy, the value of RMB is permitted to fluctuate within a narrow band against a basket of certain foreign currencies. China is currently under significant international pressures to liberalize this government currency policy, and if such liberalization were to occur, the value of RMB could appreciate or depreciate against the U.S. dollar.

 

Because substantially all of our earnings and majority of our cash assets are denominated in RMB, other than certain cash deposits we keep in a bank in Hong Kong and the U.S., appreciation or depreciation in the value of RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividends we may issue in future that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by the PRC exchange control regulations that restrict our ability to convert RMB into foreign currency.

 

Interest Rate Risk

 

We have not been, nor do we anticipate being exposed to material risks due to changes in interest rates. Our risk exposure to changes in interest rates relates primarily to the interest income generated by cash deposited in interest-bearing savings accounts and interest expense on variable rate bank loan. We have not used, and do not expect to use in the future any derivative financial instruments to hedge our interest risk exposure. However, fluctuations in interest rates can lead to significant changes in our interest income and interest expense.

 

Credit Risk

 

We are exposed to credit risk from our cash in banks, accounts receivable and due from local government for real estate property development completed. The credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions. Accounts receivable are subjected to credit evaluations. An allowance would be made, if necessary, for estimated unrecoverable amounts by reference to past default experience, if any, and by reference to the current economic environment.

 

Inflation

 

Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

 

We Conduct Substantially All Our Business in Foreign Country

  

Substantially all of our operations are conducted in China and are subject to various political, economic, and other risks and uncertainties inherent in conducting business in China. Among other risks, our Company and our subsidiaries’ operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

 

  36  

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures and to confirm that any necessary corrective action, including process improvements, was taken. The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our SEC reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2020. Management is committed to improving the internal controls over financial reporting and will undertake the consistent improvements or enhancements on an ongoing basis. To remediate the material weakness and significant deficiencies and to prevent similar deficiencies in the future, we are currently evaluating additional controls and procedures, which may include:

 

Implementing an ongoing initiative and training in the Company to ensure the importance of internal controls and compliance to ensure that established policies and procedures are fully understood throughout the organization and plan to provide continuous U.S. GAAP knowledge training to relevant employees involved to ensure the performance of and compliance with those procedures and policies

 

The remedial measures being undertaken may not be fully effectuated or may be insufficient to address the significant deficiencies we identified, and there can be no assurance that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified or occur in the future. If additional significant deficiencies (or if material weaknesses) in our internal controls are discovered or occur in the future, among other similar or related effects: (i) the Company may fail to meet future reporting obligations on a timely basis, (ii) the Company’s consolidated financial statements may contain material misstatements, and (iii) the Company’s business and operating results may be harmed.

 

Changes in Internal Control over Financial Reporting

 

Except for the matters described above to improve our internal controls over financial reporting, there were no changes in our internal control over financial reporting for the three months ended March 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, however, the Company is in the process of designing and planning to change as described above.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We may be subject to, from time to time, various legal proceedings relating to claims arising out of our operations in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the business, financial condition, or results of operations of the Company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(a) Exhibits

  

Exhibit Number   Description of Exhibit
     
31.1*   Rule 13a-14(a) Certification of Chief Executive Officer
     
31.2*   Rule 13a-14(a) Certification of Chief Financial Officer
     
32.1*   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
     
101.INS*   XBRL Instance
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation
     
101.DEF*   XBRL Taxonomy Extension Definition
     
101.LAB*   XBRL Taxonomy Extension Labels
     
101.PRE*   XBRL Taxonomy Extension Presentation

 

* Furnished electronically herewith

 

  38  

 

 

SIGNATURES

 

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

 

  China HGS Real Estate, Inc.
     
May 15, 2020 By: /s/ Xiaojun Zhu
    Xiaojun Zhu
    Chief Executive Officer

 

  39  

 

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