UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x |
ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the fiscal year ended September 30, 2020
¨ |
TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the transition period from ___________ to ___________
Commission File No. 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)
Securities registered under Section 12(b) of the Exchange
Act:
Title
of each class registered: |
Trading
Symbol |
Name of
each exchange on which registered: |
Common Stock, par
value $0.001 |
HGSH |
Nasdaq Capital
Market |
Securities registered under Section 12(g) of the Exchange
Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of
the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 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-K (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such
files). x Yes ¨ No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting
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 and 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 Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, based upon the
closing price of the registrant’s common stock on March 30,
2020, the last business day of the Company's second fiscal quarter,
as reported by the Nasdaq Capital Market on that date, was
$9,770,400. This calculation does not reflect a determination that
certain persons are affiliates of the registrant for any other
purpose.
As of January 13, 2021, the number of shares outstanding of
the registrant’s common stock was 22,525,000
DOCUMENTS INCORPORATED BY REFERENCE
None.
CHINA HGS REAL ESTATE INC.
FORM 10-K
For the Fiscal Year Ended September 30, 2020
INDEX
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K (the “Report”) and other
reports (collectively the “Filings”) filed by the registrant from
time to time with the Securities and Exchange Commission (the
“SEC”) contain or may contain forward looking statements and
information that are based upon beliefs of, and information
currently available to, the registrant’s management as well as
estimates and assumptions made by the registrant’s management. When
used in the filings the words “anticipate,” “believe,” “estimate,”
“expect,” “future,” “intend,” “plan” or the negative of these terms
and similar expressions as they relate to the registrant or the
registrant’s management identify forward looking statements. Such
statements reflect the current view of the registrant with respect
to future events and are subject to risks, uncertainties,
assumptions and other factors (including the risks contained in the
section of this Report entitled “Risk Factors”) relating to the
registrant’s industry, the registrant’s operations and results of
operations and any businesses that may be acquired by the
registrant. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect,
actual results may differ significantly from those anticipated,
believed, estimated, expected, intended or planned.
Although the registrant believes that the expectations reflected in
the forward looking statements are reasonable, the registrant
cannot guarantee future results, levels of activity, performance or
achievements. Except as required by applicable law, including the
securities laws of the United States, the registrant does not
intend to update any of the forward-looking statements to conform
these statements to actual results. The following discussion should
be read in conjunction with the registrant’s financial statements
and the related notes thereto included in this Report.
In this Report, “we,” “our,” “us,” “China HGS Real Estate Inc. or
the “Company” sometimes refers collectively to China HGS and its
subsidiaries and affiliated companies.
PART I
ITEM 1. BUSINESS
Our Organization
China HGS Real Estate Inc. (the “Company” or “China HGS,” “we”,
“our”, “us”), formerly known as China Agro Sciences Corp., is a
corporation organized under the laws of the State of Florida.
HGS Investment is a Delaware corporation and owns 100% of the
equity interest in Shaanxi HGS Management and Consulting
Co., Ltd. (“Shaanxi HGS”), a wholly owned foreign entity
incorporated under the laws of the People’s Republic of China
(“PRC” or “China”).
China HGS does not conduct any substantive operations of its own.
Instead, through its subsidiary, Shaanxi HGS, it entered into
certain exclusive contractual agreements with Shaanxi Guangsha
Investment and Development Group Co., Ltd. (“Guangsha”).
Pursuant to these agreements, Shaanxi HGS is obligated to absorb a
majority of the risk of loss from Guangsha’s activities and
entitles Shaanxi HGS to receive a majority of Guangsha’s expected
residual returns. In addition, Guangsha’s shareholders have pledged
their equity interest in Guangsha to Shaanxi HGS, irrevocably
granted Shaanxi HGS an exclusive option to purchase, to the extent
permitted under PRC Law, all or part of the equity interests in
Guangsha and agreed to entrust all the rights to exercise their
voting power to the person(s) appointed by Shaanxi HGS.
Our Company engages in real estate development, primarily in the
construction and sale of residential apartments, car parks and
commercial properties.
Guangsha was organized in August 1995 as a limited liability
company under the laws of the PRC. Guangsha is headquartered in the
city of Hanzhong, Shaanxi Province. Guangsha is engaged in
developing large scale and high quality commercial and residential
projects, including multi-layer apartment buildings, sub-high-rise
apartment buildings, high-rise apartment buildings, and office
buildings.
Our corporate structure is set forth below:
Business Overview
We conduct all of our business in China. All of our business is
conducted in mainland China. Guangsha was founded by
Mr. Xiaojun Zhu, our Chairman and Chief Executive Officer and
commenced operations in 1995 in Hanzhong, a prefecture-level city
in Shaanxi Province.
Since Guangsha was founded, management has been focused on
expanding our business in Tier 3 and Tier 4 cities and counties in
China that we strategically select based on population and
urbanization growth rates, general economic conditions and growth
rates, income and purchasing power of resident consumers,
anticipated demand for private residential properties, availability
of future land supply and land prices, and governmental urban
planning and development policies. We utilize a standardized and
scalable model that emphasizes rapid asset turnover, efficient
capital management and strict cost control. We plan to expand into
strategically selected Tier 3 and Tier 4 cities and counties with
real estate development potential in Shaanxi Province, and expect
to benefit from rising demand for residential housing as a result
of increasing income levels of consumers and growing populations in
these cities and counties due to urbanization.
In September 2020, the Company started land leveling and
construction process for the Oriental Garden Phase II and Liangzhou
Mansion real estate properties in the Liangzhou road real estate
project. Our Liangzhou Road related projects, which consist of
residential buildings, office buildings and commercial plaza, will
start construction after the approval by the local government of
the road and become a new city center of Hanzhong city.
Real Estate Industry Overview
During the volatile real estate market, the Company has been
capitalizing on its inherent strengths and market opportunities in
Tier 3 and Tier 4 cities and counties to deliver value for our
shareholders. We feel confident and also competent to take on every
challenge and grasp every opportunity during market consolidation.
We expect to provide rapid response to the market on the basis of
our projected business plans together with a flexible approach in
seizing market opportunities; strict investment standard and
prudent attitude towards investment opportunities, and appropriate
replenishment of quality land resources in existing regions to
realize value within the Tier 3 and Tier 4 cities and counties in
Western China.
Company Positioning
The Company is headquartered in Hanzhong in the southwestern part
of the Shaanxi province, in the center of the Hanzhong Basin, on
the Han River, near the Sichuan border. According to the China City
Statistical Yearbook, Hanzhong had a population of about
3.8 million in 2018 calendar year.
|
|
Hanzhong is a key transportation hub connecting China’s Middle
Economic zone and Western Economic Zone. The travel time from
Xi’an, the provincial capital of Shaanxi province, to Hanzhong
takes less than 2 hours. The new airport in Hanzhong was completed
and put into service in 2014. The airport handled 650,000
passengers and 2,200 tons of cargo in 2019. Xicheng, a high-speed
railway between Chengdu, the provincial capital of Sichuan
province, and Xi’an with a major stop in Hanzhong was completed in
2017. It takes 1.5 hours from Hanzhong to Xi’an and 2.5 hours from
Hanzhong to Chengdu. The railway passenger’s volume is expected to
increase from 1.5 million to 6 million by 2020.
In accordance with Hanzhong Government’s 2019 annual report,
Hanzhong’s GDP reached RMB 154.8 billion (approximately $22.8
billion) by 2019 calendar year, representing a 5.1% increase from
2018 calendar year. Residents’ annual disposable income for 2019
calendar year was RMB32,828 (equivalent to $4,835), representing a
8.1% increase as compared to 2018 calendar year.
Many Tier 3 and Tier 4 cities and counties in China provide a major
source of migration workers for the Tier 1 and Tier 2 cities in
China. The income from migration workers also is becoming a
significant factor in supporting the hometown economy. Based on
Hanzhong Government’s 2019 annual report, the number of Hanzhong’s
migration workers reached approximately 865,000 as of
December 31, 2019 (2018 – 834,700).
The target market of the Company is in Western China. The Company
continues to focus on Tier 3 and Tier 4 cities and counties in
acquiring sizable quality land reserves at low cost in a flexible
and diversified manner. There has been an increasing demand for
high quality residential housing, largely driven by the “Go West”
policy and accelerated urbanization. Many buyers in Tier 3 and Tier
4 cities and counties are first time home buyers. In order to
mitigate default risk, the Company generally requires from its
homebuyer customers a deposit in the range of 30%-50% of the
purchase price, which is higher than the percentage required by the
government for the mortgage down payment.
The Company received the National Grade-I real-estate development
qualification granted by the Ministry of Housing and Urban-Rural
Development of the People's Republic of China ("MOHURD")"on
October 12, 2011. The Grade-I real-estate development
qualification is the highest qualification for real-estate
developers in China and requires meeting several strict criteria,
including:
a. Registered capital of at least RMB 50 million (approximately
$7.3 million);
b. At least five years of experience in real estate development and
operation;
c. The completion of construction of a total over 300,000 square
meters. of ground floor area (GFA) within the last three years and,
in the most recent year, developed real estate projects of at least
150,000 square meters; and
d. The completed real estate projects have no quality issues in
each of the past five years; and an established, comprehensive
quality control and guarantee system.
The National Grade-I real-estate development qualification provides
significant opportunities for the Company to expand its operations
beyond Shaanxi province into new regional real estate markets in
China.
Looking ahead, the Company will continue to focus on developing
high quality and large scale real estate projects in the suburban
areas of Tier 3 and Tier 4 cities and counties with promising
economic growth potential. Leveraging on its unique competitive
strengths, and under the direction and guidance of the government’s
macro policies, the Company expects to further replicate its
successful business model into new high growth regions through
strategic selection of project locations, a short project
development schedule characterized by fast asset turnover and
excellent execution ability, as well as innovative product offering
closely in line with market demand. The Company aims at becoming a
leading large-scale residential property developer in Western China
and a well-recognized brand name.
Pre-Sales and Sales
In the PRC, real estate developers are allowed to begin to market
properties before construction is completed. Like other developers,
we pre-sell properties prior to completion of construction. Under
PRC pre-sales regulations, property developers must satisfy
specific conditions before properties under construction can be
pre-sold. These mandatory conditions include:
· |
the land premium must have been
paid in full; |
· |
the land use rights certificate, the construction site planning
permit, the construction work planning permit and the
construction permit must have been obtained;
|
· |
at least 25% of the total project
development cost must have been incurred; |
· |
the progress and the expected
completion and delivery date of the construction must be
fixed; |
· |
the pre-sale permit must have been
obtained; and |
· |
the completion of certain
milestones in the construction processes must be specified by the
local government authorities. |
These mandatory conditions are designed to require a certain level
of capital expenditure and substantial progress in project
construction before the commencement of pre-sales. Generally, the
local governments also require developers and property purchasers
to have standard pre-sale contracts prepared under the auspices of
the government. Developers are required to file all pre-sale
contracts with local land bureaus and real estate administrations
after entering into such contracts.
After-Sale Services and Delivery
We assist customers in arranging for and providing information
related to financing. We also assist our customers in various title
registration procedures related to their properties, and we have
set up an ownership certificate team to assist purchasers to obtain
their property ownership certificates. We offer various
communication channels to customers to facilitate customer feedback
collection. We also cooperate with property management companies
that manage our properties and ancillary facilities, to handle
customer feedback.
We endeavor to deliver the units to our customers on a timely
basis. We closely monitor the progress of construction of our
property projects and conduct pre-delivery property inspections to
ensure timely delivery. The time frame for delivery is set out in
the sale and purchase agreements entered into with our customers,
and we are subject to penalty payments to the purchasers for any
delay in delivery caused by us. The Company has never incurred any
delay penalties. Once a property development has been completed,
has passed the requisite government inspections and is ready for
delivery, we will notify our customers and hand over keys and
possession of the properties.
Marketing and Distribution Channel
We maintain a marketing and sales force for our development
projects, which at September 30, 2020 consisted of 78
employees specializing in marketing and sales. We also train and
use outside real estate agents to market and increase the public
awareness of our projects, and spread the acceptance and influence
of our brand. However, our marketing and sales are primarily
conducted by our own sales force because we believe our own
dedicated sales representatives are better motivated to serve our
customers as well as to control our property pricing and selling
expenses.
Our marketing and sales team develops the appropriate advertising
and selling plan for each project. We develop public awareness
through marketing and advertising as well as referrals from
customers. We utilize a customer relationship management system to
track customer profiles, which helps us to forecast future customer
requirements and general demand for our projects. This allows us to
have real-time information on the status of individual customer
transactions as well as available inventory by project, which
enables us to better anticipate the preferences of current and
future customers.
We use various advertising media to market our developments and
enhance our brand name, including newspapers, magazines,
television, radio, e-marketing and outdoor billboards. We also
participate in real estate exhibitions.
We have also developed a strong relationship with local
institutional purchasers and governments. The Company has entered
into various significant residential-apartment group-purchase
agreements with local government and institutional purchasers.
A typical real estate property sales transaction usually consists
of three steps. First, the customer pays a deposit to the Company.
Within a week, after paying the deposit, the customer will sign a
purchase contract with us and make a down payment to us in cash.
After making the down payment, the customer arranges for a mortgage
loan for the balance of the purchase price. Once the loan is
approved, the mortgage loan proceeds are paid to us directly by the
bank. Finally, we deliver the property to the customer. Legal
title, as evidenced by a property ownership certificate issued by
local land and construction bureaus, will be delivered to the
customer.
For customers purchasing properties with mortgage financing, under
current PRC laws, their minimum down payment is 30% of the total
purchase price for the purchase of the first self-use residential
unit with total GFA of 90 square meters (about 970 square feet) or
more on all existing units and those yet to be completed, and a
down payment of 20% on the first residential units for self-use
with total GFA of under 90 square meters. In order to mitigate the
default risk, the Company requires from its homebuyer customers
deposits ranging from 30% - 50% of the purchase price, which is
higher than the percentage required by the government for the
mortgage down payment.
Like most real estate companies in China, we generally provide
guarantees to mortgagee banks in respect of the mortgage loans
provided to the purchasers of our properties up until completion of
the registration of the mortgage with the relevant mortgage
registration authorities. As of September 30, 2020, the
Company had security deposits for these guarantees amounted to
approximately $3.4 million. Guarantees for mortgages on residential
properties are typically discharged when the individual property
ownership certificates are issued. In our experience, the issuance
of the individual property ownership certificates typically takes
six to twelve months, so our mortgage guarantees typically remain
outstanding for up to twelve months after we deliver the underlying
property.
Our Property Development Operations
We have a systematic and standardized process of project
development, which we implement through several well-defined
phases. One critically significant portion of our process is the
land acquisition process, which is segmented into three stages:
(i) opportunity identification, (ii) initial planning and
budgeting, and (iii) land use rights acquisition. The
following diagram sets forth the key stages of our property
development process.
LAND ACQUISITION
PROCESS |
|
Project
planning and design |
|
Project
construction
and
Management |
|
Pre-sale, sale
and marketing |
|
After-sale
and delivery |
|
|
|
|
|
|
|
|
|
Opportunity Identification |
|
Initial
Planning |
|
Land Acquisition |
|
|
|
|
-Strategic planning |
|
-Feasibility study |
|
-Financial assessment |
|
-Outsource architectural and engineering design |
|
-Outsource construction |
|
-Pre-sale |
|
-Delivery |
-Geographic and market analysis |
|
-Preliminary design |
|
-Internal approval |
|
-Design management |
|
-Construction supervision |
|
-Marketing |
|
-Feedback collection |
|
|
-Project evaluation |
|
-Bidding process |
|
-Arrange financing |
|
-Quality control |
|
-Advertising |
|
|
|
|
|
|
|
|
|
|
-Completion inspection |
|
|
|
|
|
|
|
|
|
|
|
|
-Landscaping and fixture installation |
|
|
|
|
Our Projects
Overview
We develop the following three types of real estate projects, which
may be developed in one or more phases:
· |
multi-layer apartment buildings,
which are typically six stories or less; |
· |
sub-high-rise apartment buildings,
which are typically seven to 11 stories; and |
· |
high-rise apartment buildings,
which are typically 12 to 33 stories. |
At any one time, our projects (or phases of our projects) are in
one of the following three stages:
· |
completed projects, meaning
properties for which construction has been completed; |
· |
properties under construction,
meaning properties for which construction permits have been
obtained but construction has not been completed; and |
· |
properties under planning, meaning
properties for which we have entered into land grant contracts and
are in the process of obtaining the required permits to begin
construction. |
Our main projects located in Hanzhong City are: Mingzhu Beiyuan,
Oriental Pearl Garden and Liangzhou Road related projects. In
Yang County, our project is Yangzhou Pearl Garden and Yangzhou
Palace. Most projects are being developed in multiple phases.
Real Estate Projects located in Hanzhong City
Mingzhu Garden - Mingzhu Nanyuan
Mingzhu Nanyuan consists of multi-layer residential buildings and
sub-high-rise and high-rise residential buildings with commercial
shops on the first floors, all of which were completed by fiscal
2012 with total GFA of 35,220 square meters. As of
September 30, 2020, the remaining unsold GFA was Nil.
|
|
|
Mingzhu Garden - Mingzhu Beiyuan
This project is located in the southwest part of Hanzhong City. The
Phase I project includes two high-rise residential buildings with
commercial shops located on the first floor with unsold GFA of Nil
square meters as of September 30, 2020. The Phase II Mingzhu
Beiyuan project includes 17 high-rise residential buildings with
GFA of 358,058 square meters. The Company started construction in
the third quarter of fiscal 2012 and completed the construction in
the last quarter of fiscal 2015. As of September 30, 2020, the
unsold GFA was 80,894.
|
|
|
Mingzhu Xinju
This project is located in the downtown of Hanzhong City. It
consists of two residential buildings, with commercial shops
located on the first floors with total GFA of 21,137 square
meters. One building was completed by fiscal 2010 and the
other one completed by fiscal 2011 with remaining unsold GFA of Nil
square meters as at September 30, 2020, which are primarily
underground parking units.
|
|
|
Oriental Pearl Garden
This project is located in the downtown of Hanzhong City. The
Company started construction in the third quarter of fiscal 2012.
It consists of 12 high-rise residential buildings with commercial
shops on the first and second floors with GFA of approximately
275,014 square meters. The project was fully completed in fiscal
2016. As of September 30, 2020, the unsold GFA was 57,418
square meters.
|
|
|
Real Estate Projects located in Yang County
Yangzhou Pearl Garden
Yangzhou Pearl Garden mainly consists of multi-layer residential
buildings and sub-high-rise residential buildings with commercial
shops on the first floors. As of September 30, 2020, the
remaining unsold GFA of Phase I of Yangzhou Pearl Garden, which
includes multi-layer residential buildings, commercial units,
sub-high-rise and high-rise residential buildings was a total GFA
of Nil square meters. Yangzhou Pearl Garden Phase II consists of
five high-rise residential buildings and one multi-layer
residential building, with a total GFA of 67,653 square meters. The
construction was completed in fiscal 2015. As of September 30,
2020, the unsold GFA of Yangzhou Pearl Garden Phase II was 12,458
square meters.
Yangzhou Palace
The Company is currently constructing 9 high-rise residential
buildings and 16 sub-high-rise residential and multi-layer
residential buildings with total GFA of 297,450 square meters in
Yangzhou Palace located in Yang County. The construction started in
the fourth quarter of fiscal 2013 and was completed by for the year
ended September 30, 2019. The Company received the pre-sale
license on September 1, 2016 and started to promote and sell
the property in November 2016. As of September 30, 2020,
the remaining unsold GFA of Yangzhou Palace, which includes
multi-layer residential buildings, commercial units, sub-high-rise
and high-rise residential buildings was a total GFA of 131,354
square meters.
The following table sets forth our real estate projects in the year
ended September 30, 2020:
Project Name |
|
Location |
|
Type of Buildings |
|
GFA sold / disposed
during the year |
|
|
Unsold GFA as
of September
30, 2019 |
|
Yangzhou Pearl Garden
Phase I |
|
Yang County |
|
Multi-layer
residential |
|
|
|
|
|
|
|
|
|
|
|
|
Sub-high-rise residential |
|
|
7,240 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden |
|
|
|
|
|
|
|
|
|
|
|
|
(Mingzhu Nanyuan) |
|
Hanzhong City |
|
Sub-high-rise residential |
|
|
343 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden |
|
|
|
|
|
|
|
|
|
|
|
|
(Mingzhu
Beiyuan) Phase I |
|
Hanzhong
City |
|
High-rise
residential |
|
|
2,151 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nan Dajie |
|
|
|
|
|
|
|
|
|
|
|
|
(Mingzhu
Xinju) |
|
Hanzhong
City |
|
High-rise
residential |
|
|
3,541 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden |
|
|
|
|
|
|
|
|
|
|
|
|
(Mingzhu
Beiyuan) Phase II |
|
Hanzhong
City |
|
High-rise
residential |
|
|
8,579 |
|
|
|
80,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Pearl
Garden |
|
Hanzhong
City |
|
High-rise
residential |
|
|
230 |
|
|
|
57,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Pearl
Garden Phase II |
|
Yang
County |
|
High-rise
residential |
|
|
299 |
|
|
|
12,458 |
|
Yangzhou
Palace |
|
Yang
County |
|
High-rise
residential |
|
|
10,854 |
|
|
|
131,354 |
|
Total |
|
|
|
|
|
|
33,237 |
|
|
|
282,124 |
|
|
(1) |
The amounts for “total GFA” in this
table are the amounts of total saleable gross floor area and are
derived on the following basis: |
|
· |
for properties that are sold, the
stated GFA is based on that sales contracts relating to such
property; |
|
· |
for unsold properties that are
completed, the stated GFA is calculated based on the detailed
construction blueprint and the calculation method approved by the
PRC government for saleable GFA, after necessary adjustments;
and |
|
· |
for properties that are under
planning, the stated GFA is based on the land grant contract and
our internal projections. |
Suppliers
Land Bank
In China, the supply of land is controlled by the government. Since
the early 2000s, the real estate industry in China has been
transitioning from an arranged system controlled by the PRC
government to a more market-oriented system. At present, although
the Chinese government still owns all urban land in China, land use
rights with terms of up to 70 years can be granted to, owned or
leased by, private individuals and companies.
Land - under planning and development
In May 2011, the Company entered into a development agreement
with the local government. Pursuant to the agreement, the Company
will prepay the development cost of approximately $17.6 million
(RMB 119,700,000) and the Company has the right to acquire the land
use rights through public bidding. The prepaid development cost
will be deducted from the final purchase price of the land use
rights. As of September 30, 2020, a deposit of approximately
$1.9 million was paid by the Company (2019- $2.8 million). The
local government is still in a slow process of re-zoning the
property. The Company expects to make payment of the remaining
development cost based on the government’s current work
progress.
All land transactions are required to be reported to and authorized
by the local Bureau of Land and Natural Resources. With respect to
real estate project design and construction services, the Company
typically selects the lowest-cost provider based on quality
selected through an open bidding process. Such service providers
are numerous in China and the Company foresees no difficulties in
securing alternative sources of services as needed.
Other Suppliers
The Company uses various suppliers in the construction of its
projects. For the year ended September 30, 2020 and 2019, none
suppliers accounted for more than 10% of the total project
expenditures.
Competition
The real estate industry in China is highly competitive. In the
Tier 3 and Tier 4 cities and counties that we focus on, the markets
are relatively more fragmented than in the Tier 1 or Tier 2 cities.
