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.
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.
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.
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.
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.
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.
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
|
|
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.
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.
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.
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.
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.
|
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
|
|
|
|
|
|
|
|
|
|
|
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.
|
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.
|
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
|
|
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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
|
|
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.
|
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.
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.
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.
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.
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.