UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2020
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from_______ to ________
Commission File Number: 001-34864
CHINA HGS REAL ESTATE, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
Florida |
|
33-0961490 |
| (State
or Other Jurisdiction of Incorporation) |
|
(I.R.S. Employer Identification
Number) |
6 Xinghan Road, 19th Floor, Hanzhong City
Shaanxi Province, PRC 723000
(Address of Principal Executive Offices, Zip Code)
+(86) 091 - 62622612
(Registrant’s Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x No ¨
Indicate by check mark whether the registrant has submitted
electronically, every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes x No ¨
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
| Large
accelerated filer ¨ |
|
Accelerated
filer ¨ |
| Non-accelerated filer
x |
|
Smaller reporting company
x |
| |
|
Emerging growth company
¨ |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of
common equity, as of May 14, 2020 is as follows:
| Class of Securities |
|
Shares Outstanding |
|
| Common Stock, $0.001 par value |
|
|
45,050,000 |
|
TABLE OF CONTENTS
PART I: FINANCIAL
INFORMATION
ITEM 1. INTERIM FINANCIAL
STATEMENTS
CHINA HGS REAL ESTATE,
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| |
|
March 31, |
|
|
September 30, |
|
| |
|
2020 |
|
|
2019 |
|
| ASSETS |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash |
|
$ |
658,313 |
|
|
$ |
263,139 |
|
| Restricted cash |
|
|
3,877,935 |
|
|
|
3,938,978 |
|
| Contract assets |
|
|
214,057 |
|
|
|
12,668,925 |
|
| Real estate property development
completed |
|
|
13,913,109 |
|
|
|
100,817,944 |
|
| Other current assets |
|
|
2,977,062 |
|
|
|
2,031,937 |
|
| Total current assets |
|
|
21,640,476 |
|
|
|
119,720,923 |
|
| |
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net |
|
|
582,467 |
|
|
|
614,008 |
|
|
Real estate property development
completed, net of current portion |
|
|
98,003,569 |
|
|
|
1,115,086 |
|
|
Security deposits |
|
|
4,882,739 |
|
|
|
7,972,117 |
|
|
Real estate property under
development |
|
|
220,591,224 |
|
|
|
215,745,225 |
|
|
Deferred tax assets |
|
|
232,884 |
|
|
|
- |
|
|
Due from local government for real
estate property development completed |
|
|
2,751,608 |
|
|
|
2,725,854 |
|
| Total Assets |
|
$ |
348,684,967 |
|
|
$ |
347,893,213 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS'
EQUITY |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Construction loans |
|
$ |
88,311,349 |
|
|
$ |
77,332,569 |
|
| Accounts payables |
|
|
27,715,544 |
|
|
|
27,368,510 |
|
| Other payables |
|
|
5,449,409 |
|
|
|
5,289,176 |
|
| Construction deposits |
|
|
1,830,949 |
|
|
|
1,814,232 |
|
| Contract liabilities |
|
|
1,855,044 |
|
|
|
1,907,828 |
|
| Customer deposits |
|
|
18,632,287 |
|
|
|
16,139,572 |
|
| Shareholder loans |
|
|
2,132,129 |
|
|
|
2,129,114 |
|
| Accrued expenses |
|
|
2,945,345 |
|
|
|
3,585,644 |
|
|
Taxes payable |
|
|
12,687,474 |
|
|
|
13,882,875 |
|
| Total current liabilities |
|
|
161,559,530 |
|
|
|
149,449,520 |
|
| |
|
|
|
|
|
|
|
|
|
Tax payable - long term |
|
|
8,082,593 |
|
|
|
8,006,943 |
|
|
Customer deposits, net of current
portion |
|
|
1,039,431 |
|
|
|
1,043,692 |
|
|
Construction loans, less current
portion |
|
|
17,387,305 |
|
|
|
29,464,867 |
|
|
Construction deposits, net of current
portion |
|
|
1,239,643 |
|
|
|
1,228,041 |
|
| Total liabilities |
|
|
189,308,502 |
|
|
|
189,193,063 |
|
| |
|
|
|
|
|
|
|
|
| Commitments and Contingencies |
|
|
|
|
|
|
|
|
| Stockholders' equity |
|
|
|
|
|
|
|
|
| Common stock, $0.001 par value, 100,000,000
shares authorized, 45,050,000 shares issued and outstanding March
31, 2020 and September 30, 2019 |
|
|
45,050 |
|
|
|
45,050 |
|
| Additional paid-in capital |
|
|
129,907,805 |
|
|
|
129,907,805 |
|
| Statutory surplus |
|
|
10,360,251 |
|
|
|
10,360,251 |
|
| Retained earnings |
|
|
33,189,365 |
|
|
|
34,070,767 |
|
| Accumulated other comprehensive
deficit |
|
|
(14,126,006) |
|
|
|
(15,683,723 |
) |
| Total stockholders' equity |
|
|
159,376,465 |
|
|
|
158,700,150 |
|
| |
|
|
|
|
|
|
|
|
| Total Liabilities and Stockholders'
Equity |
|
$ |
348,684,967 |
|
|
$ |
347,893,213 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
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.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Exchange Risk
All of our net sales, and a majority of our costs and expenses are
denominated in RMB. Although the conversion of RMB is highly
regulated in China, the value of RMB against the value of the
U.S. dollar or any other currency nonetheless may fluctuate
and be affected by, among other things, changes in China’s
political and economic conditions. Under current policy, the value
of RMB is permitted to fluctuate within a narrow band against a
basket of certain foreign currencies. China is currently under
significant international pressures to liberalize this government
currency policy, and if such liberalization were to occur, the
value of RMB could appreciate or depreciate against the
U.S. dollar.