We compete primarily with regional property developers and an
increasing number of large national property developers who have
also started to enter these markets. Competitive factors include
the geographical location of the projects, the types of products
offered, brand recognition, price, designing and quality. In the
regional markets in which we operate, our major competitors include
regional real estate developers Wanbang Real Estate Development Co.
Ltd., (“Wanbang”), Jingtai Real Estate Development Co.
Ltd.,(“Jingtai”) and Shaanxi Fenghui Real Estate Development Co.
Ltd., (“Fenghui”) as well as other national real estate developers
such as Evergrande Real Estate Group (“Evergrande”) who have also
started their projects in these local markets.
Nationally, there are numerous national real estate developers that
have real estate projects across China. There are many housing and
land development companies listed on the Shanghai and Shenzhen
Stock Exchanges. However, such companies usually undertake large
scale projects and are unlikely to compete with the Company for
business as the Company targets small to medium sized projects in
Tier 3 and Tier 4 cities and counties.
In the regional market, the Company’s only direct competitor with
meaningful market share in the market is Wanbang. This company
generally undertakes medium and small scale projects and focuses on
development of commercial real estate properties, such as hotels
and shopping centers.
Competitive Strength:
We believe the following strengths allow us to compete
effectively:
Well Positioned to Capture Opportunities in Tier 3 and Tier 4
Cities and Counties.
With the increase in consumer disposable income and urbanization
rates, a growing middle-income consumer market has emerged driving
demand for affordable and high quality housing in many cities
across northwest China. We focus on building large communities of
modern, mid-sized residential properties for this market segment
and have accumulated substantial knowledge and experience about the
residential preferences and demands of mid-income customers. We
believe we can leverage our experience to capture the growth
opportunities in the markets.
Standardized and Scalable Business Model.
Our business model focuses on a standardized property development
process designed for rapid asset turnover. We break up the overall
process into well-defined stages and closely monitor costs and
development schedules through each stage. These stages include
(i) identifying land, (ii) pre-planning and budgeting,
(iii) land acquisition, (iv) detailed project design,
(v) construction management, (vi) pre-sales, sales and
(vii) after-sale service. We commence pre-planning and
budgeting prior to the land acquisition, which enables us to
acquire land at costs that meet our pre-set investment targeted
returns and to quickly begin the development process upon
acquisition. Our enterprise resource planning enables us to collect
and analyze information on a real-time basis throughout the entire
property development process. We utilize our customer relationship
management system to track customer profiles and sales to forecast
future individual preferences and market demand.
Experienced Management Team Supported by Trained and Motivated
Workforce.
Our CEO and founder, Mr. Xiaojun Zhu has over 20 years of
experience in the real estate industry and has gained considerable
strategic planning and business management expertise in the past
decade. Our management and workforce are well-trained and
motivated. Employees receive on-going training in their areas of
specialization at our head office in Hanzhong.
Guangsha is also an “AAA Enterprise in Shaanxi Construction
Industry” as recognized by the Credit Association of Agricultural
Bank of China, Shaanxi Branch.
Strategies
Our goal is to become the leading residential property developer
focused on China’s Tier 3 and Tier 4 cities and counties by
implementing the following strategies:
Continue Expanding in Selected Tier 3 and Tier 4 Cities. We
believe that Tier 3 and Tier 4 cities and counties present
development opportunities that are well suited for our scalable
business model of rapid asset turnover. Furthermore, Tier 3 and
Tier 4 cities and counties currently tend to be in an early stage
of market maturity and have fewer large national developers. We
believe that the fragmented market and relative abundance of land
supply in Tier 3 and Tier 4 cities, as compared to Tier 1 and Tier
2 cities, offer more opportunities for us to generate attractive
margins. And we also believe that our experience affords us the
opportunity to emerge as a leading developer in these markets. In
the near future, we plan to enter into other Tier 3 and Tier 4
cities that have:
|
· |
Increasing urbanization rates and
population growth; |
|
· |
High economic growth and increasing
individual income; and |
|
· |
Sustainable land supply for future
developments. |
We plan to continue to closely monitor our capital and cash
positions and carefully manage our cost for land use rights,
construction costs and operating expenses. We believe that we will
be able to use our working capital more efficiently by adhering to
prudent cost management, which will help to maintain our profit
margins. When selecting a property project for development, we will
continue to follow our established internal evaluation process,
including utilizing the analysis and input of our experienced
management team and choosing third-party contractors through a
tender process open only to bids which meet our budgeted costs.
Quality Control
We emphasize quality control to ensure that our buildings and
residential units meet our standards and provide high quality
service. We select only experienced design and construction
companies. We, through our contracts with construction contractors,
provide customers with warranties covering the building structure
and certain fittings and facilities of our property developments in
accordance with the relevant regulations. To ensure construction
quality, our construction contracts contain quality warranties and
penalty provisions for poor work quality. In the event of delay or
poor work quality, the contractor may be required to pay pre-agreed
damages under our construction contracts. Our construction
contracts do not allow our contractors to subcontract or transfer
their contractual arrangements with us to third parties. We
typically withhold 2% of the agreed construction fees for two to
five years after completion of the construction as security to
guarantee quality, which provides us with assurance for our
contractors’ work quality.
Our contractors are also subject to our quality control procedures,
including examination of materials and supplies, on-site inspection
and production of progress reports. We require our contractors to
comply with relevant PRC laws and regulations, as well as our own
standards and specifications. We set up a profile for each and
every unit constructed and monitor the quality of such unit
throughout its construction period until its delivery. We also
employ independent surveyors to supervise the construction
progress. In addition, the construction of real estate projects is
regularly inspected and supervised by the PRC governmental
authorities.
Environmental Matters
As a developer of property in the PRC, we are subject to various
environmental laws and regulations set by the PRC national,
provincial and municipal governments. These include regulations on
air pollution, noise emissions, as well as water and waste
discharge. As of September 30, 2020, we have never
paid any penalties associated with the breach of any such laws and
regulations. Compliance with existing environmental laws and
regulations has not had a material adverse effect on our financial
condition and results of operations, and we do not believe it will
have such an impact in the future.
Our projects are normally required to undergo an environmental
impact assessment by government-appointed third parties, and a
report of such assessment needs to be submitted to the relevant
environmental authorities in order to obtain their approval before
commencing construction.
Upon completion of each project, the relevant environmental
authorities inspect the site to ensure the applicable environmental
standards have been complied with, and the resulting report is
presented together with other specified documents to the relevant
construction administration authorities for their approval and
record. Approval from the environmental authorities on such report
is required before we can deliver our completed work to our
customers. As of September 30, 2020, we have not experienced
any difficulties in obtaining those approvals for commencement of
construction and delivery of completed projects.
Employees
We currently have 139 full-time employees.
Department |
Management |
|
|
27 |
|
Accounting Staff |
|
|
7 |
|
Sales and
marketing staff |
|
|
78 |
|
Administrative |
|
|
27 |
|
Total |
|
|
139 |
|
ITEM 1A. RISK
FACTORS
Risks Relating to Our Business
Our business is sensitive to China economy and China real estate
policies. A downturn in China economy and restrictive real estate
polices could materially and adversely affect our revenues and
results of operations.
Any slowdown in China’s economic development might lead to tighter
credit markets, increased market volatility, sudden drops in
business and consumer confidence and dramatic changes in business
and consumer behaviors. As exports slowed, China’s reported GDP
growth dropped to 6.2% in the first nine months of 2019 calendar
year from 8.1% in the first quarter of 2012, prompting the
government to loosen economic policy to support growth. The current
package of economic support policies is designed to stabilize the
economy against slowing exports. Ongoing government regulatory
measures, including the “Ten National Notices” announced in 2010,
the “Eight National Notices” and property tax approved in
January 2011, have brought the PRC property market further
down to the bottom in 2012 and the recovery of real market is shown
in the 2014 and in 2015. In the first nine months of 2020, the
overall risk remained in tier 3 and 4 cities despite initial signs
of improvement in sales. In response to their perceived uncertainty
in economic conditions, consumers might delay, reduce or cancel
purchases of homes, and our homebuyers may also defer, reduce or
cancel purchases of our units and our results of operations may be
materially and adversely affected.
If we are unable to successfully manage our expansion into other
Tier 3 and Tier 4 cities, we will not be able to execute our
business plan.
Historically, our business and operations have been concentrated in
Hanzhong City and other surrounding counties. If we are unable to
successfully develop and sell projects outside Hanzhong City, our
future growth may be limited and we may not generate adequate
returns to cover our investments in these Tier 3 and Tier 4 cities.
In addition, as we expand our operations to Tier 3 and Tier 4
cities with higher land prices, our costs may increase, which may
lead to a decrease in our profit margin.
We require substantial capital resources to fund our land use
rights acquisition and property developments, which may not be
available.
Property development is capital intensive. Our ability to secure
sufficient financing for land use rights acquisition and property
development depends on a number of factors that are beyond our
control, including market conditions in the capital markets, the
PRC economy and the PRC government regulations that affect the
availability and cost of financing for real estate companies.
We may be unable to acquire desired development sites at
commercially reasonable costs.
Our revenue depends on the completion and sale of our projects,
which in turn depends on our ability to acquire development sites.
Our land use rights costs are a major component of our cost of real
estate sales and increases in such costs could diminish our gross
margin. In China, the PRC government controls the supply of land
and regulates land sales and transfers in the secondary market. As
a result, the policies of the PRC government, including those
related to land supply and urban planning, affect our ability to
acquire, and our costs of acquiring, land use rights for our
projects. In recent years, the PRC government has introduced
various measures attempting to moderate investment in the property
market in China.
Although we believe that these measures are generally targeted at
the luxury property market and speculative purchases of land and
properties, the PRC government could introduce other measures in
the future that may adversely affect our ability to obtain land for
development. We currently acquire our development sites primarily
by bidding for government land. Under current regulations, land use
rights acquired from government authorities for commercial and
residential development purposes must be purchased through a public
tender, auction or listing-for-sale. Competition in these bidding
processes has resulted in higher land use rights costs for us. We
may also need to acquire land use rights through acquisition, which
could increase our costs. Moreover, the supply of potential
development sites in any given city will diminish over time and we
may find it increasingly difficult to identify and acquire
attractive development sites at commercially reasonable costs in
the future.
We provide guarantees for the mortgage loans of our customers
which expose us to risks of default by our customers.
We pre-sell properties before actual completion and, in accordance
with industry practice, our customers’ mortgage banks require us to
guarantee our customers’ mortgage loans. Typically, we provide
guarantees to PRC banks with respect to loans procured by the
purchasers of our properties for the total mortgage loan amount
until the completion of the registration of the mortgage with the
relevant mortgage registration authorities, which generally occurs
within six to twelve months after the purchasers take possession of
the relevant properties. In line with what we believe to be
industry practice, we rely on the credit evaluation conducted by
mortgagee banks and do not conduct our own independent credit
checks on our customers. The mortgagee banks typically require us
to maintain, as restricted cash, 5% to 10% of the mortgage proceeds
paid to us as security for our obligations under such guarantees
(the security deposit).
If a purchaser defaults on its payment obligations during the term
of our guarantee, the mortgagee bank may deduct the delinquent
mortgage payment from 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. For the years ended
September 30, 2020 and 2019, the Company has not experienced
any delinquent mortgage loans and has not experienced any losses
related to this guarantee. As of September 30, 2020 and 2019,
our outstanding guarantees in respect of our customers' mortgage
loans amounted to approximately $78 million and $70 million,
respectively. As of September 30, 2020 and 2019, the amount of
security deposits provided for these guarantees was approximately
$3.4 million and $3.9 million respectively and the Company believes
that such reserves are sufficient.
We rely on third-party contractors.
Substantially all of our project construction and related work are
outsourced to third-party contractors. We are exposed to risks that
the performance of our contractors may not meet our standards or
specifications. Negligence or poor work quality by any contractors
may result in defects in our buildings or residential units, which
could in turn cause us to suffer financial losses, harm our
reputation or expose us to third-party claims. We work with
multiple contractors on different projects and we cannot guarantee
that we can effectively monitor their work at all times.
Although our construction and other contracts contain provisions
designed to protect us, we may be unable to successfully enforce
these rights and, even if we are able to successfully enforce these
rights, the third-party contractor may not have sufficient
financial resources to compensate us. Moreover, the contractors may
undertake projects from other property developers, engage in risky
undertakings or encounter financial or other difficulties, such as
supply shortages, labor disputes or work accidents, which may cause
delays in the completion of our property projects or increases in
our costs.
We may be unable to complete our property developments on time or
at all. The progress and costs for a development project can be
adversely affected by many factors, including, without
limitation:
|
· |
delays in obtaining necessary
licenses, permits or approvals from government agencies or
authorities; |
|
· |
shortages of materials, equipment,
contractors and skilled labor; |
|
· |
disputes with our third-party
contractors; |
|
· |
failure by our third-party
contractors to comply with our designs, specifications or
standards; |
|
· |
difficult geological situations or
other geotechnical issues; and |
|
· |
onsite labor disputes or work
accidents; and natural catastrophes or adverse weather
conditions. |
Any construction delays, or failure to complete a project according
to our planned specifications or budget, may delay our property
sales, which could harm our revenues, cash flows and our
reputation.
Changes of laws and regulations with respect to pre-sales may
adversely affect our cash flow position and performance.
We depend on cash flows from pre-sale of properties as an important
source of funding for our property projects and servicing our
indebtedness. Under current PRC laws and regulations, property
developers must fulfill certain conditions before they can commence
pre-sale of the relevant properties and may only use pre-sale
proceeds to finance the construction of specific developments.
Our results of operations may fluctuate from period to
period.
Our results of operations tend to fluctuate from period to period.
The number of properties that we can develop or complete during any
particular period is limited due to the substantial capital
required for land acquisition and construction, as well as the
lengthy development periods required before positive cash flows may
be generated. In addition, several properties that we have
developed or that are under development are large scale and are
developed in multiple phases over the course of one to several
years. The selling prices of the residential units in larger scale
property developments tend to change over time, which may impact
our sales proceeds and, accordingly, our revenues for any given
period.
We rely on our key management members.
We depend on the services provided by key management members.
Competition for management talent is intense in the property
development sector. In particular, we are highly dependent on
Mr. Xiaojun Zhu, our founder, Chairman and Chief Executive
Officer. We do not maintain key employee insurance. In the event
that we lose the services of any key management member, we may be
unable to identify and recruit suitable successors in a timely
manner or at all, which will adversely affect our business and
operations. Moreover, we need to employ and retain more management
personnel to support our expansion into other Tier 3 and Tier 4
cities and counties. If we cannot attract and retain suitable human
resources, especially at the management level, our business and
future growth will be adversely affected.
Increases in the price of raw materials may increase our cost of
sales and reduce our earnings.
Our third-party contractors are responsible for procuring almost
all of the raw materials used in our project developments. Our
construction contracts typically provide for fixed or capped
payments, but the payments are subject to changes in
government-suggested steel prices. The increase in steel prices
could result in an increase in our construction cost. In addition,
the increases in the price of raw materials, such as cement,
concrete blocks and bricks, in the long run could be passed on to
us by our contractors, which will increase our construction cost.
Any such cost increase could reduce our earnings to the extent we
are unable to pass these increased costs to our customers.
Any unauthorized use of our brand or trademark may adversely
affect our business.
We own trademarks for “汉中广厦”, in the
form of Chinese characters and our company logo. We rely on the PRC
intellectual property and anti-unfair competition laws and
contractual restrictions to protect brand name and trademarks. We
believe our brand, trademarks and other intellectual property
rights are important to our success. Any unauthorized use of our
brand, trademarks and other intellectual property rights could harm
our competitive advantages and business. Historically, China has
not protected intellectual property rights to the same extent as
the United States, and infringement of intellectual property rights
continues to pose a serious risk of doing business in China.
Monitoring and preventing unauthorized use is difficult. The
measures we take to protect our intellectual property rights may
not be adequate. Furthermore, the application of laws governing
intellectual property rights in China and abroad is uncertain and
evolving, and could involve substantial risks to us. If we are
unable to adequately protect our brand, trademarks and other
intellectual property rights, our reputation may be harmed and our
business may be adversely affected.
We may fail to obtain, or may experience material delays in
obtaining necessary government approvals for any major property
development, which will adversely affect our business.
The real estate industry is strictly regulated by the PRC
government. Property developers in China must abide by various laws
and regulations, including implementation rules promulgated by
local governments to enforce these laws and regulations. Before
commencing, and during the course of, development of a property
project, we need to apply for various licenses, permits,
certificates and approvals, including land use rights certificates,
construction site planning permits, construction work planning
permits, construction permits, pre-sale permits and completion
acceptance certificates. We need to satisfy various requirements to
obtain these certificates and permits. To date, we have not
encountered serious delays or difficulties in the process of
applying for these certificates and permits, but we cannot
guarantee that we will not encounter serious delays or difficulties
in the future. In the event that we fail to obtain the necessary
governmental approvals for any of our major property projects, or a
serious delay occurs in the government’s examination and approval
progress, we may not be able to maintain our development schedule
and our business and cash flows may be adversely affected.
We may forfeit land to the PRC government if we fail to comply
with procedural requirements applicable to land grants from the
government or the terms of the land use rights grant
contracts.
According to the relevant PRC regulations, if we fail to develop a
property project according to the terms of the land use rights
grant contract, including those relating to the payment of land
premiums, specified use of the land and the time for commencement
and completion of the property development, the PRC government may
issue a warning, may impose a penalty or may order us to forfeit
the land. Specifically, under current PRC law, if we fail to
commence development within one year after the commencement date
stipulated in the land use rights grant contract, the relevant PRC
land bureau may issue a warning notice to us and impose an idle
land fee on the land of up to 20% of the land premium. If we fail
to commence development within two years, the land will be subject
to forfeiture to the PRC government, unless the delay in
development is caused by government actions or force majeure. Even
if the commencement of the land development is compliant with the
land use rights grant contract, if the developed GFA on the land is
less than one-third of the total GFA of the project or the total
capital invested is less than one-fourth of the total investment of
the project and the suspension of the development of the land
continues for more than one year without government approval, the
land will also be treated as idle land and be subject to penalty or
forfeiture. We cannot assure you that circumstances leading to
significant delays in our development schedule or forfeiture of
land will not arise in the future. If we forfeit land, we will not
only lose the opportunity to develop the property projects on such
land, but may also lose all past investments in such land,
including land premiums paid and development costs incurred.
Any non-compliant GFA of our uncompleted and future property
developments will be subject to governmental approval and
additional payments.
The local government authorities inspect property developments
after their completion and issue the completion acceptance
certificates if the developments are in compliance with the
relevant laws and regulations. If the total constructed GFA of a
property development exceeds the GFA originally authorized in the
relevant land grant contracts or construction permit, or if the
completed property contains built-up areas that do not conform with
the plan authorized by the construction permit, the property
developer may be required to pay additional amounts or take
corrective actions with respect to such non-compliant GFA before a
completion acceptance certificate can be issued to the property
development.
Our failure to assist our customers in applying for property
ownership certificates in a timely manner may lead to compensatory
liabilities to our customers.
We are required to meet various requirements within 90 days after
delivery of property, or such other period contracted with our
customers, in order for our customers to apply for their property
ownership certificates, including passing various governmental
clearances, formalities and procedures. Under our sales contract,
we are liable for any delay in the submission of the required
documents as a result of our failure to meet such requirements, and
are required to compensate our customers for delays. In the case of
serious delays on one or more property projects, we may be required
to pay significant compensation to our customers and our reputation
may be adversely affected.
We are subject to potential environmental liability.
We are subject to a variety of laws and regulations concerning the
protection of health and the environment. The particular
environmental laws and regulations that apply to any given
development site vary significantly according to the site’s
location and environmental condition, the present and former uses
of the site and the nature of the adjoining properties.
Environmental laws and conditions may result in delays, may cause
us to incur substantial compliance and other costs and can prohibit
or severely restrict project development activity in
environmentally-sensitive regions or areas. Although the
environmental investigations conducted by local environmental
authorities have not revealed any environmental liability that we
believe would have a material adverse effect on our business,
financial condition or results of operations to date, it is
possible that these investigations did not reveal all environmental
liabilities and that there are material environmental liabilities
of which we are unaware. We cannot assure you that future
environmental investigations will not reveal material environmental
liability. Also, we cannot assure you that the PRC government will
not change the existing laws and regulations or impose additional
or stricter laws or regulations, the compliance with which may
cause us to incur significant capital expenditure.
We have never paid cash dividends and are not likely to do so in
the foreseeable future.
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings for use in
the operation and expansion of our business. We do not expect to
pay any cash dividends in the foreseeable future but will review
this policy as circumstances dictate.
We need to improve our internal financial reporting
controls. If we are unable to establish appropriate
internal financial reporting controls and procedures, it could
cause us to fail to meet our reporting obligations, subject us to
regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a
negative effect on the market price for shares of our common
stock.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. We
maintain a system of internal control over financial reporting,
which is defined as a process designed by, or under the supervision
of, our principal executive officer and principal financial
officer, or persons performing similar functions, and effected by
our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
We cannot assure you that we will not, in the future, identify
areas requiring improvement in our internal control over financial
reporting. We cannot assure you that the measures we will take to
remediate any areas in need of improvement will be successful or
that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue our
growth.
As a public company, we are required to comply with the
reporting obligations of the Exchange Act and Section 404 of
the Sarbanes-Oxley Act of 2013. If we fail to comply with the
reporting obligations of the Exchange Act and Section 404 of
the Sarbanes-Oxley Act or if we fail to maintain adequate internal
controls over financial reporting, our business, results of
operations and financial condition could be materially adversely
affected.
As a public company, we are required to comply with the periodic
reporting obligations of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), including preparing annual reports
and quarterly reports. Our failure to prepare and disclose this
information in a timely manner could subject us to penalties under
U.S. federal securities laws, expose us to lawsuits and restrict
our ability to access financing. In addition, we are required under
applicable law and regulations to design and implement internal
controls over financial reporting, and evaluate our existing
internal controls with respect to the standards adopted by the U.S.
Public Company Accounting Oversight Board.
The Company assessed its internal control over financial reporting
and still has significant and material deficiencies as of
September 30, 2020 The Company’s remediation plan is listed in
Item 9A. However, we cannot assure you that our current remediation
plan can resolve all the significant deficiencies and material
weaknesses in the internal control over financial reporting. As a
result, we may be required to implement further remedial measures
and to design enhanced processes and controls to address issues
identified through future reviews. This could result in significant
delays and costs to us and require us to divert substantial
resources, including management time, from other activities.
If we do not fully remediate the material weaknesses identified by
management or fail to maintain the adequacy of our internal
controls in the future, we may not be able to ensure that we can
conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with the
Sarbanes-Oxley Act. Moreover, effective internal controls are
necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, any failure to
satisfy the requirements of Section 404 on a timely basis
could result in the loss of investor confidence in the reliability
of our financial statements, which in turn could harm our business
and negatively impact the trading price of our common stock.
Risk Relating to the Residential Property Industry in
China
The PRC government may adopt further restrictive measures to
slow the increase in prices of real property and real property
development.
Along with the economic growth in China, investments in the
property sectors have increased significantly in the past few
years. In response to concerns over the scale of the increase in
property investments, the PRC government has introduced policies to
curtail property development. We believe those regulations, among
others, significantly affect the property industry in China.
These restrictive regulations and measures could increase our
operating costs in adapting to these regulations and measures,
limit our access to capital resources or even restrict our business
operations. We cannot be certain that the PRC government will not
issue additional and more stringent regulations or measures, which
could further slowdown property development in China and adversely
affect our business and prospects.
We are heavily dependent on the performance of the residential
property market in China, which is at a relatively early
development stage.
The residential property industry in the PRC is still in a
relatively early stage of development. Although demand for
residential property in the PRC has been growing rapidly in recent
years, such growth is often coupled with volatility in market
conditions and fluctuation in property prices. It is extremely
difficult to predict how much and when demand will develop, as many
social, political, economic, legal and other factors, most of which
are beyond our control, may affect the development of the market.
The level of uncertainty is increased by the limited availability
of accurate financial and market information as well as the overall
low level of transparency in the PRC, especially in Tier 3 and 4
cities which have lagged in progress in these aspects when compared
to Tier 1 cities.
The lack of a liquid secondary market for residential property may
discourage investors from acquiring new properties. The limited
amount of property mortgage financing available to PRC individuals
may further inhibit demand for residential developments.
We face intense competition from other real estate
developers.
The property industry in the PRC is highly competitive. In the Tier
3 and Tier 4 cities we focus on, local and regional property
developers are our major competitors, and an increasing number of
large state-owned and private national property developers have
started entering these markets. Many of our competitors, especially
the state-owned and private national property developers, are well
capitalized and have greater financial, marketing and other
resources than we have. Some also have larger land banks, greater
economies of scale, broader name recognition, a longer track record
and more established relationships in certain markets. In addition,
the PRC government’s recent measures designed to reduce land supply
further increased competition for land among property
developers.
Competition among property developers may result in increased costs
for the acquisition of land for development, increased costs for
raw materials, shortages of skilled contractors, oversupply of
properties, decrease in property prices in certain parts of the
PRC, a slowdown in the rate at which new property developments will
be approved and/or reviewed by the relevant government authorities
and an increase in administrative costs for hiring or retaining
qualified personnel, any of which may adversely affect our business
and financial condition. Furthermore, property developers that are
better capitalized than we are may be more competitive in acquiring
land through the auction process. If we cannot respond to changes
in market conditions as promptly and effectively as our
competitors, or effectively compete for land acquisition through
the auction systems and acquire other factors of production, our
business and financial condition will be adversely affected.
In addition, risk of property over-supply is increasing in parts of
China, where property investment, trading and speculation have
become overly active. We are exposed to the risk that in the event
of actual or perceived over-supply, property prices may fall
drastically, and our revenue and profitability will be adversely
affected.
We may be deemed a PRC resident enterprise for PRC tax purposes
under the new Enterprise Income Tax Law, which could result in the
imposition of a 25% enterprise income tax payable on our taxable
global income.
On March 16, 2007, the National People’s Congress of the PRC
passed the Enterprise Income Tax Law of the PRC (‘‘New Income Tax
Law’’), which took effect on January 1, 2008. On
December 6, 2007, the Implementation Rules of Enterprise
Income Tax Law of the PRC (‘‘Implementation Rules’’) were also
enacted, and took effect on January 1, 2008. In accordance
with the new laws and regulations, a unified enterprise income tax
rate of 25% and unified tax deduction standards will be applied
equally to both domestic enterprises and foreign-invested
enterprises.
Under the New Income Tax Law and the Implementation Rules,
enterprises established under the laws of foreign jurisdictions
other than the PRC may nevertheless be considered as PRC-resident
enterprises for tax purposes if these enterprises have their ‘‘de
facto management body’’ within the PRC. Under the Implementation
Rules, ‘‘de facto management body’’ is defined as a body that has
material and overall management and control over the manufacturing
and business operations, personnel and human resources, finances
and treasury, and acquisition and disposition of properties and
other assets of an enterprise. At present, it is unclear what
factors will be used by the PRC tax authorities to determine
whether we are a ‘‘de facto management body’’ in China. All of our
management personnel are located in the PRC, and all of our
revenues arise from our operations in China. If the PRC tax
authorities determine that we are a PRC resident enterprise, we
will be subject to PRC tax on our worldwide income at the 25%
uniform tax rate, which may have a material adverse effect on our
financial condition and results of operations. Notwithstanding the
foregoing provision, the New Income Tax Law also provides that, if
a PRC resident enterprise already invests in another PRC resident
enterprise, the dividends received by the investing resident
enterprise from the invested resident enterprise are exempt from
income tax, subject to certain qualifications. Therefore, if we are
classified as a PRC resident enterprise, the dividends received
from our PRC subsidiaries may be exempt from income tax. However,
due to the limited history of the New Income Tax Law, it is unclear
as to (i) the detailed qualification requirements for such
exemption and (ii) whether dividend payments by our PRC
subsidiaries to us will meet such qualification requirements, even
if we are considered a PRC resident enterprise for tax
purposes.
We face uncertainty from the Circular on Strengthening the
Administration of Enterprise Income Tax on Non-resident
Enterprises' Share Transfer (“Circular 698”) released in
December 2009 by China's State Administration of Taxation
(SAT), effective as of January 1, 2008.
Where a foreign investor indirectly transfers equity interests in a
Chinese resident enterprise by selling the shares in an offshore
holding company, and the latter is located in a country
(jurisdiction) where the effective tax burden is less than 12.5% or
where the offshore income of her residents is not taxable, the
foreign investor is required to provide the tax authority in charge
of that Chinese resident enterprise with the relevant information
within 30 days of the transfers.
Where a foreign investor indirectly transfers equity interests in a
Chinese resident enterprise through the abuse of form of
organization and there are no reasonable commercial purposes such
that the corporate income tax liability is avoided, the tax
authority has the power to re-assess the nature of the equity
transfer in accordance with the “substance-over-form” principle and
deny the existence of the offshore holding company that is used for
tax planning purposes. “Income derived from equity transfers” as
mentioned in this circular refers to income derived by non-resident
enterprises from direct or indirect transfers of equity interest in
China resident enterprises, excluding share in Chinese resident
enterprises that are bought and sold openly on the stock
exchange.
While the term "indirectly transfer" is not defined, we understand
that the relevant PRC tax authorities have jurisdiction regarding
requests for information over a wide range of foreign entities
having no direct contact with China. The relevant authority has not
yet promulgated any formal provisions or formally declared or
stated how to calculate the effective tax in the country
(jurisdiction) and the process of the disclosure to the tax
authority in charge of that Chinese resident enterprise. Meanwhile,
there are no formal declarations with regard to how to decide
“abuse of form of organization” and “reasonable commercial
purpose,” which can be utilized by us to determine if our company
complies with the Circular 698.
Failure to comply with PRC regulations relating to the
establishment of offshore special purpose companies by PRC
residents may materially adversely affect us.
On July 15, 2014, SAFE issued the Notice on Relevant Issues in
the Foreign Exchange Control over Investment, Financing and Return
Investment Through Special Purpose Companies by Residents Inside
China, generally referred to as Circular 37, which required PRC
residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose
company, or SPV, for the purpose of engaging in an equity financing
outside of China on the strength of domestic PRC assets originally
held by those residents. Internal implementing guidelines issued by
SAFE, which became public in June 2007 (known as Notice 106),
expanded the reach of Circular 37 by (1) purporting to cover
the establishment or acquisition of control by PRC residents of
offshore entities which merely acquire “control” over domestic
companies or assets, even in the absence of legal ownership;
(2) adding requirements relating to the source of the PRC
resident's funds used to establish or acquire the offshore entity;
(3) covering the use of existing offshore entities for
offshore financings; (4) purporting to cover situations in
which an offshore SPV establishes a new subsidiary in China or
acquires an unrelated company or unrelated assets in China; and
(5) making the domestic affiliate of the SPV responsible for
the accuracy of certain documents which must be filed in connection
with any such registration, notably, the business plan which
describes the overseas financing and the use of proceeds.
Amendments to registrations made under Circular 37 are required in
connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of
any security interest in any assets located in China to guarantee
offshore obligations, and Notice 106 makes the offshore SPV jointly
responsible for these filings. In the case of an SPV which was
established, and which acquired a related domestic company or
assets, before the implementation date of Circular 37, a
retroactive SAFE registration was required to have been completed
before March 31, 2006. This date was subsequently extended
indefinitely by Notice 106, which also required that the registrant
establish that all foreign exchange transactions undertaken by the
SPV and its affiliates were in compliance with applicable laws and
regulations. Failure to comply with the requirements of Circular
37, as applied by SAFE in accordance with Notice 106, may result in
fines and other penalties under PRC laws for evasion of applicable
foreign exchange restrictions. Any such failure could also result
in the SPV's affiliates being impeded or prevented from
distributing their profits and the proceeds from any reduction in
capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
We have asked our stockholders, who are PRC residents as defined in
Circular 37, to register with the relevant branch of SAFE, as
currently required, in connection with their equity interests in us
and our acquisitions of equity interests in our PRC subsidiary.
However, we cannot provide any assurances that they can obtain the
above SAFE registrations required by Circular 37 and Notice 106.
Moreover, because of uncertainty over how Circular 37 will be
interpreted and implemented, and how or whether SAFE will apply it
to us, we cannot predict how it will affect our business operations
or future strategies. For example, our present and prospective PRC
subsidiaries' ability to conduct foreign exchange activities, such
as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 37 and
Notice 106 by our PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete
the necessary registration procedures required by Circular 37 and
Notice 106. We also have little control over either our present or
prospective direct or indirect stockholders or the outcome of such
registration procedures. A failure by our PRC resident beneficial
holders or future PRC resident stockholders to comply with Circular
37 and Notice 106, if SAFE requires it, could subject these PRC
resident beneficial holders to fines or legal sanctions, restrict
our overseas or cross-border investment activities, limit our
subsidiaries' ability to make distributions or pay dividends or
affect our ownership structure, which could adversely affect our
business and prospects.
PRC economic, political and social conditions as well as
government policies can affect our business.
The PRC economy differs from the economies of most developed
countries in many aspects, including:
|
· |
degree of government
involvement; |
|
· |
level and control of capital
reinvestment; |
|
· |
control of foreign exchange;
and |
|
· |
allocation of resources. |
The PRC economy has been transitioning from a centrally planned
economy to a more market-oriented economy. For more than two
decades, the PRC government has implemented economic reform
measures emphasizing utilization of market forces in the
development of the PRC economy. Although we believe these reforms
will have a positive effect on China’s overall and long-term
development, we cannot predict whether changes in the PRC economic,
political and social conditions, laws, regulations and policies
will have any adverse effect on our current or future business,
financial condition or results of operations.
Changes in foreign exchange regulations may adversely affect our
results of operations.
We currently receive all of our revenues in RMB. The PRC government
regulates the conversion between RMB and foreign currencies. Over
the years, the government has significantly reduced its control
over routine foreign exchange transactions under current accounts,
including trade and service related foreign exchange transactions,
payment of dividends and service of foreign debt. However, foreign
exchange transactions by our PRC subsidiaries under capital
accounts continue to be subject to significant foreign exchange
controls and require the approval of, or registration with, PRC
governmental authorities. There can be no assurance that these PRC
laws and regulations on foreign investment will not cast
uncertainties on our financing and operating plans in China. Under
current foreign exchange regulations in China, subject to the
relevant registration at SAFE, we will be able to pay dividends in
foreign currencies, without prior approval from SAFE, by complying
with certain procedural requirements. However, there can be no
assurance that the current PRC foreign exchange policies regarding
debt service and payment of dividends in foreign currencies will
continue in the future. Changes in PRC foreign exchange policies
might have a negative impact on our ability to service our foreign
currency-denominated indebtedness and to distribute dividends to
our shareholders in foreign currencies.
Interpretation of PRC laws and regulations involves
uncertainty.
Our core business is conducted within China and is governed by PRC
laws and regulations. The PRC legal system is based on written
statutes, and prior court decisions can only be used as a
reference. Since 1979, the PRC government has promulgated laws and
regulations in relation to economic matters such as foreign
investment, corporate organization and governance, commerce,
taxation and trade, with a view to developing a comprehensive
system of commercial law, including laws relating to property
ownership and development. However, due to the fact that these laws
and regulations have not been fully developed, and because of the
limited volume of published cases and the non-binding nature of
prior court decisions, interpretation of PRC laws and regulations
involves a degree of uncertainty. Some of these laws may be changed
without being immediately published or may be amended with
retroactive effect. Depending on the government agency or how an
application or case is presented to such agency, we may receive
less favorable interpretations of laws and regulations than our
competitors, particularly if a competitor has long been established
in the locality of, and has developed a relationship with, such
agency. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and
management attention. All these uncertainties may cause
difficulties in the enforcement of our land use rights,
entitlements under its permits, and other statutory and contractual
rights and interests.
The Chinese government exerts substantial influence over the
manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic
autonomy and private economic activities, and, as a result, we are
dependent on our relationship with the local government in the
province in which we operate our business. Chinese government has
exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation
and state ownership. Our ability to operate in China may be harmed
by changes in its laws and regulations, including those relating to
taxation, environmental regulations, land use rights, property and
other matters. We believe that our operations in China are in
material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of these
jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our
compliance with such regulations or interpretations. Accordingly,
government actions in the future, including any decision not to
continue to support recent economic reforms and to return to a more
centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions
thereof, and could require us to divest ourselves of any interest
we then hold in Chinese properties.
Future inflation in China may inhibit our activity to conduct
business in China.
In recent years, the Chinese economy has experienced periods of
rapid expansion and high rates of inflation, which have led to the
adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit
or regulate growth and contain inflation. While inflation has been
more moderate since 1995, high inflation may in the future cause
Chinese government to impose controls on credit and/or prices, or
to take other action, which could inhibit economic activity in
China, and thereby harm the market for our products.
Because Chinese law governs almost all of our material agreements,
we may not be able to enforce our legal rights within China or
elsewhere, which could result in a significant loss of business,
business opportunities, or capital.
Chinese law governs almost all of our material agreements. We
cannot assure you that we will be able to enforce any of our
material agreements or that remedies will be available outside of
China. The system of laws and the enforcement of existing laws in
China may not be as certain in implementation and interpretation as
in the United States. The inability to enforce or obtain a remedy
under any of our current or future agreements could result in a
significant loss of business, business opportunities or capital. It
will be extremely difficult to acquire jurisdiction and enforce
liabilities against our officers, directors and assets based in
China.
Substantially all of our assets are located in the PRC and all of
our officers and most of our present directors reside outside of
the United States. As a result, it may not be possible
for United States investors to enforce their legal rights, to
effect service of process upon our directors or officers or to
enforce judgments of United States courts predicated upon civil
liabilities and criminal penalties of our directors and officers
under Federal securities laws. Moreover, we have been advised that
China does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the United
States. Further, it is unclear if extradition treaties now in
effect between the United States and China would permit effective
enforcement of criminal penalties of the Federal securities
laws.
Failure to comply with the United States Foreign Corrupt
Practices Act could subject us to penalties and other adverse
consequences.
We are subject to the United States Foreign Corrupt Practices Act,
which generally prohibits United States companies from engaging in
bribery or other prohibited payments to foreign officials for the
purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices occur from time-to-time in the PRC. We
can make no assurance, however, that our employees or other agents
will not engage in such conduct for which we might be held
responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties and
other consequences that may have a material adverse effect on our
business, financial condition and results of operations.
We may have difficulty establishing adequate management, legal
and financial controls in the PRC.
The PRC historically has been deficient in Western style management
and financial reporting concepts and practices, as well as in
modern banking, computer and other control systems. We may have
difficulty in hiring and retaining a sufficient number of qualified
employees to work in the PRC. As a result of these factors, we may
experience difficulty in establishing management, legal and
financial controls, collecting financial data and preparing
financial statements, books of account and corporate records and
instituting business practices that meet Western standards. We may
have difficulty establishing adequate management, legal and
financial controls in the PRC.
Risks Relating to our Securities
We may be subject to the penny stock rules which will make
the shares of our common stock more difficult to sell.
We may be subject now and in the future to the SEC’s “penny stock”
rules if our shares of common stock sell below $1.00 per
share. Penny stocks generally are equity securities with a price of
less than $1.00. The penny stock rules require broker-dealers
to deliver a standardized risk disclosure document prepared by the
SEC which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer
must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson, and monthly account statements
showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information must be given to the customer
orally or in writing prior to completing the transaction and must
be given to the customer in writing before or with the customer's
confirmation.
On June 21, 2019, the “Company received a letter from the
Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”)
notifying the Company that it is no longer in compliance with the
minimum bid price requirement for continued listing on the Nasdaq
Capital Market. Nasdaq Listing Rule 5550(a)(2) requires
listed companies to maintain a minimum bid price of $1.00 per
share. The letter noted that the bid price of the Company’s common
stock was below $1.00 for the 30-day period ending June 20,
2019. The notification letter has no immediate effect on the
Company’s listing on the Nasdaq Capital Market. Nasdaq has provided
the Company with 180 days, or until January 14, 2020, to
regain compliance with the minimum bid price requirement by having
a closing bid price of at least $1.00 per share for a minimum of 10
consecutive business days. On December 19, 2019, Nasdaq
determined that the Company is eligible for an additional 180
calendar day period, or until June 15, 2020, to regain
compliance. Given the extraordinary market conditions caused by
COVID-19, Nasdaq has determined to toll the compliance periods for
bid price and market value of publicly held shares requirements
through June 30, 2020. In that regard, on April 16, 2020,
Nasdaq filed an immediately effective rule change with the
Securities and Exchange Commission. Accordingly, the Company has
until August 31, 2020, to regain compliance. As of
November 3, 2020, The Company has been advised that
March 1, 2021 represents the full extent of the Panel’s
discretion to grant continued listing while it is non-compliant.
Should the company fail to demonstrate compliance with Nasdaq
Listing Rule 5550(a)(2) by that date, the Panel will
issue a final delist determination and the Company will be
suspended from trading on The Nasdaq Stock Market.
In addition, the penny stock rules require that prior to a
transaction, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the
transaction. The penny stock rules are burdensome and may
reduce purchases of any offerings and reduce the trading activity
for shares of our common stock. As long as our shares of common
stock are subject to the penny stock rules, the holders of such
shares of common stock may find it more difficult to sell their
securities.
Our shares of common stock are very thinly traded, and the price
if traded may not reflect our value. There can be no assurance that
there will be an active market for our shares of common stock
either now or in the future.
Our shares of common stock are very thinly traded, and the price if
traded may not reflect our value. There can be no assurance that
there will be an active market for our shares of common stock
either now or in the future. The market liquidity will be dependent
on the perception of our operating business and any steps that our
management might take to bring us to the awareness of investors.
There can be no assurance given that there will be any awareness
generated. Consequently, investors may not be able to liquidate
their investment or liquidate it at a price that reflects the value
of the business. If a more active market should develop, the price
may be highly volatile. Because there may be a low price for our
shares of common stock, many brokerage firms may not be willing to
effect transactions in the securities. Even if an investor finds a
broker willing to effect a transaction in the shares of our common
stock, the combination of brokerage commissions, transfer fees,
taxes, if any, and any other selling costs may exceed the selling
price. Further, many lending institutions will not permit the use
of such shares of common stock as collateral for any loans.
ITEM 1B. Unresolved
Staff Comments
None.
ITEM
2. Properties
The Company’s principal administrative, sales, and marketing
facilities are located at 6 Xinghan Road, 19th Floor, Hanzhong
City, Shaanxi Province. The Company built the office building in
which its headquarters are located and owns the floor that houses
its headquarters. In addition, the Company also owns a sales office
in Yang County. See Item 1. Business — Our
Projects for a description of the location and general character of
the Company's real estate projects.
ITEM 3. Legal
Proceedings
There are no pending legal proceedings to which the Company is a
party or in which any director, officer or affiliate of the
Company, any owner of record or beneficially of more than 5% of any
class of voting securities of the Company, or security holder is a
party adverse to the Company or has a material interest adverse to
the Company. The Company’s property is not the subject of any
pending legal proceedings.
ITEM 4. Mine and
Safety Disclosure
Not applicable.
PART II
Item 5. Market For
Registrant’s Common Equity, Related Stockholder Matters And Issuer
Purchases Of Equity Securities
Market Information
China HGS’s common stock is currently quoted on the NASDAQ Capital
Market under the symbol “HGSH”. Between September 13, 2010 and
July 19, 2012, China HGS’s common stock was quoted on the
NASDAQ Global Market under the same symbol. Prior to China HGS’s
listing on NASDAQ Global Market, its common stock was quoted on the
OTC Bulletin Board under the symbol “CAHS.” The following table
sets forth the high and low sale prices for the Company’s common
stock for the periods indicated.
FISCAL
2019 |
|
High |
|
|
Low |
|
1st
Quarter Ended December 31, 2019 |
|
$ |
1.80 |
|
|
$ |
1.16 |
|
2nd
Quarter Ended March 31,2020 |
|
$ |
3.70 |
|
|
$ |
0.48 |
|
3rd
Quarter Ended June 30, 2020 |
|
$ |
4.40 |
|
|
$ |
0.52 |
|
4th
Quarter Ended September 30, 2020 |
|
$ |
2.88 |
|
|
$ |
0.85 |
|
FISCAL
2018 |
|
|
High
|
|
|
|
Low
|
|
1st
Quarter Ended December 31, 2018 |
|
$ |
1.60 |
|
|
$ |
0.82 |
|
2nd
Quarter Ended March 31,2019 |
|
$ |
1.39 |
|
|
$ |
0.90 |
|
3rd
Quarter Ended June 30, 2019 |
|
$ |
1.18 |
|
|
$ |
0.80 |
|
4th
Quarter Ended September 30, 2019 |
|
$ |
0.91 |
|
|
$ |
0.66 |
|
Holders
According to the records of our transfer agent, China HGS had 288
stockholders of record as of September 30, 2020.
Dividends
All of our assets are located within the PRC. Under the laws of the
PRC governing foreign invested enterprises, dividend distribution
and liquidation are allowed but subject to special procedures under
relevant rules and regulations. Any dividend payment is
subject to the approval of the Board of Directors and subject to
foreign exchange rules governing such repatriation. Any
liquidation is subject to both the relevant government agency’s
approval and supervision, as well as foreign exchange controls.
We have never declared or paid any cash dividends on our common
stock and we do not expect to pay any cash dividends in the
foreseeable future. We expect to retain any earnings to support
operations and to finance the growth and development of our
business. Any future determination relating to our
dividend policy will be made at the discretion of our Board of
Directors and will depend on a number of factors, including future
earnings, capital requirements, financial conditions and future
prospects and other factors the Board of Directors may deem
relevant. The payment of dividends from our subsidiaries
to our parent company is subject to restrictions including
primarily the restriction that foreign invested enterprises may
only buy, sell and/or remit foreign currencies at those banks
authorized to conduct foreign exchange business after providing
valid commercial documents.
PRC regulations restrict the ability of our PRC subsidiary to make
dividends and other payments to its offshore parent company.
PRC legal restrictions permit payments of dividend by our PRC
subsidiary only out of its accumulated after-tax profits, if any,
determined in accordance with PRC accounting standards and
regulations. Our PRC subsidiary is also required under PRC
laws and regulations to allocate at least 10% of its annual
after-tax profits determined in accordance with PRC GAAP to a
statutory general reserve fund until the amounts in said fund
reaches 50% of its registered capital. Allocations to this
statutory reserve fund can only be used for specific purposes and
are not transferable to us in the form of loans, advances or cash
dividends. Any limitations on the ability of our PRC subsidiary to
transfer funds to us could materially and adversely limit our
ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends and otherwise fund and
conduct our business.