Because substantially all of our earnings and majority of our cash
assets are denominated in RMB, other than certain cash deposits we
keep in a bank in Hong Kong and the U.S., appreciation or
depreciation in the value of RMB relative to the U.S. dollar
would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in our
business or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividends we may
issue in future that will be exchanged into U.S. dollars and
earnings from, and the value of, any U.S. dollar-denominated
investments we make in the future.
Very limited hedging transactions are available in China to reduce
our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk. While we may decide to
enter into hedging transactions in the future, the availability and
effectiveness of these hedging transactions may be limited and we
may not be able to successfully hedge our exposure at all. In
addition, our currency exchange losses may be magnified by the PRC
exchange control regulations that restrict our ability to convert
RMB into foreign currency.
Interest Rate Risk
We have not been, nor do we anticipate being exposed to material
risks due to changes in interest rates. Our risk exposure to
changes in interest rates relates primarily to the interest income
generated by cash deposited in interest-bearing savings accounts
and interest expense on variable rate bank loan. We have not used,
and do not expect to use in the future any derivative financial
instruments to hedge our interest risk exposure. However,
fluctuations in interest rates can lead to significant changes in
our interest income and interest expense.
Credit Risk
We are exposed to credit risk from our cash in banks, accounts
receivable and due from local government for real estate property
development completed. The credit risk on cash in bank and fixed
deposits is limited because the counterparties are recognized
financial institutions. Accounts receivable are subjected to credit
evaluations. An allowance would be made, if necessary, for
estimated unrecoverable amounts by reference to past default
experience, if any, and by reference to the current economic
environment.
Inflation
Inflationary factors, such as increases in the cost of our products
and overhead costs, could impair our operating results. Although we
do not believe that inflation has had a material impact on our
financial position or results of operations to date, a high rate of
inflation in the future may have an adverse effect on our ability
to maintain current levels of gross margin and selling, general and
administrative expenses as a percentage of sales revenue if the
selling prices of our products do not increase with these increased
costs.
We Conduct Substantially All Our Business in Foreign
Country
Substantially all of our operations are conducted in China and are
subject to various political, economic, and other risks and
uncertainties inherent in conducting business in China. Among other
risks, our Company and our subsidiaries’ operations are subject to
the risks of restrictions on transfer of funds; export duties,
quotas, and embargoes; domestic and international customs and
tariffs; changing taxation policies; foreign exchange restrictions;
and political conditions and governmental regulations.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this
Quarterly Report on Form 10-Q (the “Evaluation Date”). The
evaluation of our disclosure controls and procedures included a
review of our processes and the effect on the information generated
for use in this Quarterly Report on Form 10-Q. In the course of
this evaluation, we sought to identify any material weaknesses in
our disclosure controls and procedures and to confirm that any
necessary corrective action, including process improvements, was
taken. The purpose of this evaluation is to determine if, as of the
Evaluation Date, our disclosure controls and procedures were
operating effectively such that the information, required to be
disclosed in our SEC reports (i) was recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms, and (ii) was accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Management conducted its evaluation of disclosure controls and
procedures under the supervision of our chief executive officer and
our chief financial officer. Based upon this evaluation, our
principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were not
effective as of March 31, 2020. Management is committed to
improving the internal controls over financial reporting and will
undertake the consistent improvements or enhancements on an ongoing
basis. To remediate the material weakness and significant
deficiencies and to prevent similar deficiencies in the future, we
are currently evaluating additional controls and procedures, which
may include:
| • |
Implementing an ongoing initiative and training
in the Company to ensure the importance of internal controls and
compliance to ensure that established policies and procedures are
fully understood throughout the organization and plan to provide
continuous U.S. GAAP knowledge training to relevant employees
involved to ensure the performance of and compliance with those
procedures and policies |
The remedial measures being undertaken may not be fully effectuated
or may be insufficient to address the significant deficiencies we
identified, and there can be no assurance that significant
deficiencies or material weaknesses in our internal control over
financial reporting will not be identified or occur in the future.
If additional significant deficiencies (or if material weaknesses)
in our internal controls are discovered or occur in the future,
among other similar or related effects: (i) the Company may fail to
meet future reporting obligations on a timely basis, (ii) the
Company’s consolidated financial statements may contain material
misstatements, and (iii) the Company’s business and operating
results may be harmed.
Changes in Internal Control over Financial
Reporting
Except for the matters described above to improve our internal
controls over financial reporting, there were no changes in our
internal control over financial reporting for the three months
ended March 31, 2020 that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting, however, the Company is in the process of designing and
planning to change as described above.
PART II: OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
We may be subject to, from time to time, various legal proceedings
relating to claims arising out of our operations in the ordinary
course of our business. We are not currently a party to any legal
proceedings, the adverse outcome of which, individually or in the
aggregate, would have a material adverse effect on the business,
financial condition, or results of operations of the Company.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY
DISCLOSURES
None.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
* Furnished electronically herewith
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
| |
China HGS Real Estate,
Inc. |
|
|
|
|
| May 15, 2020 |
By: |
/s/ Xiaojun Zhu |
| |
|
Xiaojun Zhu |
| |
|
Chief Executive Officer |
China HGS Real Estate (NASDAQ:HGSH)
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