Stock Performance Graph
The following graph presents a comparison of the performance of our
common stock with that of the NASDAQ Composite Index and the NASDAQ
Capital Market Composite Index from September 30, 2010 to
September 30, 2019. The graph shall not be deemed “filed” for
purposes of Section 18 of the Exchange Act, or otherwise
subject to the liabilities under that section, and shall not be
deemed to be incorporated by reference into any filing of the
Company under the Securities Act or the Exchange Act.
|
|
30-Sep-10 |
|
30-Sep-11 |
|
30-Sep-12 |
|
30-Sep-13 |
|
30-Sep-14 |
|
30-Sep-15 |
|
30-Sep-16 |
|
30-Sep-17 |
|
30-Sep-18 |
|
30-Sep-19 |
|
30-Sep-20 |
|
China HGS Real Estate Inc. |
|
|
100 |
|
|
32.30 |
|
|
6.22 |
|
|
183.97 |
|
|
121.77 |
|
|
40.76 |
|
|
56.46 |
|
|
31.81 |
|
|
29.43 |
|
|
16.99 |
|
|
25.84 |
|
Nasdaq
Composite Index |
|
|
100 |
|
|
101.97 |
|
|
131.56 |
|
|
159.23 |
|
|
189.70 |
|
|
195.06 |
|
|
224.27 |
|
|
274.25 |
|
|
339.71 |
|
|
337.72 |
|
|
471.48 |
|
NASDAQ
Capital Market Composite |
|
|
100 |
|
|
85.00 |
|
|
109.49 |
|
|
134.77 |
|
|
129.00 |
|
|
109.75 |
|
|
113.45 |
|
|
140.98 |
|
|
160.45 |
|
|
136.85 |
|
|
162.44 |
|
*$100 invested at closing prices on September 30, 2010 in our
common stock or in a stock index.
Equity Compensation Plan Information
See “Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters” for disclosure
regarding our equity compensation plan.
Purchase of Equity Securities by Our Company and Affiliated
Purchases
None.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial
Data
Not applicable.
Item 7. Management's
Discussion And Analysis of Financial Conditions And Results Of
Operations.
The following discussion and analysis of financial condition and
results of operations relates to the operations and financial
condition reported in the financial statements of China HGS Real
Estate Inc. for the fiscal years ended September 30, 2020 and
2019 and should be read in conjunction with such financial
statements and related notes included in this report.
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 and 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 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. |
Our 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 fiscal 2020, our sales and net loss were approximately $13.0
million and $1.0 million, respectively, representing a decrease of
approximately 67.5% and 73.5% from fiscal 2019, respectively. The
decrease in revenue, gross profit and net income was mainly due to
less GFA sold during fiscal 2020.
For fiscal 2020, our average selling price (“ASP”) for real estate
projects (excluding sales of parking spaces) located in Yang County
was approximately $718 per square meter, consistent from ASP of
$720 per square meter in fiscal 2019. The ASP of our Hanzhong real
estate projects (excluding sales of parking spaces) was
approximately $419 per square meter for fiscal 2020, decreased by
25.2% as compared to the ASP of $560 per square meter for fiscal
2019. The decrease ASP in Hanzhong real estate projects was mainly
due to the fact that many units sold in fiscal 2020 was for
government’s reallocation of residence purpose with lower ASP.
Market Outlook
In Fiscal 2019, the macro-economic backdrop will continue to be
uncertain with unrelenting downside pressure, while the overall
inventory level of properties will remain high. The central
government will continue to adopt policies aimed to ensure
stability, economic growth and improved employment. The details of
implementation by local government will vary among different PRC
cities.
In 2020, the Company expects to start the construction of the real
estate projects surrounding the Liangzhou Road area 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. Our customers continue to experience growth of
their disposable income. With a lower housing price to family
disposable income ratio and an increasing urbanization level, there
is a growing demand for high quality residential housing. From this
perspective, the Company is positive about the outlook for the
local real estate market in a long term. In the meantime, the
Company is diversifying its revenue and developing more commercial
and municipal projects.
We intend to remain focused on our existing construction projects
in Hanzhong City and Yang County, deepening our institutional sales
network, enhancing our cost and operational synergies and improving
cash flows and strengthening our balance sheet. In this respect, we
began the construction of the following large high rise residential
projects in Hanzhong City and Yang County:
Liangzhou road 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 September 30, 2020, the main Liangzhou road construction is
substantially completed, due to the complicated multiple level of
government review process. Since the Company started land leveling
and construction process for the Oriental Garden Phase II and
Liangzhou Mansion real estate properties in the Liangzhou road real
estate project in September, 2020, the Company expected to the
government’s acceptance to be completed before the end of fiscal
2021. 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
September 30, 2020, the actual costs incurred by the Company
were $164,879,955 (September 30, 2019 - $146,958,903) and the
incremental cost related to residence resettlement approved by the
local government.
The Liangzhou Road related projects mainly consists Oriental Garden
Phase II, Liangzhou Mansion and Pearl Commercial Plaza surrounding
the Liangzhou road area. The Company started land leveling and
construction process for the Oriental Garden Phase II and Liangzhou
Mansion real estate properties in the Liangzhou road real estate
project in September, 2020.
Oriental 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 these three real estate projects after
the road construction 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. 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 (
September 30, 2020 and 2019 - 4.75%). The local government has
approved a refund to the Company by reducing local surcharges or
taxes otherwise required in the real estate development. The road
construction was substantially completed as of September 30,
2020 and in process of government review and approval.
In September 2012, the Company was approved by the Hanzhong
local government to construct four municipal roads with a total
length of approximately 1,192 meters. The project was deferred and
then restarted during the quarter ended March 31, 2014. As of
September 30, 2020, the local government was still in the
process of assessing the budget for these projects.
Under
development: |
|
Estimated Completion time of construction |
Hanzhong City Hanfeng Beiyuan East Road |
|
To be delivered to the government in
2021 |
Hanzhong City Liangzhou Road related projects |
|
The road construction was
substantially completed in September 2018, the other
related projects started in September 2020. |
Hanzhong City Beidajie project |
|
Under planning stage |
Yang County East 2nd Ring Road |
|
To be delivered to the government in
2021 |
RESULTS OF OPERATIONS
Year ended September 30, 2020 as compared to year ended
September 30, 2019
Revenues
The following is a breakdown of revenue for the years ended
September 30, 2020 and 2019:
|
|
For the years ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
Revenue recognized for completed condominium real estate
projects |
|
$ |
12,979,227 |
|
|
$ |
13,400,491 |
|
Revenue
recognized for condominium real estate projects under
development |
|
|
- |
|
|
|
26,564,065 |
|
Total |
|
$ |
12,979,227 |
|
|
$ |
39,964,556 |
|
Revenue recognized for completed condominium real estate
projects
The following table summarizes our revenue generated by different
projects:
|
|
For the Years Ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
Variance |
|
|
|
Revenue |
|
|
% |
|
|
Revenue |
|
|
% |
|
|
Variance |
|
|
% |
|
Projects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou
Pearl Garden Phase I and II |
|
$ |
1,312,921 |
|
|
|
10.1 |
% |
|
$ |
2,726,864 |
|
|
|
20.3 |
% |
|
$ |
(1,413,943 |
) |
|
|
(51.9 |
)% |
Oriental Pearl
Garden |
|
|
187,284 |
|
|
|
1.4 |
% |
|
|
2,627,563 |
|
|
|
19.6 |
% |
|
|
(2,440,279 |
) |
|
|
(92.9 |
)% |
Mingzhu Garden
(Nanyuan and Beiyuan) Phase I and II |
|
|
3,500,750 |
|
|
|
27.0 |
% |
|
|
8,046,064 |
|
|
|
60.1 |
% |
|
|
(4,545,314 |
) |
|
|
(56.5 |
)% |
Yangzhou Palace |
|
|
7,978,272 |
|
|
|
61.5 |
% |
|
|
- |
|
|
|
|
|
|
|
7,978,272 |
|
|
|
100 |
% |
Total Revenue |
|
|
12,979,227 |
|
|
|
100 |
% |
|
|
13,400,491 |
|
|
|
100 |
% |
|
|
(1421,264 |
) |
|
|
(3.1 |
)% |
Sales Tax |
|
|
(193,719 |
) |
|
|
|
|
|
|
(133,803 |
) |
|
|
|
|
|
|
(59,916 |
) |
|
|
(44.8 |
)% |
Revenue
net of sales tax |
|
$ |
12,785,508 |
|
|
|
|
|
|
$ |
13,266,688 |
|
|
|
|
|
|
$ |
(481,180 |
) |
|
|
(3.6 |
)% |
Our revenues are derived from the sale of residential buildings,
commercial store-fronts and parking spaces in projects that we have
developed. Comparing to last year, revenues before sales tax
decreased by 3.1% to approximately $13.0 million in fiscal 2020
from approximately $13.4 million in fiscal 2019. The total GFA sold
during fiscal 2020 was 21,735 square meters, consistent from the
22,339 square meters sold during last year. Currently, 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 as well as Yangzhou Palace projects has been completed
during the third quarter of fiscal 2019, therefore only limited
models are available for customer selection, which limited our
ability to promote our existing house model to broader range of
customers and resulted in lower sales for current year. The sales
tax for fiscal 2020 increased by 44.8% from fiscal 2019, due to
more surcharge tax charged for the completed real estate properties
during fiscal 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 year ended September 30, 2020, there
was no revenue recognized under the percentage of completion
method, because Yangzhou Palace real estate project was completed
by September 30, 2019 and our current real estate projects
under development in Liangzhou Road and related project under
development as of September 30, 2020 have not met the criteria
for revenue recognition under the percentage of completion
method.
|
|
|
|
|
For the year ended September 30, 2019 |
|
|
|
Total GFA |
|
|
Average
Percentage of
Completion(1) |
|
|
Qualified
Contract
Sales(2) |
|
|
Revenue
Recognized
under
Percentage of
Completion |
|
|
Accumulated
Revenue
recognized
under
Percentage of
completion |
|
Real estate properties under development located in Yang
County |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Palace |
|
|
297,450 |
|
|
|
100 |
% |
|
$ |
77,979,739 |
|
|
$ |
26,564,065 |
|
|
$ |
77,979,739 |
|
|
(1) |
Percentage of Completion progress
is calculated by dividing total costs incurred by total estimated
costs for the relevant buildings in each real estate building ,
estimated as of the date 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 September 30, 2019 and 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 revenues
for the years indicated.
|
|
For the Years Ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Cost |
|
|
Percentage |
|
|
Cost |
|
|
Percentage |
|
|
Variance |
|
|
Variance % |
|
Land
use rights |
|
$ |
843,284 |
|
|
|
9.0 |
% |
|
$ |
2,692,563 |
|
|
|
8.9 |
% |
|
$ |
(1,849,279 |
) |
|
|
(68.7 |
)% |
Construction costs |
|
|
8,526,536 |
|
|
|
91.0 |
% |
|
|
27,560,950 |
|
|
|
91.1 |
% |
|
|
(19,034,414 |
) |
|
|
(69.1 |
)% |
Total |
|
$ |
9,369,820 |
|
|
|
100 |
% |
|
$ |
30,253,513 |
|
|
|
100 |
% |
|
$ |
(20,883,693 |
) |
|
|
(69.0 |
)% |
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 $9.4 million for the year ended
September 30, 2020 compared to $30.3 million for the year
ended September 30, 2019. The 69% decrease in cost of sales
was mainly attributable to the decrease in total GFA sold for
Oriental Pearl Garden, Mingzhu Garden (Nanyuan and Beiyuan) Phase I
and II and Yang County Yangzhou Palace project during fiscal
2020 which led to decreased revenue and cost of sales during fiscal
2020.
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 year ended
September 30, 2020 were approximately $0.8 million, as
compared to $2.7 million for the year ended September 30,
2019, representing a decrease of $1.8 million from last year. The
decrease in costs of land use rights was due to less GFA sold
during fiscal 2020.
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, 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 year ended September 30, 2020 were
approximately $8.5 million as compared to approximately $27.6
million for the year ended September 30, 2019, representing a
decrease of $10.0 million. The decrease in construction cost was
due to the decrease in units sold in fiscal 2020.
Gross profits
Gross profit was approximately $0.7 million for the year ended
September 30, 2020 as compared to approximately $9.3 million
for the year ended September 30, 2019, representing a decrease
of approximately $8.6 million, which was mainly attributable to
less GFA sold in Oriental Pearl Garden and Yang County Yangzhou
Palace project during fiscal 2020 and addition impairment of $2.7
million recognized during the year. We have only limited models
available for customer selection in Oriental Pearl Garden project
and Yangzhou Yangzhou Palace project, therefore, the sales from
these completed projects decreased from last year. For fiscal 2020,
our average selling price (“ASP”) for real estate projects
(excluding sales of parking spaces) located in Yang County was
approximately $719 per square meter, consistent from the ASP of
$720 per square meter for fiscal 2019. The ASP of our Hanzhong real
estate projects (excluding sales of parking spaces) was
approximately $419 per square meter for fiscal 2020, decreased by
25.2% as compared to the ASP of $560 per square meter for fiscal
2019. The decrease ASP in Hanzhong real estate projects was mainly
due to the fact that many units sold in fiscal 2020 was for
government’s reallocation of residence purpose with lower selling
price.
The overall gross profit as a percentage of real estate sales was
5.5% for the year ended September 30, 2020, decreased from
23.3% for the year ended September 30, 2019, was mainly due to
the additional impairment loss of $2.7 million recognized for the
year ended September 30, 2020.
|
|
For the Year Ended September 30 |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
Project |
|
Gross Profit |
|
|
Gross
Margin |
|
|
Gross Profit |
|
|
Gross
Margin |
|
|
Variance |
|
|
Variance
% |
|
Yangzhou
Pearl Garden Phase I and II |
|
$ |
289,032 |
|
|
|
22 |
% |
|
$ |
1,619,575 |
|
|
|
59 |
% |
|
$ |
(1,330,543 |
) |
|
|
82 |
% |
Yangzhou Palace |
|
|
2,424,864 |
|
|
|
30 |
% |
|
|
5,210,427 |
|
|
|
20 |
% |
|
|
(2,785,563 |
) |
|
|
(54 |
)% |
Mingzhu
Garden
(Mingzhu Nanyuan and Beiyuan) Phase I and II |
|
|
842,776 |
|
|
|
24 |
% |
|
|
2,105,274 |
|
|
|
26 |
% |
|
|
(1,262,498 |
) |
|
|
(60 |
)% |
Oriental Garden |
|
|
52,735 |
|
|
|
28 |
% |
|
|
775,767 |
|
|
|
30 |
% |
|
|
(723,032 |
) |
|
|
(93 |
)% |
Sales Tax |
|
|
(193,719 |
) |
|
|
- |
|
|
|
(389,406 |
) |
|
|
- |
|
|
|
195,687 |
|
|
|
(50 |
)% |
Impairment losses on real estate property development
completed |
|
|
(2,703,031 |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
(2,703,031 |
) |
|
|
- |
|
Total Gross Profit |
|
$ |
712,657 |
|
|
|
5.5 |
% |
|
$ |
9,321,637 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
Total
Revenue |
|
$ |
12,979,227 |
|
|
|
|
|
|
$ |
39,964,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
Total operating expenses decreased by 8.0% or approximately $0.3
million to approximately $2.9 million for the year ended
September 30, 2020 from approximately $3.2 million for the
year ended September 30, 2019, as a result of a decrease in
general administrative expense of approximately $0.3 million, but
offset with a slight increase in selling expense of $0.1 million.
The Company incurred more marketing expense in fiscal 2020 to
promote the sales in Yangzhou Palace project, which resulted higher
selling expense in last year. The $0.3 million decrease in general
and administrative expense was due to less consulting and
professional fee incurred for the year ended September 30,
2020.
|
|
For the years ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
General and administrative expenses |
|
$ |
2,324,057 |
|
|
$ |
2,661,578 |
|
Selling
expenses |
|
|
580,639 |
|
|
|
494,646 |
|
Total
Operating expenses |
|
$ |
2,904,696 |
|
|
$ |
3,156,224 |
|
Percentage of
Revenue before sales tax |
|
|
22.4 |
% |
|
|
7.9 |
% |
Interest expense, net
Net interest expense was approximately $0.1 million for the year
ended September 30, 2020 and 2019.
Other income, net
For the year ended September 30, 2020, the Company had net
other income of $1.4 million due to the fact that the Company
disposed certain real estate properties in the existing real estate
property completed and under-development to suppliers with
settlement of their related payables. For the year ended
September 30, 2019, the Company incurred net other expense of
$0.3 million for certain non-operating related expenditures.
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 years ended September 30, 2020 and 2019.
For the year ended September 30, 2020, the income tax
provision was approximately $0.8 million, decreased from
approximately $2.0 million in fiscal 2019 due to loss incurred in
fiscal 2020.
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. For
the year ended September 30, 2018, the Company recognized 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. As of September 30, 2020, the
Company provided an additional $1.0 million 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. For years ended September 30,
2020 and 2019, the Company is subject to income tax rate of 25% on
taxable income. 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
We reported approximately net income of $1.0 million in net income
for the year ended September 30, 2020, representing a decrease
of 73.5% or approximately $2.7 million as compared to net income of
approximately $3.7 million for the year ended September 30,
2019. The decrease in net income was mainly due to less GFA sold
during fiscal 2020.
Other comprehensive income
We operate primarily in the PRC and the functional currency of our
operating subsidiary is the Chinese Renminbi (”RMB”). 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 USD at the rates used in
translation.
Translation adjustments amounted to approximately $8.6 million and
negative $6.7 million for the years ended September 30, 2020
and 2019, respectively. The balance sheet amounts with
the exception of equity at September 30, 2020 were translated
at 6.7896 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 years ended September 30,
2020 and 2019 were 7.0056 RMB to 1.00 USD and 6.8753 RMB to 1.00
USD, 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.
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 $27.0 million in
fiscal 2020 as compared to fiscal 2019 due to decreased sales
volume of both residential and commercial properties developed by
us. 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 periods. As a
result, the developing period of real estate properties and our
operating cycle has been extended and we may not be able to
liquidate our large balance of completed real estate property
within a short term as we originally expected. In addition, as of
September 30, 2020, we had large construction loans payable
balance of approximately $109.9 million and large accounts payable
balance of approximately $25.4 million to be paid to subcontractors
within one year. The above mentioned facts raised substantial doubt
about the Company's ability to continue as a going concern 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 September 30, 2020, our total cash and
restricted cash balance decreased to approximately $3.9 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 September 30, 2020, we had
approximately $109.0 million completed residential apartments and
commercial units available for sale to potential buyers when
needed. Although we reported approximately $25.4 million accounts
payable as of September 30, 2020, due to the long term
relationship with our construction suppliers and subcontractors, we
were able to effectively manage cash spending on construction and
negotiate with them to adjust the payment schedule based on our
cash on hand. In addition, most of our existing real estate
development projects related to old town renovation which are
supported by local government. As of September 30, 2020, we
reported approximately $109.9 million construction loan 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 September 30, 2020, we had
approximately $19.4 million 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. For the year ended
September 30, 2020, we had five large ongoing construction
projects, which were under preliminary development stage due to
delayed inspection and acceptance of the development plans by local
government. In June 2020, we completed the residence
relocation surrounding Liangzhou Road related projects and expects
to construct the Liangzhou Road related projects starting from the
fourth quarter of fiscal year 2020. For other four projects, we
expect we will be able to obtain government’s approval of the
development plans on these projects in the coming fiscal year and
start the pre-sale of the real estate property to generate cash
when certain property development milestones have been achieved.
For the years ended September 30, 2020 and 2019, the Company
had positive cash flow from operating activities. In addition, our
principal shareholder, Mr. Xiaojun Zhu has been providing and
has committed to continue to provide his personal funds to support
the Company’s operation whenever necessary.
Cash Flow
Year ended September 30, 2020 as compared to year ended
September 30, 2019
Comparison of cash flows results for the fiscal year ended
September 30, 2020 and fiscal year ended September 30,
2019 are summarized as follows:
|
|
For
the years ended September 30, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
Variance |
|
Net
cash provided by operating activities |
|
$ |
2,217,264 |
|
|
$ |
8,937,581 |
|
|
$ |
(6,720,317 |
) |
Net
cash used in provided by financing activities |
|
$ |
(2,415,924 |
) |
|
$ |
(11,337,359 |
) |
|
$ |
8,921,435 |
|
Effect
of changes of foreign exchange rate on cash |
|
$ |
(135,921 |
) |
|
$ |
(173,682 |
) |
|
$ |
37,761 |
|
Net
increase (decrease) in cash |
|
$ |
(334,581 |
) |
|
$ |
(2,573,460 |
) |
|
$ |
2,238,879 |
|
Operating activities
Net cash provided by operating activities during fiscal 2020 was
approximately $2.2 million, consisting of net income of
approximately $1.0 million, noncash adjustments of approximately
$2.7 million impairment on the real estate property completed and
deficit of $5.0 million due to gain on settlement of certain
payables with suppliers and settlements on shareholder loans and
net changes in our operating assets and liabilities, which mainly
included a decrease in real estate property completed of
approximately $9.4 million due to the sales of real estate
properties, a decrease of security deposit with government of $6.3
million due to the fact that the Company started the construction
of Liangzhou road and affiliated projects in September 2020
and the local government refunded such deposits to support the
Company’s working capital and an increase of $1.3 million in
customers deposit received from buyers, offset by the continuous
spending on real estate property under development of $7.5 million,
a reduction of accounts payable of $1.5 million due to payments to
suppliers based on development progress and a reduction of tax
payable of $2.6 million.
Net cash provided by operating activities during fiscal 2019 was
approximately $8.9 million, consisting of net income of
approximately $3.7 million, noncash adjustments of approximately
$1.4 million and net changes in our operating assets and
liabilities, which mainly included an increase in real estate
property completed of approximately $45.8 million and a decrease in
real estate property under development of approximately $51.0
million due to the completion of Yangzhou Palace real estate
project during the year and reclassification from real estate
property under development to real estate property completed, an
increase of accounts payable of $8.0 million due to continuous
spending on the real estate under developments, an increase of $1.2
million in tax payable, offset by a reduction of customer deposits
of $4.3 million and reduction of contract balance of $3.9 million
due to recognition of revenue.
Financing activities
Net cash used in financing activities was approximately $4.6
million for fiscal 2020, mainly representing the repayment of
construction loan of $2.4 million during fiscal 2020 and a
settlement of shareholder loan of $2.1 million.
Net cash used in financing activities was approximately $11.3
million for fiscal 2019, mainly representing the repayment of loans
during fiscal 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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.
For the years ended September 30, 2020 and 2019, the Company
has not experienced any delinquent mortgage loans and has not
experienced any losses related to this guarantee. As of
September 30, 2020 and 2019, our outstanding guarantees in
respect of our customers' mortgage loans amounted to approximately
$68 million and $78 million, respectively. As of September 30,
2020 and 2019, the amount of security deposits provided for these
guarantees was approximately $3.4 million and $3.9 million
respectively and the Company believes that such reserves are
sufficient.
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.
Critical Accounting Policies and Management Estimates
Revenue recognition
The Company adopted FASB ASC Topic 606 Revenue from Contracts with
Customers (“ASC 606”) on October 1, 2018 using the modified
retrospective approach. Under ASC 606, Revenue from Contracts with
Customers, revenue is recognized in accordance with the transfer of
goods and services to customers at an amount that reflects the
consideration that the Company expects to be entitled to for those
goods and services. The Company determines revenue recognition
through the following steps:
|
· |
identification of the
contract, or contracts, with a customer; |
|
· |
identification of the
performance obligations in the contract; |
|
· |
determination of the
transaction price, including the constraint on variable
consideration; |
|
· |
allocation of the
transaction price to the performance obligations in the contract;
and |
|
· |
recognition of revenue
when (or as) the Group satisfy a performance
obligation. |
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 obligation
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 (“percentage completion method”).
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.
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 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 years ended September 30, 2020 and 2019,
the Company recognized $2,703,031 and nil impairment for real
estate property completed, respectively.
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.
Item 7A. Quantitative and
Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial
Statements and Supplementary Data
CHINA HGS REAL ESTATE INC.
TABLE OF CONTENTS
 |
|
|
|
 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
China HGS Real Estate Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
China HGS Real Estate Inc. and subsidiaries (the “Company”) as of
September 30, 2020, and the related consolidated statements of
income and comprehensive income, stockholders’ equity, and cash
flows for the year then ended, and the related notes (collectively
referred to as the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
September 30, 2020, and the results of its operations and its cash
flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. Our audit included performing procedures to assess the
risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit
also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We
believe that our audit provides a reasonable basis for our
opinion
/s/Wei, Wei & Co., LLP
We have served as the Company’s auditor since 2020
New York, NY
January 13, 2021
|

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
China HGS Real Estate Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
China HGS Real Estate Inc. (the “Company”) as of September 30, 2019
and 2018, and the related consolidated statements of income and
comprehensive loss, stockholders’ equity and cash flows for
each of the yeas in the two-year period ended September 30, 2019,
and the related notes and schedules (collectively referred to as
the financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of September 30, 2019 and 2018, and the results of
its operations and its cash flows for each of the years in the
two-year period ended September 30, 2019, in conformity with
accounting principles generally accepted in the United States of
America.
Basis for Opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor from 2009 through 2020
New York, New York
January 14, 2020
CHINA HGS REAL ESTATE INC.
CONSOLIDATED BALANCE
SHEETS
|
|
September 30, |
|
|
September 30, |
|
|
|
2020 |
|
|
2019 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash |
|
$ |
457,699 |
|
|
$ |
263,139 |
|
Restricted cash |
|
|
3,409,837 |
|
|
|
3,938,978 |
|
Contract assets |
|
|
14,255,328 |
|
|
|
12,668,925 |
|
Real estate property development completed |
|
|
94,671,258 |
|
|
|
101,933,030 |
|
Other assets |
|
|
8,132,555 |
|
|
|
2,031,937 |
|
Property, plant
and equipment, net |
|
|
571,330 |
|
|
|
614,008 |
|
Security
deposits |
|
|
1,855,506 |
|
|
|
7,972,117 |
|
Real estate
property under development |
|
|
227,741,017 |
|
|
|
215,745,225 |
|
Due
from local government for real estate property development
completed |
|
|
2,869,623 |
|
|
|
2,725,854 |
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
353,964,153 |
|
|
$ |
347,893,213 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Construction loans |
|
$ |
109,937,408 |
|
|
$ |
106,797,436 |
|
Accounts payables |
|
|
25,415,352 |
|
|
|
27,368,510 |
|
Other payables |
|
|
4,028,048 |
|
|
|
5,289,176 |
|
Construction deposits |
|
|
3,202,730 |
|
|
|
3,042,273 |
|
Contract liabilities |
|
|
1,847,685 |
|
|
|
1,907,828 |
|
Customer deposits |
|
|
19,405,528 |
|
|
|
17,183,264 |
|
Shareholder loans |
|
|
- |
|
|
|
2,129,114 |
|
Accrued expenses |
|
|
1,920,370 |
|
|
|
3,585,644 |
|
Taxes payable |
|
|
19,881,211 |
|
|
|
21,889,818 |
|
Total liabilities |
|
|
185,638,332 |
|
|
|
189,193,063 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
Stockholders'
equity |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value,
50,000,000 shares authorized, 22,525,000* shares issued and
outstanding September 30, 2020 and 2019 |
|
|
22,525 |
|
|
|
22,525 |
|
Additional paid-in
capital* |
|
|
129,930,330 |
|
|
|
129,930,330 |
|
Statutory surplus |
|
|
10,458,395 |
|
|
|
10,360,251 |
|
Retained earnings |
|
|
34,954,061 |
|
|
|
34,070,767 |
|
Accumulated other comprehensive loss |
|
|
(7,039,490 |
) |
|
|
(15,683,723 |
) |
Total stockholders' equity |
|
|
168,325,821 |
|
|
|
158,700,150 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity |
|
$ |
353,964,153 |
|
|
$ |
347,893,213 |
|
*the number of common stock outstanding has been restated to
reflect the 2:1 stock reverse split on August 20, 2020 (Note
11).
The accompanying notes are an integral part of these consolidated
financial statements
CHINA HGS REAL ESTATE INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2020 and 2019
|
|
2020 |
|
|
2019 |
|
Real estate sales |
|
$ |
12,979,227 |
|
|
$ |
39,964,556 |
|
Less: Sales
tax |
|
|
193,719 |
|
|
|
389,406 |
|
Impairment losses
on real estate property development completed |
|
|
2,703,031 |
|
|
|
- |
|
Cost of
real estate sales |
|
|
9,369,820 |
|
|
|
30,253,511 |
|
Gross profit |
|
|
712,657 |
|
|
|
9,321,639 |
|
Operating
expenses |
|
|
|
|
|
|
|
|
Selling and
distribution expenses |
|
|
580,639 |
|
|
|
494,646 |
|
General
and administrative expenses |
|
|
2,324,057 |
|
|
|
2,661,578 |
|
Total operating expenses |
|
|
2,904,696 |
|
|
|
3,156,224 |
|
Operating
income |
|
|
(2,192,039 |
) |
|
|
6,165,415 |
|
Interest
expense, net |
|
|
(65,535 |
) |
|
|
(131,270 |
) |
Other income (expense), net |
|
|
4,080,945 |
|
|
|
(309,930 |
) |
Income
before income taxes |
|
|
1,823,371 |
|
|
|
5,724,215 |
|
Provision for income taxes |
|
|
841,933 |
|
|
|
2,022,043 |
|
Net
income |
|
|
981,438 |
|
|
|
3,702,172 |
|
Other
comprehensive loss |
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
|
8,644,233 |
|
|
|
(6,679,858 |
) |
Comprehensive income (loss) |
|
$ |
9,625,671 |
|
|
$ |
(2,977,686 |
) |
Basic and
diluted income per common share |
|
|
|
|
|
|
|
|
Basic
and diluted |
|
$ |
0.04 |
|
|
$ |
0.16 |
|
Weighted
average common shares outstanding |
|
|
|
|
|
|
|
|
Basic
and diluted* |
|
|
22,525,000 |
|
|
|
22,525,000 |
|
*the number of common stock outstanding has been restated to
reflect the 2:1 stock reverse split on August 20, 2020 (Note
11).
The accompanying notes are an integral part of these consolidated
financial statements
CHINA HGS REAL ESTATE INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
Common
Stock |
|
|
Additional |
|
|
Statutory |
|
|
Retained |
|
|
Accumulated
Other
Comprehensive |
|
|
|
|
|
|
Shares* |
|
|
Amount |
|
|
Paid-in Capital |
|
|
Surplus |
|
|
Earnings |
|
|
Loss |
|
|
Total |
|
Balance
at September 30, 2018 |
|
|
22,525,000 |
|
|
$ |
22,525 |
|
|
$ |
129,930,330 |
|
|
$ |
9,925,794 |
|
|
$ |
30,803,052 |
|
|
$ |
(9,003,865 |
) |
|
$ |
161,677,836 |
|
Appropriation
of statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434,457 |
|
|
|
(434,457 |
) |
|
|
|
|
|
|
- |
|
Net
income for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,702,172 |
|
|
|
|
|
|
|
3,702,172 |
|
Foreign
currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,679,858 |
) |
|
|
(6,679,858 |
) |
Balance
at September 30, 2019 |
|
|
22,525,000 |
|
|
$ |
22,525 |
|
|
$ |
129,930,330 |
|
|
$ |
10,360,251 |
|
|
$ |
34,070,767 |
|
|
$ |
(15,683,723 |
) |
|
$ |
158,700,150 |
|
Appropriation
of statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Net
income for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
981,438 |
|
|
|
|
|
|
|
981,438 |
|
Appropriation
of statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,144 |
|
|
|
(98,144 |
) |
|
|
|
|
|
|
- |
|
Foreign
currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,644,233 |
|
|
|
8,644,233 |
|
Balance
at September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,525,000 |
|
|
$ |
22,525 |
|
|
$ |
129,930,330 |
|
|
$ |
10,458,395 |
|
|
$ |
34,954,061 |
|
|
$ |
(7,039,490 |
) |
|
$ |
168,325,821 |
|
*the number of common stock outstanding has been restated to
reflect the 2:1 stock reverse split on August 20, 2020 (Note
11).
The accompanying notes are an integral part of these consolidated
financial statements
CHINA HGS REAL ESTATE INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 and 2019
|
|
2020 |
|
|
2019 |
|
Cash flows from operating
activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
981,438 |
|
|
$ |
3,702,172 |
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Deferred tax provision |
|
|
- |
|
|
|
1,302,606 |
|
Depreciation |
|
|
72,748 |
|
|
|
79,270 |
|
Impairment losses on real estate property
development completed |
|
|
2,703,031 |
|
|
|
- |
|
Gain
on settlement of shareholder loan and payables with
suppliers |
|
|
(4,998,762 |
) |
|
|
- |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Advances to vendors |
|
|
- |
|
|
|
20,395 |
|
Security deposits |
|
|
6,335,525 |
|
|
|
- |
|
Contract assets |
|
|
(889,901 |
) |
|
|
(601,265 |
) |
Real
estate property development completed |
|
|
9,369,820 |
|
|
|
(45,818,735 |
) |
Real
estate property under development |
|
|
(7,511,989 |
) |
|
|
50,974,817 |
|
Other
assets |
|
|
(398,747 |
) |
|
|
(725,508 |
) |
Accounts payables |
|
|
(1,498,176 |
) |
|
|
7,967,500 |
|
Other
payables |
|
|
23,918 |
|
|
|
609,156 |
|
Contract liabilities |
|
|
(155,809 |
) |
|
|
(3,854,568 |
) |
Customer deposits |
|
|
1,275,401 |
|
|
|
(4,261,166 |
) |
Construction deposits |
|
|
- |
|
|
|
8,538 |
|
Accrued expenses |
|
|
(474,420 |
) |
|
|
700,527 |
|
Taxes payables |
|
|
(2,616,813 |
) |
|
|
(1,166,158 |
) |
Net cash provided by operating
activities |
|
|
2,217,264 |
|
|
|
8,937,581 |
|
|
|
|
|
|
|
|
|
|
Cash flow from financing
activities |
|
|
|
|
|
|
|
|
Proceeds from construction loans |
|
|
- |
|
|
|
488,307 |
|
Repayment of construction loans |
|
|
(2,415,924 |
) |
|
|
(11,825,666 |
) |
Repayment of shareholder loans |
|
|
- |
|
|
|
- |
|
Net cash (used in) financing
activities |
|
|
(2,415,924 |
) |
|
|
(11,337,359 |
) |
Effect of changes of foreign exchange rate on
cash |
|
|
(135,921 |
) |
|
|
(173,682 |
) |
Net (decrease) in cash |
|
|
(334,581 |
) |
|
|
(2,573,460 |
) |
Cash, restricted cash, beginning of
year |
|
|
4,202,117 |
|
|
|
6,775,577 |
|
Cash, restricted cash, end of
year |
|
$ |
3,867,536 |
|
|
$ |
4,202,117 |
|
Supplemental disclosures of cash flow
information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
6,847,515 |
|
|
$ |
7,199,086 |
|
Income taxes paid |
|
$ |
782,836 |
|
|
$ |
347,675 |
|
|
|
|
|
|
|
|
|
|
Representing |
|
|
|
|
|
|
|
|
Cash |
|
$ |
457,699 |
|
|
$ |
263,139 |
|
Restricted cash |
|
$ |
3,409,837 |
|
|
$ |
3,938,978 |
|
|
|
$ |
3,867,536 |
|
|
$ |
4,202,117 |
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
Settlement of shareholder loan and related
accrued interest |
|
$ |
(3,402,313 |
) |
|
|
- |
|
Settlement of payables with suppliers |
|
|
(3,415,572 |
) |
|
|
- |
|
The accompanying notes are an integral part of these consolidated
financial statements
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
China HGS Real Estate Inc. (the “Company” or “China HGS” or “we”,
“our”, “us”) is a corporation organized under the laws of the
State of Florida.
China HGS does not conduct any substantive operations of its own.
Instead, through its subsidiary, Shaanxi HGS Management and
Consulting Co., Ltd (“Shaanxi HGS”), it entered into certain
exclusive contractual agreements with the management of the
Company’s PRC operating subsidiary, Shaanxi Guangsha Investment and
Development Group Co., Ltd (“Guangsha”). Pursuant to these
agreements, Shaanxi HGS is obligated to absorb a majority of the
risk of loss from Guangsha’s activities and entitles Shaanxi HGS to
receive a majority of Guangsha’s expected residual returns. In
addition, Guangsha’s shareholders have pledged their equity
interest in Guangsha to Shaanxi HGS, irrevocably granted Shaanxi
HGS an exclusive option to purchase, to the extent permitted under
PRC Law, all or part of the equity interests in Guangsha and agreed
to entrust all the rights to exercise their voting power to the
person(s) appointed by Shaanxi HGS.
Based on these contractual arrangements, management believes that
Guangsha should be considered a “Variable Interest Entity” (“VIE”)
under ASC 810 “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51”, because the equity investors in
Guangsha no longer have the characteristics of a controlling
financial interest, and the Company, through Shaanxi HGS, is the
primary beneficiary of Guangsha. Accordingly, Guangsha has been
consolidated.
The Company, through its subsidiaries and VIE, engages in real
estate development, in the construction and sale of residential
apartments, parking lots and commercial properties. Total assets
and liabilities presented on the consolidated balance sheets and
sales, cost of sales, net income presented on Consolidated
Statement of Income and Comprehensive Loss as well as the cash flow
from operation, investing and financing activities presented on the
Consolidated Statement of Cash Flows are substantially the
financial position, operation and cash flow of Guangsha. The
Company has not provided any financial support to Guangsha for the
years ended September 30, 2020 and 2019. The following assets
and liabilities of the consolidated VIE are included in the
accompanying consolidated financial statements of the Company as of
September 30, 2020 and 2019:
|
|
Balance as of |
|
|
|
September 30,
2020 |
|
|
September 30,
2019 |
|
Total assets |
|
|
353,600,159 |
|
|
|
347,536,362 |
|
Total
liabilities |
|
$ |
181,104,861 |
|
|
$ |
184,937,708 |
|
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of consolidation and basis of presentation
The Company’s consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). The consolidated financial
statements include the accounts 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.
The Company’s operations involve real estate development and sales.
Starting from the year ended September 30, 2020, the Company
has been involved in larger real estate property development with
an extended development cycle. As a result, it is not possible to
precisely measure the duration of its operating cycle. The
accompanying consolidated balance sheets of the Company have been
prepared on an unclassified basis in accordance with real estate
industry practice and the prior year balance sheet has been
adjusted to reflect this change.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Liquidity
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 $27.0 million in
fiscal 2020 as compared to fiscal 2019 due to decreased sales
volume of both residential and commercial properties developed by
us, as a result, we reported a net income of approximately $1.0
million for the year ended September 30,2020. 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 periods. As a result, the
developing period of real estate properties and our operating cycle
has been extended and we may not be able to liquidate our large
balance of completed real estate property within a short term as we
originally expected. In addition, as of September 30, 2020, we
had large construction loans payable balance of approximately
$109.9 million and large accounts payable balance of approximately
$25.4 million to be paid to subcontractors within one year. The
above mentioned facts raised substantial doubt about the Company's
ability to continue as a going concern 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 September 30, 2020, our total cash and
restricted cash balance decreased to approximately $3.9 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 September 30, 2020, we had
approximately $94.7 million completed residential apartments and
commercial units available for sale to potential buyers. Although
we reported approximately $25.4 million accounts payable as of
September 30, 2020, due to the long term relationship with our
construction suppliers and subcontractors, we were able to
effectively manage cash spending on construction and negotiate with
them to adjust the payment schedule based on our cash on hand. In
addition, most of our existing real estate development projects
related to old town renovation which are supported by local
government. As of September 30, 2020, we reported
approximately $109.9 million construction loan 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 September 30, 2020, we had
approximately $19.4 million 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. For the year ended
September 30, 2020, we had five large ongoing construction
projects (see Note 3, real estate property under development) which
were under preliminary development stage due to delayed inspection
and acceptance of the development plans by local government. In
June 2020, we completed the residence relocation surrounding
Liangzhou Road related projects and expects to construct the
Liangzhou Road related projects starting from the fourth quarter of
fiscal year 2020. For other four projects, we expect we will be
able to obtain government’s approval of the development plans on
these projects in the coming fiscal year and start the pre-sale of
the real estate property to generate cash when certain property
development milestones have been achieved. For the years ended
September 30, 2020 and 2019, the Company had positive cash
flow from operating activities. In addition, our principal
shareholder, Mr. Xiaojun Zhu has been providing and has
committed to continue to provide his personal funds to support the
Company’s operation whenever necessary.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue recognition
The Company adopted FASB ASC Topic 606 Revenue from Contracts with
Customers (“ASC 606”) on October 1, 2018 using the modified
retrospective approach. Under ASC 606, Revenue from Contracts with
Customers, revenue is recognized in accordance with the transfer of
goods and services to customers at an amount that reflects the
consideration that the Company expects to be entitled to for those
goods and services. The Company determines revenue recognition
through the following steps:
· identification
of the contract, or contracts, with a customer;
· identification
of the performance obligations in the contract;
· determination of
the transaction price, including the constraint on variable
consideration;
· allocation of
the transaction price to the performance obligations in the
contract; and
· recognition of
revenue when (or as) the Group satisfy a performance
obligation.
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 obligation
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 (“percentage completion method”).
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 previously 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue recognition - continued
Disaggregation of Revenues
Disaggregated revenues was as follows:
|
|
For the years ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
Revenue recognized for completed condominium real estate
projects |
|
$ |
12,979,227 |
|
|
$ |
13,400,491 |
|
Revenue
recognized for condominium real estate projects under
development |
|
|
- |
|
|
|
26,564,065 |
|
Total |
|
$ |
12,979,227 |
|
|
$ |
39,964,556 |
|
Contract balances
Timing of revenue recognition may differ from the timing of billing
and cash receipts from customers. The Company records a contract
asset when revenue is recognized prior to invoicing, or a contract
liability when cash is received in advance of recognizing revenue.
A contract asset is a right to consideration that is conditional
upon factors other than the passage of time. Contract assets
include billed and billable receivables, which are the Company’s
unconditional rights to consideration other than to the passage of
time. Contract liabilities include cash collected in excess of
revenues. Customer deposits are excluded from contract
liabilities.
The Company has elected to apply the optional practical expedient
for costs to obtain a contract which allows the Company to
immediately expense sales commissions (included under selling
expenses) because the amortization period of the asset that the
Company otherwise would have used is one year or less.
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.
Changes of estimated gross profit margins related to revenue
recognized under the percentage of completion method are made in
the period in which circumstances requiring the revisions become
known. For the year ended September 30, 2020 and 2019, the
Company did not change the estimated revenue and related gross
profit margin from fiscal 2019. .
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 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.
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 consolidated
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.
|
|
2020 |
|
|
2019 |
|
Year
end RMB : USD exchange rate |
|
|
6.7896 |
|
|
|
7.1477 |
|
Annual
average RMB : USD exchange rate |
|
|
7.0056 |
|
|
|
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.
Cash
Cash includes cash on hand and demand deposits in accounts
maintained with large reputable commercial banks within the PRC.
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash
equivalents.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Restricted cash
The restricted cash is required by the banks as collateral for
mortgage loans given to the home buyers before obtaining the
certificates of ownership of the properties as collateral. In order
to provide the banks with the certificates of ownership, the
Company is required to complete certain procedures with the Chinese
government, which normally takes six to twelve months. Because the
banks provide the loan proceeds to the Company without obtaining
certificates 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. The
restricted cash is released by the banks once they receive the
certificates of ownership. These deposits are not covered by
insurance. The Company has not experienced any losses in such
accounts and management believes its restricted cash account is not
exposed to any significant risks.
Advances to vendors
Advances to vendors consist of balances paid to contractors and
vendors for services and materials that have not been provided or
received and generally relate to the development and construction
of residential and commercial units in the PRC. Advances to vendors
are reviewed periodically to determine whether their carrying value
has become impaired. Historically, the Company has not experienced
any losses as a result of these advances.
Security deposits for land use rights
Security deposits for land use rights consist of the deposit held
by the PRC government for the purchase of land use rights and the
deposit held by an unrelated party to transfer its land use rights
to the Company. The deposits will be reclassified to real estate
property under development upon the transfers of legal title.
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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Real estate property development completed and under
development- continued
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 years ended September 30, 2020 and 2019,
the Company recognized $2,703,031 and nil impairment for real
estate property completed, respectively.
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 years ended September 30, 2020 and 2019, the
total interest capitalized in the real estate property development
was $7,086,018 and $7,158,391, respectively.
Property, plant and equipment, net
Property, plant and equipment are recorded at cost less accumulated
depreciation and any impairment losses. The cost of an
asset comprises its purchase price and any directly attributable
costs of bringing the asset to its working condition and location
for its intended use.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, less any estimated residual
value. Estimated useful lives of the assets are as
follows:
Buildings |
39 years |
Machinery and office equipment |
5-10 years |
Vehicles |
8 years |
Any gain or loss on disposal or retirement of a fixed asset is
recognized in the profit and loss account and is the difference
between the net sales proceeds and the net carrying amount of the
asset. When property and equipment are retired or otherwise
disposed of, the asset and accumulated depreciation are removed
from the accounts and the resulting profit or loss is reflected in
income (loss).
Maintenance, repairs and minor renewals are charged directly to
expense as incurred unless such expenditures extend the useful life
or represent a betterment, in which case they are capitalized.
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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Impairment of long-lived assets - continued
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 for the
years ended September 30, 2020 and 2019.
Customer deposits
Customer deposits consist of amounts received from customers
relating to the sale of residential units in the PRC. In the PRC,
customers will generally obtain permanent financing for the
purchase of their residential unit prior to the completion of the
project. The lending institution will provide the funding to the
Company upon the completion of the financing rather than the
completion of the project. The Company receives these funds and
recognizes them as a liability until the revenue can be
recognized.
Property warranties
The Company provides its customers with warranties which cover
major defects of the building structure and certain fittings and
facilities of properties sold. The warranty period varies from two
years to five years, depending on different property components the
warranty covers. The Company continually estimates potential costs
for materials and labor with regard to warranty-type claims
expected to be incurred subsequent to the delivery of a property.
Reserves are determined based on historical data and trends with
respect to similar property types and geographical areas. The
Company continually monitors the warranty reserve and makes
adjustments to its pre-existing warranties, if any, in order to
reflect changes in trends and historical data as information
becomes available. The Company may seek further recourse against
its contractors or any related third parties if it can be proved
that the faults are caused by them. In addition, the Company also
withholds up to 2% of the contract cost from sub-contractors for
periods of two to five years. These amounts are included in
construction deposits, and are only paid to the extent that there
has been no warranty claim against the Company relating to the work
performed or materials supplied by the subcontractors. For the
years ended September 30, 2020 and 2019, the Company had not
recognized any warranty costs in excess of the amount retained from
subcontractors and therefore, no warranty reserve is considered
necessary at the balance sheet dates.
Stock-based compensation
Share-based payment transactions are measured based on the
grant-date fair value of the equity instrument issued and
recognized as compensation expense over the requisite service
period, or vesting period.
Forfeitures to be estimated at the time of grant and revised, if
necessary, in the subsequent period if actual forfeitures differ
from initial estimates. Forfeiture rate is estimated based on
historical and future expectation of employee turnover rate and are
adjusted to reflect future change in circumstances and facts, if
any. Share-based compensation expense is recorded net of estimated
forfeitures such that expense was recorded only for those stock
options and common stock awards that are expected to vest.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Construction deposits
Construction deposits are the warranty deposits the real estate
contractors provide to the Company upon signing the construction
contracts. The Company can use such deposits to reimburse customers
in the event of customer claims due to construction
defects. The remaining balance of the deposits are
returned to the contractors when the terms of the after-sale
property warranty expires, which normally occurs within two to five
years after the date of the deposit.
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. A
valuation allowances is 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
September 30, 2020 and 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 years ended September 30, 2020 and
2019. As of September 30, 2020, the Chinese entities’ income
tax returns filed in China for the years ended December 31,
2019, 2018, 2017, 2016 and 2015 are subject to examination by the
Chinese taxing authorities.
As of September 30, 2020, the tax years ended
September 30, 2010 through September 30, 2019 for the
Company’s PRC entities remain open for statutory examination by PRC
tax authorities. The parent Company China HGS Real Estate Inc.’s
both U.S. federal tax returns and Florida state tax returns are
delinquent since 2009. Its tax years ended September 30, 2014
through September 30, 2019 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 September 30, 2020 and 2019, including an approximately
$2.3 million provision on the deemed repatriation of undistributed
foreign earnings and an additional $1.0 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. Failure to furnish any income tax and information returns
with respect to any foreign business entity required, within the
time prescribed by the IRS, subjects the Company to civil
penalties. Management is of the opinion that penalties, if any,
that may be assessed would not be material to the consolidated
financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 years ended
September 30, 2020 and 2019 were net income and foreign
currency translation adjustments.
Advertising expenses
Advertising costs are expensed as incurred. For the years ended
September 30, 2020 and 2019, the Company recorded advertising
expenses of $271,811 and $57,448, respectively.
Basic and diluted earnings per share
The Company computes earnings 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 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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. The
company’s cash and restricted cash were on deposit at financial
institutions in the PRC, which the management believes are of high
credit quality. In May 1, 2015, China’s new Deposit Insurance
Regulation came into effect, pursuant to which banking financial
institutions, such as commercial banks, established in China are
required to purchase deposit insurance for deposits in RMB and in
foreign currency placed with them. Such Deposit Insurance
Regulation would not be effective in providing complete protection
for the Company’s accounts, as its aggregate deposits are much
higher than the compensation limit. However, the Company believes
that the risk of failure of any of these Chinese banks is remote.
Bank failure is uncommon in China and the Company believes that
those Chinese banks that hold the Company’s cash and restricted
cash are financially sound based on public available information.
For the years ended September 30, 2020 and 2019, the Company
has not experienced any delinquent mortgage loans and has not
experienced any losses related to this guarantee. The Company
believes that such reserves are sufficient.
The Company is dependent on third-party sub-contractors,
manufacturers, and distributors for all construction services and
supply of construction materials. For the year ended
September 30, 2020 and 2019, none supplier accounted for more
than 10% of the total project expenditure.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments,” which requires the Company to
measure and recognize expected credit losses for financial assets
held and not accounted for at fair value through net income. In
November 2018, April 2019 and May 2019, the FASB issued ASU No.
2018-19, “Codification Improvements to Topic 326, Financial
Instruments - Credit Losses,” “ASU No. 2019-04, Codification
Improvements to Topic 326, Financial Instruments - Credit Losses,”
“Topic 815, Derivatives and Hedging, and Topic 825, Financial
Instruments,” and “ASU No. 2019-05, Financial Instruments - Credit
Losses (Topic 326): Targeted Transition Relief,” which provided
additional implementation guidance on the previously issued ASU.
The ASU is effective for fiscal years beginning after December 15,
2020. The ASU requires a modified retrospective adoption method.
The Company is still evaluating the impact of adoption on its
financial statements and disclosures.
In October 2018, the FASB issued ASU No. 2018-17 (“ASU
2018-17”), Consolidation (Topic 810): Targeted Improvements to
Related Party Guidance for Variable Interest Entities. The updated
guidance requires entities to consider indirect interests held
through related parties under common control on a proportional
basis rather than as the equivalent of a direct interest in its
entirety when determining whether a decision-making fee is a
variable interest. The amendments in this update are effective for
non-public business entities for fiscal years beginning after
December 15, 2020, and interim periods within fiscal years
beginning after December 15, 2021, with early adoption
permitted. These amendments should be applied retrospectively with
a cumulative-effect adjustment to retained earnings at the
beginning of the earliest period presented. The Company is
currently evaluating the impact of adopting this standard 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, to simplify the accounting for income
taxes. The new guidance eliminates certain exceptions related to
the approach for intraperiod tax allocation, the methodology for
calculating income taxes in an interim period and the recognition
of deferred tax liabilities for outside basis differences. It also
simplifies aspects of the accounting for franchise taxes and
enacted changes in tax laws or rates and clarifies the accounting
for transactions that result in a step-up in the tax basis of
goodwill. This ASU will become effective for the Company's annual
and interim periods beginning in January 1, 2021, and early
adoption is permitted. The Company is evaluating the impact of this
standard on its consolidated financial statements.
Excepts as mentioned above, the Company does not believe other
recently issued but not yet effective accounting standards, if
currently adopted, would have a material effect on the Company’s
consolidated balance sheets, statements of income and comprehensive
loss, stockholders’ equity and cash flow.
Reclassifications
The Company changed its presentation of its consolidated balance
sheet to an unclassified format as of September 30, 2020. Certain
amounts in the prior year consolidated balance sheet have been
reclassified for comparative purposes to conform to the current
year’s presentation.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. REAL ESTATE PROPERTY COMPLETED AND UNDER
DEVELOPMENT
The following summarizes the components of real estate property
completed and under development as of September 30, 2020 and
2019:
|
|
Balance
as of |
|
|
|
September 30,
2020 |
|
|
September 30,
2019 |
|
Development
completed: |
|
|
|
|
|
|
|
|
Hanzhong
City Mingzhu Garden Phase I (e) |
|
$ |
- |
|
|
$ |
530,314 |
|
Hanzhong
City Mingzhu Garden Phase II |
|
|
22,801,439 |
|
|
|
24,264,216 |
|
Hanzhong
City Nan Dajie (Mingzhu Xinju) (e) |
|
|
- |
|
|
|
1,157,554 |
|
Hanzhong
City Oriental Pearl Garden |
|
|
19,937,105 |
|
|
|
19,070,129 |
|
Yang
County Yangzhou Pearl Garden Phase I (e) |
|
|
- |
|
|
|
1,514,241 |
|
Yang
County Yangzhou Pearl Garden Phase II |
|
|
2,559,977 |
|
|
|
3,054,412 |
|
Yang
County Yangzhou Palace |
|
|
49,372,737 |
|
|
|
52,342,164 |
|
Real
estate property development completed |
|
|
94,671,258 |
|
|
|
101,933,030 |
|
Under
development: |
|
|
|
|
|
|
|
|
Hanzhong
City Shijin Project (“’Shijin Project) (d) |
|
|
- |
|
|
|
6,776,688 |
|
Hanzhong
City Liangzhou Road and related projects (a) |
|
|
164,879,955 |
|
|
|
146,958,903 |
|
Hanzhong
City Hanfeng Beiyuan East (b) |
|
|
824,496 |
|
|
|
706,194 |
|
Hanzhong
City Beidajie (b) |
|
|
57,142,127 |
|
|
|
56,654,212 |
|
Yang
County East 2nd Ring Road (c) |
|
|
4,894,439 |
|
|
|
4,649,228 |
|
Real
estate property under development |
|
|
227,741,017 |
|
|
|
215,745,225 |
|
|
(a) |
In September 2013, the Company entered into an agreement
(“Liangzhou Agreement”) with the Hanzhong local government on the
Liangzhou Road reformation and expansion project (Liangzhou Road
Project”). Pursuant to the agreement, the Company is contracted to
reform and expand the Liangzhou Road, a commercial street in
downtown Hanzhong City, with a total length of 2,080 meters and
width of 30 meters and to resettle the existing residences in the
Liangzhou road area. The government’s original road construction
budget was approximately $33 million in accordance with the
Liangzhou Agreement. The Company, in return, is being compensated
by the local government to have an exclusive right on acquiring at
least 394.5 Mu land use rights in a specified location of Hanzhong
City. The Liangzhou Road Project’s road construction started at the
end of 2013. In 2014, the original scope and budget on the
Liangzhou road reformation and expansion project was extended,
because the local government included more area and resettlement
residences into the project, which resulted in additional
investments from the Company. In return, the Company is authorized
by the local government to develop and manage the commercial and
residential properties surrounding the Liangzhou Road project. As
of June 30, 2020, the main Liangzhou road construction is
substantially completed. The Company also completed the relocation
of residence by the end of June 2020 and expects to launch the
construction of the Liangzhou Road related projects starting from
the fourth quarter of fiscal year 2020.
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
September 30,2020, the actual costs incurred by the Company
were $164,879,955 (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.
|
|
(b) |
In September 2012, the Company
was approved by the Hanzhong local government to construct four
municipal roads with a total length of approximately 1,192 meters.
The project was deferred and then restarted during the quarter
ended June 30, 2014. As of September 30, 2020, the local
government has not completed the budget for these projects
therefore the delivery to these projects for government’s
acceptance and related settlement were extended to 2021. |
|
(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
(September 30, 2020 and 2019 - 4.75%). The local government
has approved a refund to the Company by reducing local surcharges
or taxes otherwise required in the real estate development. The
road construction was substantially completed as of
September 30, 2020 and in process of government review and
approval. |
|
(d) |
For the year ended September 30, 2020, the Company entered
into an agreement with Mr. Zhu Xiaojun and an unrelated party
(the “buyer group”) to dispose Shijin project at price of
$8,984,329 (or RMB 61 million). The carrying value of Shijin
project prior to the disposal was $7,134,107. Pursuant to the
agreement, a portion of selling price of $3,402,313 was fully
settled by the Company’s shareholder’s loan of $2,145,945 and
accrued interest payable of $1,256,368 to Mr. Zhu Xiaojun. The
rest of proceeds approximately $5.6 million will be collected from
the unrelated party by September 30, 2021 (Note 9). The
transaction resulted in a gain of approximately $1.9 million for
the year ended September 30, 2020.
|
|
(e) |
For the year ended September 30, 2020, the
Company entered into an agreement with certain suppliers to settle
the related payables balances of $3,415,572 with these suppliers by
disposal of the remaining real estate properties in Hanzhong City
Mingzhu Garden Phase I, Hanzhong City Nan Dajie and Yang County
Yangzhou Pearl Garden Phase I projects with the aggregated carrying
value of $267,032 (after recognized an impairment loss of
$2,703,031 during the year ended September 30, 2020). The
transaction resulted in a gain of approximately $3.1 million for
the year ended September 30, 2020. |
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PROPERTY, PLANT AND EQUIPMENT, NET
As of September 30, 2020 and 2019, property, plant and
equipment was as follows:
|
|
As
of September 30, |
|
|
|
2020 |
|
|
2019 |
|
Buildings |
|
$ |
805,208 |
|
|
$ |
764,867 |
|
Automobiles |
|
|
97,823 |
|
|
|
207,186 |
|
Total |
|
|
903,031 |
|
|
|
972,053 |
|
Less:
accumulated depreciation |
|
|
(331,701 |
) |
|
|
(358,045 |
) |
Property,
plant and equipment, net |
|
$ |
571,330 |
|
|
$ |
614,008 |
|
Depreciation expense for the years ended September 30, 2020
and 2019 was $72,748 and $79,270, respectively.
NOTE 5. RECEIVABLE FROM LOCAL GOVERNMENT
In June 2012, the Company was approved by Hanzhong local
government to construct two municipal roads with total length of
1,064.09 meters. The Company completed and delivered these two
roads to the local government on March 21, 2014 with local
government’s approval. The Company recognized such revenue during
the year ended September 30, 2014. As of September 30,
2020, a receivable balance from the Hanzhong local government was
$2,869,623 (September 30, 2018 - $2,725,854) and the Company
expected to realize the receivable to offset municipal surcharges
from local government for the Liangzhou Road related projects when
the Company started the Liangzhou Road related real estate property
construction in 2021 and later years.
NOTE 6. SECURITY DEPOSITS
As of September 30, 2020 and 2019, security deposits were as
follows:
|
|
As of September 30, |
|
|
|
2020 |
|
|
2019 |
|
Security deposit for land use right (1) |
|
$ |
1,855,506 |
|
|
$ |
2,798,103 |
|
Security deposits for other loan (2) |
|
|
- |
|
|
|
5,174,014 |
|
Security deposits |
|
$ |
1,855,506 |
|
|
$ |
7,972,117 |
|
|
(1) |
In May 2011, the Company
entered into a development agreement with the Hanzhong local
government. Pursuant to the agreement, the Company prepaid
$1,855,506 and $2,798,103 to Hanzhong Urban Construction Investment
Development Co., Ltd with the purpose to acquire certain land use
rights through public bidding as of September 30, 2020 and
2019, respectively. The Company currently expects to
make payment of the remaining development cost as the government’s
work progresses. |
|
(2) |
In connection with financing from Hanzhong Urban Construction
Investment Development Co., Ltd (See note 7), the Company provided
a security deposit for the loan received. As of September 30,
2020, the security deposit balances were nil (September 30,
2019 - $5,174,014) for other loan with Hanzhong Urban Construction
Investment Development Co., Ltd. Since the Company commenced
the preliminary construction of Liangzhou road and affiliated
project in September 30, 2020, the previous security deposits
was refunded by Hanzhong Urban Construction Investment Development
Co., Ltd as of September 30, 2020.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONSTRUCTION LOANS
|
|
September 30, 2020 |
|
|
September 30, 2019 |
|
Loan A
(i) |
|
$ |
92,450,491 |
|
|
$ |
90,186,614 |
|
Loan C
(ii) |
|
|
17,486,917 |
|
|
|
16,610,822 |
|
|
|
|
109,937,408 |
|
|
|
106,797,436 |
|
(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
$114.1 million (RMB 775,000,000) for a long term loan at 4.75%
interest per year to develop Liangzhou Road Project. As of
September 30, 2020, the Company borrowed $92,450,491 under
this credit line (September 30, 2019 - $90,186,614) with final
due date in October 2021. The loan is guaranteed by Hanzhong
City Hantai District Municipal Government and pledged by the
Company’s Yang County Yangzhou Palace project with carrying value
of $49,372,737 as of September 30, 2020 (September 30,
2019- $52,342,164). In addition, the Company was required to
provide a security deposit for the loan received (see note 6). As
of September 30, 2020, the security deposits paid was released
due to the Company’ commence of construction of Liangzhou Road and
affiliated project (2019 -$5,174,014). For the years ended
September 30, 2020 and 2019, the interest paid was $6,537,079
and $6,617,720, 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 years ending: |
|
Repayment
in USD |
|
|
Repayment
in RMB |
|
September 30, 2021 |
|
|
92,098,945 |
|
|
|
625,315,000 |
|
September 30, 2022 |
|
|
351,546 |
|
|
|
2,386,860 |
|
Total |
|
|
92,450,491 |
|
|
|
627,701,860 |
|
(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 $17.5 million
(RMB 119,000,000) for the development of Hanzhong City Liangzhou
Road project. As of September 30, 2020, the Company received
all the proceeds and repaid unused fund of $39,888 (RMB
270,829). The loan carries interest at a fixed annual 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 $3.3 million from December 2027 through
June 2031 and the interest is payable on annual basis. The
Company pledged the assets of Liangzhou Road related projects with
carrying value of $164,879,955 as collateral for the loan. Total
interest of $213,827 and $157,506 for the years ended
September 30, 2020 and 2019, 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 $25.8 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 and the interest is
payable on annual basis. 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 2021. As of September 30, 2020 and 2019, the outstanding
balance of loan was Nil. Interest charge for the year ended
September 30, 2020 and 2019 was $314,452 (2019- $231,626),
respectively, which was included in the construction capitalized
costs.. |
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CUSTOMER DEPOSITS
Customer deposits consist of amounts received from customers for
the pre-sale of residential units in the PRC. The details of
customer deposits are as follows:
|
|
As of September 30, |
|
|
|
2020 |
|
|
2019 |
|
Customer deposits
by real estate projects |
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan) |
|
$ |
7,606,944 |
|
|
$ |
7,029,356 |
|
Oriental Pearl
Garden |
|
|
4,358,467 |
|
|
|
4,182,454 |
|
Liangzhou road
related projects |
|
|
888,123 |
|
|
|
1,043,692 |
|
Yang County Pearl
Garden |
|
|
1,243,137 |
|
|
|
1,163,407 |
|
Yangzhou Palace |
|
|
5,308,857 |
|
|
|
3,764,355 |
|
Total |
|
$ |
19,405,528 |
|
|
$ |
17,183,264 |
|
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 September 30, 2020 and 2019, approximately
$3.4 million and $3.9 million was guaranteed by the Company,
respectively.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. SHAREHOLDERS LOANS
|
|
As of September 30, |
|
|
|
2020 |
|
|
2019 |
|
Shareholder loan – USD loan (*) |
|
$ |
- |
|
|
$ |
1,810,000 |
|
Shareholder loan – RMB loan (**) |
|
|
- |
|
|
|
319,114 |
|
Total |
|
$ |
- |
|
|
$ |
2,129,114 |
|
*. |
The
Company has a one year loan agreement (“USD Loan Agreement”) with
our Chairman, CEO and major 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 and the loan
is due on demand. The Company recorded interest of $72,400 for each
of the years ended September 30, 2020 and 2019. The Company
has not yet paid this interest. As of September 30, 2020 and
2019, the accrued interest payable amounted to $669,700 and
$597,300, respectively. |
**. |
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 funds from the Chairman in order to support the
Company’s Liangzhou 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,
2021, with at an interest rate of 4.35% per year. For years ended
September 30, 2020 and 2019, the interest was $20,661 and
$20,403, respectively, which is capitalized in the development cost
of Liangzhou road project. As of September 30, 2020 and 2019,
the accrued interest payable amounted to $586,668 and $537,651,
respectively. |
|
On
September 30, 2020, the Company entered into an agreement with
Mr. Zhu Xiaojun and an unrelated party (the “buyer group”) to
sell Shijin project at price of $7,364,204 (or RMB 50 million)
(Note 3). Pursuant to the agreement, a portion of selling price of
approximately $3.4 million was fully settled by the Company’s
shareholder’s loan payable with accrued interest payable to
Mr. Zhu Xiaojun and the rest of proceeds will be collected
from the unrelated party by September 30, 2021 (Note 9). The
transaction resulted in a gain of $1.9 million for the year ended
September 30, 2020. |
NOTE 10. 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 September 30, 2020,
the Company had business sales tax payable of $5,159,296 (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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. TAXES (continued)
(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 prior to the year ended September 30, 2018.
Starting from fiscal 2018, 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. For the years ended
September 30, 2020 and 2019, the Company’s total income tax
payable amounted to $11,639,537 and $11,720,848, respectively,
which included the income tax payable balances in PRC of $8,342,537
and $8,691,848, respectively and the Company expects to pay off the
income tax payable balance when the related real estate projects
are completely sold.
The following table reconciles the statutory rates to the Company’s
effective tax rate for the years ended September 30, 2020 and
2019:
|
|
For the years ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
Chinese statutory tax rate |
|
|
25.0 |
% |
|
|
25.0 |
% |
Valuation
allowance change |
|
|
18.7 |
% |
|
|
0.2 |
% |
Net
impact of Exemption rendered by local tax authorities and other
adjustments Effective tax rate |
|
|
2.5 |
% |
|
|
10.1 |
% |
|
|
|
46.2 |
% |
|
|
35.3 |
% |
Income tax expense for the years ended September 30, 2020 and
2019 is summarized as follows:
|
|
For the years ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
Current tax provision |
|
$ |
841,933 |
|
|
$ |
719,437 |
|
Deferred tax provision |
|
|
- |
|
|
|
1,302,606 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
841,933 |
|
|
$ |
2,022,043 |
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. 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.
For the years ended September 30, 2018, the Company recognized
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. As of September 30, 2020 and
2019, the Company provided an additional $0.8 million 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 September 30, 2020 and 2019, the outstanding LAT payable
balance was Nil with respect to completed real estate properties
sold up to September 30, 2020 and 2019, respectively.
(D) Taxes payable consisted of the following:
|
|
September 30,
2020 |
|
|
September 30,
2019 |
|
CIT |
|
$ |
12,213,470 |
|
|
$ |
11,720,848 |
|
Business tax |
|
|
5,159,296 |
|
|
|
7,819,884 |
|
Other
taxes and fees |
|
|
2,508,445 |
|
|
|
2,349,086 |
|
Total
taxes payables |
|
$ |
19,881,211 |
|
|
$ |
21,889,818 |
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCKHOLDERS’ EQUITY
(a) Common stock
As of September 30, 2019, the Company had a total of
45,050,000 shares of common stock issued and outstanding.
On August 19, 2020, the Company filed an Amendment to the
Company’s Articles of Incorporation (the “Certificate of
Amendment”) with the Florida Secretary of State to effect a
one-for-two reverse split of the Company’s authorized and issued
and outstanding shares of common stock (the “Reverse Stock Split”).
The Reverse Stock Split became effective in accordance with the
terms of the Certificate of Amendment on August 20, 2020 (the
“Effective Time”). At the Effective Time, every two shares of the
Company’s common stock authorized and issued and outstanding were
automatically combined into one share of common stock, without any
change in the par value per share. The Company will not issue any
fractional shares in connection with the Reverse Stock Split.
Instead, fractional shares will be rounded up to the nearest full
share. As a result of the reverse split, the number of common stock
outstanding as of September 30, 2020 and 2019 was restated to
reflect the effect of the reverse split.
As of September 30, 2020, the Company has a total of
22,525,000 shares of common stock issued and outstanding.
(b) Statutory surplus reserves
The Company is required to make appropriations to reserve funds,
comprising the statutory surplus reserve and discretionary surplus
reserve, based on after-tax net income determined in accordance
with generally accepted accounting principles of the PRC (“PRC
GAAP”).
Appropriations to the statutory surplus reserve is required to be
at least 10% of the after tax net income determined in accordance
with PRC GAAP until the reserve is equal to 50% of the entities’
registered capital. Appropriations to the discretionary surplus
reserve are made at the discretion of the Board of Directors. The
statutory surplus reserve fund is non-discretionary other than
during liquidation and can be used to fund previous years’ losses,
if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing shareholders
in proportion to their shareholding or by increasing the par value
of shares currently held by them, provided that the remaining
statutory surplus reserve balance after such issue is not less than
25% of the registered capital before the conversion. Pursuant
to the Company’s articles of incorporation, the Company is to
appropriate 10% of its net profits as statutory surplus reserve. As
of September 30, 2020 and 2019, the balance of statutory
surplus reserve was $10,458,395 and $10,360,251, respectively.
The discretionary surplus reserve may be used to acquire fixed
assets or to increase the working capital to expend on production
and operation of the business. The Company’s Board of Directors
decided not to make an appropriation to this reserve for the years
ended September 30, 2020 and 2019.
NOTE 12. CONTINGENCIES AND COMMITMENTS
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.
For the years ended September 30, 2020 and 2019, the Company
has not experienced any delinquent mortgage loans and has not
experienced any losses related to this guarantee. As of
September 30, 2020 and 2019, our outstanding guarantees in
respect of our customers' mortgage loans amounted to approximately
$68 million and $78 million, respectively. As of September 30,
2020 and 2019, the amount of security deposits provided for these
guarantees was approximately $3.4 million and $3.9 million
respectively and the Company believes that such reserves are
sufficient.
NOTE 13. PENDING NASDAQ COMPLIANCE ISSUE
On June 21, 2019, the “Company received a letter from the
Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”)
notifying the Company that it is no longer in compliance with the
minimum bid price requirement for continued listing on the Nasdaq
Capital Market. Nasdaq Listing Rule 5550(a)(2) requires
listed companies to maintain a minimum bid price of $1.00 per
share. The letter noted that the bid price of the Company’s common
stock was below $1.00 for the 30-day period ending June 20,
2019. The notification letter has no immediate effect on the
Company’s listing on the Nasdaq Capital Market. Nasdaq has provided
the Company with 180 days, or until January 14, 2020, to
regain compliance with the minimum bid price requirement by having
a closing bid price of at least $1.00 per share for a minimum of 10
consecutive business days. On December 19, 2019, Nasdaq
determined that the Company is eligible for an additional 180
calendar day period, or until June 15, 2020, to regain
compliance. Given the extraordinary market conditions caused by
COVID-19, Nasdaq has determined to toll the compliance periods for
bid price and market value of publicly held shares requirements
through June 30, 2020. In that regard, on April 16, 2020,
Nasdaq filed an immediately effective rule change with the
Securities and Exchange Commission. Accordingly, the Company has
until August 31, 2020, to regain compliance. As of
November 3, 2020, The Company has been advised that
March 1, 2021 represents the full extent of the Panel’s
discretion to grant continued listing while it is non-compliant.
Should the company fail to demonstrate compliance with Nasdaq
Listing Rule 5550(a)(2) by that date, the Panel will
issue a final delist determination and the Company will be
suspended from trading on The Nasdaq Stock Market.
CHINA HGS REAL ESTATE INC.
SCHEDULE I- PARENT COMPANY BALANCE SHEETS
(UNAUDITED)
|
|
September 30, |
|
|
|
2020 |
|
|
2019 |
|
ASSETS |
|
|
|
|
|
|
|
|
Investment in subsidiary |
|
$ |
171,622,821 |
|
|
$ |
164,136,450 |
|
Total assets |
|
$ |
171,622,821 |
|
|
$ |
164,136,450 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
- |
|
|
$ |
597,300 |
|
Tax payable |
|
|
3,297,000 |
|
|
|
3,029,000 |
|
Shareholder loan |
|
|
- |
|
|
|
1,810,000 |
|
Total liabilities |
|
|
3,297,000 |
|
|
|
5,436,300 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 50,000,000 shares authorized,
22,525,000 shares issued and outstanding |
|
|
22,525 |
|
|
|
22,525 |
|
Additional paid-in
capital |
|
|
129,930,330 |
|
|
|
129,930,330 |
|
Statutory
surplus |
|
|
10,458,395 |
|
|
|
10,360,251 |
|
Retained
earnings |
|
|
34,954,061 |
|
|
|
34,070,767 |
|
Accumulated other comprehensive loss |
|
|
(7,039,490 |
) |
|
|
(15,683,723 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
168,325,821 |
|
|
|
158,700,150 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity |
|
$ |
171,622,821 |
|
|
$ |
164,136,450 |
|
The accompanying notes are integral part of Schedule I
CHINA HGS REAL ESTATE INC.
SCHEDULE I - STATEMENTS OF INCOME AND COMPREHENSIVE
LOSS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
|
|
2020 |
|
|
2019 |
|
Equity
in profit of subsidiary |
|
$ |
1,321,838 |
|
|
$ |
4,344,572 |
|
General and
administrative expenses |
|
|
- |
|
|
|
- |
|
Interest expense |
|
|
72,400 |
|
|
|
72,400 |
|
Income
before income taxes |
|
|
1,249,438 |
|
|
|
4,272,172 |
|
Provision for income taxes |
|
|
268,000 |
|
|
|
570,000 |
|
Net
income |
|
|
981,438 |
|
|
|
3,702,172 |
|
Other
comprehensive loss |
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
|
8,644,233 |
|
|
|
(6,679,858 |
) |
Comprehensive loss |
|
$ |
9,625,671 |
|
|
$ |
(2,977,686 |
) |
The accompanying notes are integral part of Schedule I
CHINA HGS REAL ESTATE INC.
SCHEDULE I - STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
|
|
2020 |
|
|
2019 |
|
Cash
flows from operating activities |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
981,438 |
|
|
$ |
3,702,172 |
|
|
|
|
|
|
|
|
|
|
Adjustments to
reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Stock based
compensation |
|
|
- |
|
|
|
- |
|
Equity in profit
of subsidiary |
|
|
(1,321,838 |
) |
|
|
(4,344,572 |
) |
|
|
|
|
|
|
|
|
|
Changes in assets
and liabilities: |
|
|
|
|
|
|
|
|
Tax payable |
|
|
268,000 |
|
|
|
570,000 |
|
Accrued
expenses |
|
|
72,400 |
|
|
|
72,400 |
|
Net cash used in operating activities |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash |
|
|
- |
|
|
|
- |
|
Cash, beginning of year |
|
|
- |
|
|
|
- |
|
Cash, end of year |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
- |
|
|
$ |
- |
|
Income taxes paid |
|
$ |
- |
|
|
$ |
- |
|
The accompanying notes are integral part of Schedule I
CHINA HGS REAL ESTATE INC.
NOTES TO SCHEDULE I
NOTE 1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted. The Company’s
investment in subsidiary and variable interest entity (“VIE”) is
stated at cost plus equity in undistributed earnings of
subsidiaries.
NOTE 2. RESTRICTED ASSETS
The Company’s PRC VIE and subsidiary are restricted in their
ability to transfer a portion of their net assets to the Company.
The payment of dividends by entities organized in China is subject
to limitations, procedures and formalities. Regulations in the PRC
currently permit payment of dividends only out of accumulated
profits as determined in accordance with accounting standards and
regulations in China. The Company’s subsidiaries and its VIEs are
also required to set aside at least 10% of its after-tax profit
based on PRC accounting standards each year to its statutory
reserves account until the accumulative amount of such reserves
reaches 50% of its respective registered capital. The
aforementioned reserves can only be used for specific purposes and
are not distributable as cash dividends.
In addition, the Company’s operations and revenues are conducted
and generated in China, all of the Company’s revenues being earned
and currency received are denominated in RMB. RMB is subject to the
foreign exchange control regulation in China, and, as a result, the
Company may be unable to distribute any dividends outside of China
due to PRC foreign exchange control regulations that restrict the
Company’s ability to convert RMB into US Dollars.
Schedule I of Article 5-04 of Regulation S-X requires the
condensed financial information of registrant shall be filed when
the restricted net assets of consolidated subsidiaries exceed 25
percent of consolidated net assets as of the end of the most
recently completed fiscal year. For purposes of the above test,
restricted net assets of consolidated subsidiaries shall mean that
amount of the registrant’s proportionate share of net assets of
consolidated subsidiaries (after intercompany eliminations) which
as of the end of the most recent fiscal year may not be transferred
to the parent company by subsidiaries in the form of loans,
advances or cash dividends without the consent of a third party.
The condensed parent company financial statements have been
prepared in accordance with Rule 12-04, Schedule I of
Regulation S-X as the restricted net assets of the Company’s PRC
subsidiary and VIE exceed 25% of the consolidated net assets of the
Company.
NOTE 3. COMMITMENTS
The Company did not have any significant commitments or long-term
obligations as at September 30, 2020 and 2019.
Item 9. Changes and
Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls
and Procedures
(a) Evaluation of Disclosure Controls and
Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial
Officer, we carried out an evaluation of the effectiveness of our
disclosure controls and procedures (as such term is defined in SEC
Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report. Based on such evaluation, our
management, including our Chief Executive Officer and Chief
Financial Officer, has concluded that our disclosure controls and
procedures were not effective as of September 30, 2020,
because of the material weakness in our internal control over
financial reporting as described below.
(b) Management’s Report on Internal Control over Financial
Reporting
The Company’s management is responsible for establishing and
maintaining internal controls over financial reporting. Internal
Control Over Financial Reporting is a process designed by, and
under the supervision of, the Company’s principal executive and
principal financial officers, or persons performing similar
functions, and effected by the Company’s board of directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
1. |
Pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company; |
|
2. |
Provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
its management and board of directors; and |
|
3. |
Provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could
have a material effect on its financial statements. |
Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance
that a misstatement of our consolidated financial statements would
be prevented or detected. Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
Our management, including our chief executive officer and chief
financial officer, has conducted a self-assessment, including
attestation of the design and operational effectiveness of the
Company’s internal controls over financial reporting as of
September 30, 2020. In making its assessment, management used
the 2013 Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “2013 COSO
Framework”). The 2013 COSO Framework outlines the 17 underlying
principles and the following fundamental components of a company’s
internal control:,(i) control environment, (ii) risk
assessment, (iii) control activities, (iv) information
and communication, and (v) monitoring. Our management has
implemented and tested our internal control over financial
reporting based on these criteria and identified certain material
weaknesses set forth below.
Based on this evaluation, our management concluded that our
internal control over financial reporting as of September 30,
2020 was ineffective.
A material weakness is a deficiency or a combination of
deficiencies in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of
the annual or interim consolidated financial statements will not be
prevented or detected on a timely basis.
Management identified the following material weaknesses in its
assessment of the effectiveness of internal control over financial
reporting as of September 30, 2020:
|
· |
Lack of full-time accounting staffs
in our accounting department with sufficient knowledge of U.S. GAAP
and SEC reporting experience and lack of internal audit
function |
Remediation Efforts to Address Significant Deficiencies
To remediate the material weaknesses described above and to prevent
similar deficiencies in the future, we are currently evaluating
additional controls and procedures, which may include:
|
· |
Provide more U.S. GAAP knowledge
and SEC reporting requirement training for the accounting
department and establish formal policies and procedures in internal
audit function. |
|
· |
Implementation of an ongoing
initiative and training in the Company to ensure the importance of
internal controls and compliance with 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. |
Any actions we have taken or may take to remediate these material
weaknesses are subject to continued management review supported by
testing, as well as oversight by the Audit Committee of our Board
of Directors. We cannot assure you that these material weaknesses
will not occur in the future and that we will be able to remediate
such weaknesses in a timely manner, which could impair our ability
to accurately and timely report our financial position, results of
operations or cash flows. See the Risk Factor included in this
Annual Report on Form 10-K.
(c) Changes in Internal Controls over Financial
Reporting
The management is committed to improving the internal controls over
financial reporting and will undertake the consistent improvements
or enhancements on an ongoing basis. Except as described above,
there has been no change to our internal control over financial
reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other
Information
None.
PART III
Item 10. Directors,
Executive Officers and Corporate Governance
Directors
The Board of Directors is presently composed of five
(5) members: Xiaojun Zhu, Shenghui Luo, Christy Young Shue,
John Chen, and Yuankai Wen. Mr. Zhu serves as Chairman of the
Board of Directors. The Board of Directors has determined that
Christy Young Shue, John Chen, and Yuankai Wen are independent
directors within the meaning set forth in the NASDAQ listing
rules and as required by the rules and regulations of the
SEC, as currently in effect.
Below you will find a tabular summary of our entire Board, their
age as of September 30, 2020, the year they were each elected,
and the year in which their term ends.
Name |
|
Age |
|
|
Position |
|
Director Since |
|
Xiaojun Zhu |
|
|
53 |
|
|
President, Chief Executive Officer and Chairman of the Board of
Directors |
|
|
2009 |
|
Shenghui Luo |
|
|
51 |
|
|
Director |
|
|
2010 |
|
Christy Young Shue |
|
|
57 |
|
|
Director |
|
|
2012 |
|
John Chen |
|
|
48 |
|
|
Director |
|
|
2012 |
|
Yuankai Wen |
|
|
73 |
|
|
Director |
|
|
2010 |
|
The following paragraphs provide information about each director,
including all positions he or she holds, his or her principal
occupation and business experience for the past five years, and the
names of other publicly-held companies of which he or she currently
serves as a director or has served as a director during the past
five years.
Xiaojun Zhu, the President, Chief Executive Officer,
and Chairman of the Board of Directors of China HGS, began his
entrepreneurial career in 1995 by creating a privately-run real
estate company in Hanzhong, Shaanxi Province. With more than 20
years’ experience, Mr. Zhu is considered to be one of China’s
most influential business leaders in the real estate industry. In
October 2005, Mr. Zhu received the “Top 100 Management
Elites in China’s Building Industry 2005” award by the Chinese
Academy of Management Science. Mr. Zhu also received the
“Innovative Shaanxi - Person of the Year 2007” award and the
“Outstanding Socialism Builder of Shaanxi Province in 2008” award.
In August 2009, Mr. Zhu joined China Agro as Chairman and
Chief Executive Officer. In 2007, before joining China Agro,
Mr. Zhu served as the Chairman and General Manager of Shaanxi
Guangsha Investment and Development Group Co., Ltd. From 1995
to 2007, Mr. Zhu was the Chairman and General Manager of
Hanzhong Guangsha Real Estate Development Co, Ltd., a real
estate development company. From 1992 to 1995, prior to starting
his own business, Mr. Zhu served as a Vice General Manager in
the real estate-based subsidiary of Hanjiang Building Material
Group Corporation. From 1985 to 1988, Mr. Zhu studied at
Shaanxi Metallurgy College. As the founder of the Company,
Mr. Zhu is acknowledged to be one of China’s leading business
executives in the real estate industry and is able to provide the
Board with an understanding of the Company’s business as well as
provide expert perspective on industry trends and opportunities.
Mr. Zhu’s experience with the Company from its founding also
offers the Board insight to the evolution of the Company, including
from execution, cultural, operational, competitive and industry
points of view.
Christy Young Shue has served as a director since
August 2012. Ms. Shue served as Executive Vice President,
Finance and Investor Relations and Corporate Secretary of Harbin
Electric, Inc. (NASDAQ: HRBN) from 2007 through
April 2012, when Harbin went private as a result of a
management buyout transaction. From 2006 through 2007,
Ms. Shue was a Vice President, a Senior Investor Relations
Consultant at Christensen, an Investor Relations advisory firm.
From 2003 through 2006, Ms. Shue served as Investor Relations
Manager at International Paper (NYSE: IP). Ms. Shue received
her MBA degree in finance/international business from Stern School
of Business, New York University, a Ph.D. in Chemistry from Purdue
University, and a Bachelor of Science degree in Chemistry from
Sichuan University. Ms. Shue’s previous experience as an
officer and Investor Relations manager for public companies has
given her insights into various challenges that public companies
experience, as well as extensive knowledge and understanding of
capital market related issues such as corporate governance and
financial reporting.
John Chen has served as a director since
August 2012. Mr. Chen is a California Certified Public
Accountant. Mr. Chen has been the Chief Financial Officer of
General Steel Holdings Inc. (NYSE: GSI) since May 2004. From
1997 to 2003, Mr. Chen was a Senior Accountant at Moore
Stephens Frazer and Torbet. Mr. Chen received his Bachelor of
Science degree in Business Administration, Accounting from
California State Polytechnic University. Mr. Chen’s experience
as a California Certified Public Accountant and his experience as a
chief financial officer of a public company have provided him with
broad experience in finance including accounting and financial
reporting. This experience has led our Board of Directors to
determine that he is an “audit committee financial expert” as that
term is defined in Item 407(d)(5) of Regulation S-K under the
1934 Act.
Yuankai Wen has served as a director since
January 2010. Since 1998, Mr. Wen has served
as the Chairman of Beijing Neolinde Management Training
Center. From 1997 to 1998, he was also the Chairman of
Beijing Neolinde Management Consulting Co. From 1994 through 1997,
Mr. Wen was a Vice President of Roosevelt China Investment
Co., an investment firm. Mr. Wen received his Bachelor’s
degree in Chemistry from Nanjing University. He was also a visiting
scholar of Physical and Chemical Biology Institute, University of
Paris in France. Mr. Wen’s experience as Chairman of the
Beijing Neolinde Management Graining Center and as Chairman of the
Beijing Neolinde Management Consulting Co. has provided him with
broad leadership and executive experience. Moreover, his management
experience in China provides him with a perspective on Chinese
business operations.
Shenghui Luo has served as a director since
January 2010. Ms. Luo joined Shaanxi Guangsha
Investment and Development Group Co., Ltd., the Company’s
subsidiary, in 1997. From 2000 through March 2009,
Ms. Luo served as Vice Director of the Finance Department of
Shaanxi Guangsha Investment and Development Group
Co., Ltd. In March 2009, Ms. Luo was
appointed a Manager of the Finance Department of Shaanxi Guangsha
Investment and Development Group Co., Ltd. Ms. Luo
received her Bachelor’s degree in Accounting from Shaanxi Finance
College. As a result of Ms. Luo’s service as a member of the
Company’s finance department, she developed an extensive
understanding of the Company’s business. In addition, her knowledge
and experience in finance and accounting provides her with a broad
understanding of the Company’s financial reporting under both PRC
and US GAAP.
Family Relationships
No family relationships exist among our directors, executive
officers, or persons nominated or chosen by us to become directors
or executive officers.
All directors hold office until the next annual stockholders’
meeting or until their death, resignation, retirement, removal,
disqualification, or until their successors have been elected and
are qualified. Our officers serve at the will of the Board of
Directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive
officers have been convicted in a criminal proceeding, excluding
traffic violations or similar misdemeanors, or has been a party to
any judicial or administrative proceeding during the past five
years that resulted in a judgment, decree or final order enjoining
the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws, except for matters
that were dismissed without sanction or settlement. Except as set
forth in our discussion below in “Certain Relationships and Related
Transactions,” none of our directors, director nominees or
executive officers has been involved in any transactions with us or
any of our directors, executive officers, affiliates or associates
which are required to be disclosed pursuant to the rules and
regulations of the SEC.
Code of Ethics
The Board of Directors has adopted a Code of Conduct which sets
forth the standards by which the Company’s employees, officers and
directors should conduct themselves. The Company will disclose any
amendment to the Code of Conduct or waiver of a provision of the
Code of Conduct that applies to the Company’s Chief Executive
Officer, Chief Financial Officer and any other principal financial
officer, and any other person performing similar functions and
relates to certain elements of the Code of Conduct, including the
name of the officer to whom the waiver was granted.
Committees of the Board of Directors
The Board of Directors has the following standing committees:
Audit, Compensation, and Nominating and Corporate Governance. The
Board of Directors has adopted written charters for each of these
committees. All members of the committees appointed by the Board of
Directors are non-employee directors and the Board of Directors has
determined that all such members are independent under the
applicable rules and regulations of NASDAQ and the SEC, as
currently in effect. In addition, all directors who served on a
committee during any portion of the fiscal year ended
September 30, 2019 were independent under the applicable
rules and regulations of NASDAQ and the SEC during such
director’s period of service.
The following chart details the membership of each standing
committee as of September 30, 2020 and the number of meetings
each committee held in fiscal year 2020.
Name of Director |
|
Audit |
|
|
Compensation |
|
|
Nominating &
Corporate
Governance |
|
Christy Young
Shue |
|
|
M |
|
|
|
M |
|
|
|
C |
|
John Chen |
|
|
C |
|
|
|
M |
|
|
|
M |
|
Yuankai Wen |
|
|
M |
|
|
|
C |
|
|
|
M |
|
Number
of Meetings in Fiscal 2017 |
|
|
4 |
|
|
|
1 |
|
|
|
1 |
|
M = Member C = Chair
Executive Officers
Our executive officers and their age as of September 30, 2020
are as follows:
Name |
|
Ages |
|
|
Position |
Xiaojun Zhu * |
|
|
53 |
|
|
President, Chief Executive Officer and Chairman of the Board of
Directors |
Wei (Samuel)
Shen** |
|
|
41 |
|
|
Chief Financial
Officer |
*Mr. Zhu’s background and business experience is described
above under “Directors”
**Wei (Samuel) Shen has been the Chief Financial Officer of the
Company since May 2012. From November 2011 to
May 2012, Mr. Shen was the Vice President for Finance of
the Company. Mr. Shen is also the Director at Bluehill
Investment Advisory Group, a PRC based financial consulting firm.
From 2006 to 2011, Mr. Shen served as an Audit Assurance
Manager for a national public accounting firm, where he managed
audit engagements for U.S. public companies. Mr. Shen holds
both Chartered Accountant and Certified Public Accountant
designations and is experienced with financial reporting under IFRS
and US GAAP. Mr. Shen holds a Master of Management and Public
Accounting.
Audit Committee
The Audit Committee oversees our accounting, financial reporting
and audit processes; appoints, determines the compensation of, and
oversees, the independent registered public accountants;
pre-approves audit and non-audit services provided by the
independent registered public accountants; reviews the results and
scope of audit and other services provided by the independent
registered public accountants; reviews the accounting principles
and practices and procedures used in preparing our financial
statements; oversees the Company’s internal audit function; and
reviews our internal controls.
The Audit Committee works closely with management and our
independent registered public accountants. The Audit Committee also
meets with our independent registered public accountants without
members of management present, on a quarterly basis, following
completion of our independent registered public accountants’
quarterly reviews and annual audit and prior to our earnings
announcements, to review the results of their work. The Audit
Committee also meets with our independent registered public
accountants to approve the annual scope and fees for the audit
services to be performed.
The Board of Directors has determined that John Chen is an “audit
committee financial expert” as defined by SEC rules, as currently
in effect.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act, requires the executive
officers and directors of the Company and every person who is
directly or indirectly the beneficial owner of more than 10% of any
class of security of the Company to file reports of ownership and
changes in ownership with the SEC. Such persons also are required
to furnish our company with copies of all
Section 16(a) forms they file.
Based solely on our review of copies of such forms received by us,
we believe that during the fiscal year 2013, the executive officers
and directors of the Company and every person who is directly or
indirectly the beneficial owner of more than 10% of any class of
security of the Company complied with the filing requirements of
Section 16(a) of the Exchange Act.
Item 11. Executive
Compensation
Compensation of Executive Officers
Compensation Discussion and Analysis
Our primary goal with respect to our compensation programs has been
to attract and retain the most talented and dedicated employees in
key positions in order to compete effectively in the market place,
successfully execute our growth strategies, and create lasting
shareholder value. The Compensation Committee evaluates both
individual and Company performance when determining the
compensation of our executives. Our executives’ overall
compensation is tied to the Company financial and operational
performance, as measured by revenues and net income, as well as to
accomplishing strategic goals such as merger and acquisitions and
fund raising. We apply our compensation policies consistently for
determining compensation of our Chief Executive Officer as we do
with the other executives. The Compensation Committee assesses the
performance of our Chief Executive Officer annually and determines
the base salary and incentive compensation of our Chief Executive
Officer. Our Chief Executive Officer is primarily responsible for
the assessment of our other executive officers’ performance.
Summary Compensation Table
The following identified persons (the “Named Executive Officers”)
of the Company received compensation in the amounts set forth in
the chart below for the fiscal years ended September 30, 2020
and 2019. All compensation listed is in US dollars. No other item
of compensation was paid to any officer or director of the Company
other than reimbursement of expenses.
Name and Principal Position |
|
Year |
|
|
Salary ($) |
|
|
Bonus ($) |
|
|
All Other
Compensation ($) |
|
|
Totals ($) |
|
Xiaojun
Zhu, Chief Executive Officer and |
|
|
2020 |
|
|
|
28,549 |
|
|
|
- |
|
|
|
) |
|
|
|
28,549 |
|
Chairman of the Board
(1) |
|
|
2019 |
|
|
|
29,089 |
|
|
|
- |
|
|
|
|
|
|
|
29,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wei Shen, Chief
Financial Officer |
|
|
2020 |
|
|
|
102,775 |
|
|
|
- |
|
|
|
- |
|
|
|
102,775 |
|
|
|
|
2019 |
|
|
|
104,723 |
|
|
|
- |
|
|
|
- |
|
|
|
104,723 |
|
|
(1) |
Mr. Zhu was paid in Renminbi.
His annual salary was RMB 200,000 for fiscal 2020 and 2019. The
amounts reflected in this column have been converted to U.S.
dollars at the exchange rate of RMB 7.0056 to the U.S. dollar for
fiscal 2020 and RMB 6.8753 to the U.S. dollar for fiscal 2019. |
Option Grants Table. There were no individual grants of stock
options to purchase our common stock made to the executive officers
named in the Summary Compensation Table in fiscal 2020 and
2019.
Aggregated Option Exercises and Fiscal Year-End Option Value Table.
There were no stock options exercised during fiscal 2020 and 2019
by any executive officer named in the Summary Compensation
Table.
Long-Term Incentive Plan (“LTIP”) Awards Table. There were no
awards made to a Named Executive Officer in fiscal 2020 and 2019
under any LTIP.
Our executive officers are reimbursed by us for any out-of-pocket
expenses incurred in connection with activities conducted on our
behalf. There is no limit on the amount of these out-of-pocket
expenses and there will be no review of the reasonableness of such
expenses by anyone other than our board of directors, which
includes persons who may seek reimbursement, or a court of
competent jurisdiction if such reimbursement is challenged.
Employment Contracts and Termination of Employment
The Company is under a contract with Mr. Samuel Shen to serve
as Chief Financial Officer of the Company for an indefinite period
upon mutual agreement between Mr. Shen and the Company,
subject to parties’ right to terminate on reasonable notice.
Pursuant to the contract, Mr. Shen receives a monthly salary
of RMB 60,000 ($8,565) and a discretional bonus of up to RMB
180,000 ($25,694). Mr. Shen is also entitled to 100,000 shares
of restricted common stock of the Company at the end of the term,
subject to his continuing employment with the Company and the
board’s approval. Mr. Shen did not receive any bonus or
restricted stock for the years ended September 30, 2020, 2019
and 20178. According to the contract, the Company may terminate the
contract with Mr. Shen for causes defined in the contract with
thirty days’ advance written notice. Under certain circumstances
provided in the contract, the Company may elect to pay an
additional month’s salary in lieu of providing advance written
notice to terminate Mr. Shen. Mr. Shen may terminate the
contract with the Company by giving ninety days’ advance written
notice to the Company. The contract also contains covenants
regarding non-competition and confidentiality.
Outstanding Equity Awards at Fiscal 2020 Year End
None.
Compensation of Directors
The following table provides information regarding compensation
earned by non-employee directors who served during fiscal 2020.
FISCAL 2019 DIRECTOR COMPENSATION
Name |
|
Fees Earned
or Paid in
Cash ($) |
|
|
Stock
Awards ($) |
|
|
Option
Awards ($) |
|
|
Non-Equity
Incentive Plan
Compensation ($) |
|
|
Nonqualified
Deferred
Compensation
Earnings ($) |
|
|
All Other
Compensation ($) |
|
|
Total ($) |
|
Yuankai Wen * |
|
$ |
14,274 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
14,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Chen |
|
$ |
36,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
36,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christy Young Shue |
|
$ |
24,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
24,000 |
|
These amounts reflect the value determined by the Company for
accounting purposes for these awards and do not reflect whether the
recipient has actually realized a financial benefit from the award
(such as by exercising stock options). These amounts represents a
compensation expense for fiscal year 2019. Pursuant to SEC rules,
the amounts shown exclude the impact of estimated forfeitures
related to service-based vesting conditions. No stock option awards
were forfeited by any of our non-employee directors in fiscal year
2019.
* Mr. Wen receives annual compensation in the amount of RMB
100,000. The amount set forth in this column is based on an
exchange rate of RMB7.0056 to the U.S. dollar.
Independent Director Agreements
The Company has entered into Independent Director Agreements with
Ms. Shue, and Messrs. Chen and Wen pursuant to which the
Company has agreed to pay each of these directors annual cash
compensation in the amount of $24,000, $36,000 and RMB 100,000,
respectively. In addition, the Company has agreed to reimburse each
director for all reasonable, out-of-pocket expenses, subject to the
advance approval of the Company incurred in connection with the
performance of Director’s duties.
Board Leadership Structure and Role in Risk Oversight
One person currently holds the positions of principal executive
officer and chairman of the Board of Company. The Board does not
have a policy on whether or not the roles of the Chief Executive
Officer and Chairman should be separate. Instead, the
Company’s By-Laws provide that the directors may designate a
Chairman of the Board from among any of the directors.
Accordingly, the Board reserves the right to vest the
responsibilities of the Chief Executive Officer and Chairman in the
same person or in two different individuals depending on what it
believes is in the best interest of the Company. The
Board has determined that the consolidation of these roles is
appropriate because it allows Mr. Zhu to bring a wider
perspective to the deliberations of the Board on matters of
corporate strategy and policy. The Board believes that there
is no single Board leadership structure that would be most
effective in all circumstances and therefore retains the authority
to modify this structure to best address the Company’s and the
Board’s then current circumstances as and when appropriate.
The Company’s management is responsible for identifying, assessing
and managing the material risks facing the business. The Board and,
in particular, the Audit Committee are responsible for overseeing
the Company’s processes for assessing and managing risk. Each
of the Chief Executive Officer and Chief Financial Officer, with
input as appropriate from other appropriate management members,
report and provide relevant information directly to either the
Board and/or the Audit Committee on various types of identified
material financial, reputational, legal, operational, environmental
and business risks to which the Company is or may be subject, as
well as mitigation strategies for certain salient risks. In
accordance with NASDAQ requirements and as set forth in its
charter, the Audit Committee periodically reviews and discusses the
Company’s business and financial risk management and risk
assessment policies and procedures with senior management, the
Company’s independent auditor. The Audit Committee reports
its risk assessment function to the Board. The roles of the
Board and the Audit Committee in the risk oversight process have
not affected the Board leadership structure. Although the board has
not formally designated a lead independent director,
Mr. Sherman, the chairman of the audit committee, has led the
meetings of the audit committee which include at least a majority
of the independent directors and at which matters appropriate for
consideration at executive sessions of the board of directors were
discussed.
Item 12. Security
Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of our common stock as of January 14,2020 as to
(i) each person who is known by us to own beneficially more
than 5% of our outstanding common stock, (ii) each of the
executive officers and other persons named in the Summary
Compensation Table, (iii) each director and nominee for
director, and (iv) all directors and executive officers as a
group. Except as otherwise indicated in the footnotes, all
information with respect to share ownership and voting and
investment power has been furnished to us by the persons listed.
Except as otherwise indicated in the footnotes, each person listed
has sole voting power with respect to the shares shown as
beneficially owned. Unless otherwise indicated, the address of each
listed shareholder is c/o China HGS Real Estate Inc., 6 Xinghan
Road, 19th Floor, Hanzhong City, Shaanxi Province, PRC 723000.
Name and Address of Beneficial Owner |
|
Amount and
Nature of
Beneficial
Ownership(1) |
|
|
Percent
of
Class (2) |
|
5% Holders |
|
|
|
|
|
|
|
|
Rising
Pilot, Inc. (a British Virgin Islands company)(3) |
|
|
7,000,000 |
|
|
|
31.1 |
% |
Directors and
Officers |
|
|
|
|
|
|
|
|
Mr. Xiaojun
Zhu(4) |
|
|
14,900,000 |
|
|
|
66.2 |
% |
Shenghui Luo |
|
|
840,000 |
|
|
|
3.7 |
% |
Yuankai Wen |
|
|
- |
|
|
|
- |
|
Christy Young
Shue |
|
|
- |
|
|
|
- |
|
John Chen |
|
|
- |
|
|
|
- |
|
Wei (Samuel)
Shen |
|
|
- |
|
|
|
- |
|
All
directors and executive officers as a group (5 persons) |
|
|
15,740,000 |
|
|
|
69.9 |
% |
|
(1) |
Except as indicated in the
footnotes to this table and pursuant to applicable community
property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock owned
by such person. The number of shares beneficially owned includes
common stock that such individual has the right to acquire as of
January 13, 2021 or within 60 days thereafter, including
through the exercise of stock options. |
|
(2) |
Percentage of beneficial ownership
is based upon 22,525,000 shares of common stock outstanding as of
January 13, 2021. For each named person, this percentage
includes common stock that the person has the right to acquire
either currently or within 60 days of January 13, 2021,
including through the exercise of an option; however, such common
stock is not deemed outstanding for the purpose of computing the
percentage owned by any other person. |
|
(3) |
Mr. Xiaojun Zhu has voting and
dispositive control over securities held by Rising
Pilot, Inc. |
|
(4) |
Includes 7,900,000 shares of common
stock owned by Mr. Zhu directly and 7,000,000 shares owned
through Rising Pilot, Inc. |
Securities Authorized for Issuance Under Equity Compensation
Plans
On September 25, 2012, our shareholders approved the Company’s
2012 Omnibus Securities and Incentive Plan (the “2012 Plan”). The
2012 Plan provides for the grant of awards which are distribution
equivalent rights, incentive stock options, non-qualified stock
options, performance shares, performance units, restricted shares
of common stock, restricted stock units, stock appreciation rights
(“SARs”), tandem stock appreciation rights, unrestricted shares of
common stock or any combination of the foregoing, to key management
employees and nonemployee directors of, and nonemployee consultants
of, the Company or any of its subsidiaries (each a “participant”).
We have reserved a total of 1,000,000 shares of common stock for
issuance as or under awards to be made under the 2012 Plan. The
number of shares of common stock for which awards which are options
or SARs may be granted to a participant under the 2012 Plan during
any calendar year is limited to 500,000.
The following table summarizes information with respect to shares
of the Company’s common stock that may be issued under the
Company’s existing equity compensation plans as of
September 30, 2020
Plan Category |
|
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights |
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights |
|
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a)) |
|
Equity compensation plans approved by security holders |
|
|
- |
|
|
$ |
- |
|
|
|
1,000,000 |
|
Total |
|
|
- |
|
|
$ |
- |
|
|
|
1,000,000 |
|
Changes in Control
There are no arrangements known to us, including any pledge by any
person of our securities, the operation of which may at a
subsequent date result in a change in control of the Company.
Item 13. Certain Relationships
and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
The Audit Committee is responsible for reviewing, approving or
ratifying all material transactions between us and any related
person. Related persons can include any of our directors or
executive officers, certain of our shareholders, and any of their
immediate family members. This obligation is set forth in our Audit
and Finance Committee Charter. Although we do not have a formal
written policy with respect to our Audit Committee’s policies and
procedures for reviewing related party transactions, in evaluating
such transactions, the Audit Committee members apply the same
standards of good faith and fiduciary duty they apply to their
general responsibilities as a committee of the board and as
individual directors. In any transaction involving a related party,
our Audit Committee considers all available material facts and
circumstances of the transaction, including: (i) the direct
and indirect interests of the related party; (ii) if the
related party is a director (or immediate family member of a
director or an entity with which a director is affiliated), the
impact such transaction would have on the director’s independence;
(iii) the risks, costs and benefits to us; and
(iv) whether any alternative transactions for comparable
purposes are available. Our Audit Committee then makes a
determination as to whether the proposed terms of the transaction
are in the best interests of the Company and otherwise consistent
with arm’s length dealings with unrelated third-parties.
The following related party transactions occurred during the fiscal
year ended September 30, 2020:
The Company has a one year loan agreement (“USD Loan Agreement”)
with our Chairman, CEO and major 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 $72,400 for each of the years ended September 30,
2020 and 2019. The Company has not yet paid this interest and it is
recorded in accrued expenses in the accompanying consolidated
balance sheets as of September 30, 2020 and 2019.
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 funds from the Chairman in order to
support the Company’s Liangzhou 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 years ended September 30, 2020 and 2019, the
interest was $20,661 and $20,403, respectively, which is
capitalized in the development cost of Liangzhou road project.
On September 30, 2020, the Company entered into an agreement
with Mr. Zhu Xiaojun and an unrelated party (the “buyer
group”) to sell Shijin project at price of $7,364,204 (or RMB 50
million). Pursuant to the agreement, a portion of selling price of
approximately $3.4 million was fully settled by the Company’s
shareholder’s loan payable with accrued interest payable to
Mr. Zhu Xiaojun and the rest of proceeds will be collected
from the unrelated party by September 30, 2021. The
transaction resulted in a gain of $1.9 million for the year ended
September 30, 2020.
Director Independence
The Board of Directors has determined that Christy Young Shue, John
Chen, and Yuankai Wen are independent directors within the meaning
set forth in the NASDAQ listing rules, as currently in effect.
Item 14. Principal Accountant
Fees and Services
Friedman LLP served as the Company’s independent registered public
accounting firm for fiscal years 2019. Wei &Wei LLP shall
serve as the Company’s independent registered public accounting
firm for fiscal years 2020. Fees (excluding reimbursements for
out-of-pocket expenses) paid to independent registered public
accounting firms for services in fiscal 2020 and 2019 were as
follows:
|
|
2020 |
|
|
2019 |
|
Audit
Fees |
|
$ |
130,000 |
|
|
$ |
256,000 |
|
Audit-Related
Fees |
|
|
- |
|
|
|
- |
|
Tax Fees |
|
|
- |
|
|
|
- |
|
All
Other Fees |
|
|
- |
|
|
|
- |
|
Total |
|
$ |
130,000 |
|
|
$ |
256,000 |
|
“Audit Fees” consisted of fees for the audit of our annual
financial statements, review of the financial statements included
in our quarterly reports on Form 10-Q and services that are
normally provided by the independent registered public accountants
in connection with statutory and regulatory filings or engagements
for those fiscal years. This category also includes advice on audit
and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements, statutory
audits required by non-U.S. jurisdiction, the preparation of an
annual “management letter” on internal control matters and
assurance services provided in connection with the assessment and
testing of internal controls with respect to Section 404 of
the Sarbanes-Oxley Act of 2002.
“Audit-Related Fees” consisted of assurance and related services by
Friedman LLP that are reasonably related to the performance of the
audit or review of our financial statements and are not reported
above under “Audit Fees.”
“Tax Fees” consisted of professional services rendered by Friedman
LLP for tax compliance and tax planning. The services for the fees
disclosed under this category include tax return preparation and
technical tax advice.
The above amounts relate to services provided in the indicated
fiscal years, irrespective of when they were billed. The Audit
Committee considered the compatibility of non-audit services by
Friedman LLP with the maintenance of that firm’s independence and
determined, in each case, that at all times, Friedman LLP remained
independent.
The Audit Committee Charter establishes a policy governing our use
of Wei& Wei LLP and Friedman LLP for audit and non-audit
services. Under the Charter, the Audit Committee is required to
pre-approve all audit and non-audit services performed by the
Company’s independent registered public accountants in order to
ensure that the provision of such services does not impair the
public accountants’ independence. The Audit Committee pre-approves
certain audit and audit-related services, subject to certain fee
levels. Any proposed services that are not a type of service that
has been pre-approved or that exceed pre-approval cost levels
require specific approval by the Audit Committee in advance. The
Audit Committee has approved all audit and audit-related services
to be performed by Wei&Wei LLP in 2020.
Part IV
ITEM 15 |
|
Exhibits and Financial Statement
Schedules |
Exhibit
No. |
|
Title of Document |
3.1 |
|
Articles of Incorporation(1) |
3.2 |
|
Articles of incorporation of the
registrant as amended with the Secretary of State of Florida on
October 8, 2009(2) |
3.3 |
|
Bylaws(1) |
10.1 |
|
Share Exchange Agreement by and
between the Company, China HGS Investment, Inc., and Rising
Pilot, Inc. dated August 21, 2009(3) |
10.2 |
|
Entrusted Management Agreement, dated
as of September 18, 2009, by and among the Company,
Mr. Xiaojun Zhu and his management staff (English
translation)(4) |
10.3 |
|
Independent Director Agreement
between China HGS Real Estate Inc. and Yuankai Wen(2) |
10.4 |
|
Form of Indemnification
Agreement(2) |
10.5 |
|
Form of Nonstatutory Stock
Option Agreement(5) |
10.6 |
|
Residential Apartment Bulk Purchasing
Agreement dated May 28, 2011 between Hanzhong Municipal Public
Security Bureau and Shaanxi Guangsha Investment and Development
Group Co., Ltd. (English translation)(6) |
10.7 |
|
Residential Apartment Bulk Purchasing
Agreement dated June 8, 2011 between Hanzhong Municipal Bureau
of Justice and Shaanxi Guangsha Investment and Development Group
Co., Ltd. (English translation)(7) |
10.8 |
|
USD Shareholder Loan Agreement by and
between the Company and Mr. Xiaojun Zhu dated July 28,
2011(English translation)(8) |
10.9 |
|
Land Use Rights Transfer Agreement
between Shaanxi Guangsha Investment and Development Group
Co., Ltd. and Hanzhong Guangxia Real Estate Development
Limited dated March 16, 2011 (English translation)(9) |
10.10 |
|
Loan Agreement by and between Shaanxi
Guangsha Investment and Development Group Co. and Mr. Xiaojun
Zhu dated November 14, 2011 (English translation)(9) |
10.11 |
|
Independent Director Agreement by and
between China HGS Real Estate Inc. and John Chen, dated
August 22, 2012(12) |
10.12 |
|
Independent Director Agreement by and
between China HGS Real Estate Inc. and Christy Young Shue, dated
August 22, 2012(13) |
10.13 |
|
Labor Contract by and between Shaanxi
Guangsha Investment and Development Group Co., Ltd. and Wei
(Samuel) Shen, dated May 28, 2012(14) |
10.14 |
|
Form of Indemnification
Agreement(15) |
10.15 |
|
Loan Amendment Agreement by and
between China HGS Real Estate Inc. and Mr. Xiaojun Zhu, dated
July 19, 2013(16) |
10.16 |
|
Loan Agreement by and between Shaanxi
Guangxia Investment Development Group Co., Ltd. and China
Construction Bank, dated August 23, 2013(17) |
10.17 |
|
Loan Agreement between dated
December 31, 2013 by and between Shaanxi Guangsha Investment
and Development Group Co., Ltd and Mr. Xiaojun
Zhu(18) |
14 |
|
Code of Conduct(10) |
21 |
|
List of subsidiaries of the
Registrant(11) |
31.1* |
|
Rule 13a-14(a)/15d-14(a) Certification
of Chief Executive Officer |
31.2* |
|
Rule 13a-14(a)/15d-14(a) Certification
of Chief Financial Officer |
32.1* |
|
Section 1350
Certification of Chief Executive Officer and Chief Financial
Officer |
101* |
|
XBRL Instance Document |
(1) Incorporated herein by reference to the SB-2 Registration
Statement filed on August 31, 2001.
(2) Incorporated by reference to Exhibit 3.2 to
registrant’s quarterly report on Form 10-Q filed on
August 16, 2010.
(3) Incorporated herein by reference to the current report on
Form 8-K filed on August 21, 2009.
(4) Incorporated herein by reference to the current report on
Form 8-K filed on September 18, 2009.
(5) Incorporated herein by reference to Exhibit 10.1 to
the current report on Form 8-K filed on March 17,
2011.
(6) Incorporated herein by reference to Exhibit 10.1 to
the current report on Form 8-K filed on June 3, 2011.
(7) Incorporated herein by reference to Exhibit 10.1 to
the current report on Form 8-K filed on June 14,
2011.
(8) Incorporated herein by reference to registrant’s quarterly
report on Form 10-Q filed August 15, 2011.
(9) Incorporated herein by reference to the current report on
Form 8-K filed on December 23, 2011.
(10) Incorporated herein by reference to the current report on
Form 8-K filed on January 22, 2010.
(11) Incorporated by reference to Exhibit 21 to registrant’s
annual report on Form 10-K filed on December 29,
2010.
(12) Incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K filed on August 22, 2012.
(13) Incorporated by reference to Exhibit 10.2 to the current
report on Form 8-K filed on August 22, 2012.
(14) Incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K filed on May 29, 2012.
(15) Incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K filed on March 15, 2013.
(16) Incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K filed on July 22, 2013.
(17) Incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K filed on October 15, 2013.
(18) Incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K filed on January 7, 2014.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
China HGS Real Estate Inc. |
Date: January 13, 2021 |
By: |
/s/ Xiaojun Zhu |
|
|
Xiaojun Zhu |
|
|
President, Chief Executive Officer, and Chairman of the Board of
Directors |
|
|
Date:
January 13, 2021 |
By: |
/s/ Samuel Shen |
|
|
Samuel
Shen |
|
|
Chief
Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature |
|
Title |
|
Date |
|
|
President, Chief Executive
Officer, |
|
January 13, 2021 |
|
|
and Chairman of the Board |
|
|
/s/
Xiaojun Zhu |
|
of
Directors |
|
|
Xiaojun Zhu |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Samuel Shen |
|
Chief Financial Officer |
|
January 13, 2021 |
Samuel Shen |
|
(Principal Financial and
Accounting Officer) |
|
|
|
|
|
|
|
/s/
Shenghui Luo |
|
Director |
|
January 13, 2021 |
Shenghui Luo |
|
|
|
|
|
|
|
|
|
/s/
Christy Young Shue |
|
Director |
|
January 13, 2021 |
Christy Young Shue |
|
|
|
|
|
|
|
|
|
/s/
John Chen |
|
Director |
|
January 13, 2021 |
John Chen |
|
|
|
|
|
|
|
|
|
/s/
Yuankai Wen |
|
Director |
|
January 13, 2021 |
Yuankai Wen |
|
|
|
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